36 AS 1 (issued 1979) Accounting Standard (AS) 1 (issued 1979) Disclosure of Accounting Policies (This Accounting Standard includes paragraphs 24-27 set in bold italic type and paragraphs 1-23 set in plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of the Preface to the Statements of Accounting Standards 1 .) The following is the text of the Accounting Standard (AS) 1 issued by the Accounting Standards Board, the Institute of Chartered Accountants of India on ‘Disclosure of Accounting Policies’. The Standard deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. In the initial years, this accounting standard will be recommendatory in character. During this period, this standard is recommended for use by companieslisted on a recognised stock exchange and otherlarge commercial, industrial and business enterprises in the public and private sectors. 2 Introduction 1. Thisstatement deals with the disclosure ofsignificant accounting policies followed in preparing and presenting financial statements. 2. The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policiesfollowed in the preparation and presentation of the financial statements. The accounting policies followed vary from enterprise to enterprise. Disclosure ofsignificant accounting policiesfollowed is necessary if the view presented is to be properly appreciated. 1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which Accounting Standards are intended to apply only to items which are material. 2 It may be noted that this Accounting Standard is now mandatory. Reference may be made to the section titled ‘Announcements of the Council regarding status of various documents issued by the Institute of Chartered Accountants of India’ appearing at the beginning of this Compendium for a detailed discussion on the implications of the mandatory status of an accounting standard. Disclosure of Accounting Policies 41 3. The disclosure of some of the accounting policies followed in the preparation and presentation of the financial statements is required by law in some cases. 4. The Institute ofChartered Accountants ofIndia has, in Statementsissued by it, recommended the disclosure of certain accounting policies, e.g., translation policies in respect of foreign currency items. 5. In recent years, a few enterprises in India have adopted the practice of including in their annual reports to shareholders a separate statement of accounting policies followed in preparing and presenting the financial statements. 6. In general, however, accounting policies are not at present regularly and fully disclosed in all financial statements. Many enterprises include in the Notes on the Accounts, descriptions of some of the significant accounting policies. But the nature and degree of disclosure vary considerably between the corporate and the non-corporate sectors and between units in the same sector. 7. Even among the few enterprises that presently include in their annual reports a separate statement of accounting policies, considerable variation exists. The statement of accounting policies forms part of accounts in some cases while in others it is given as supplementary information. 8. The purpose of this Statement is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financialstatements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. Explanation Fundamental Accounting Assumptions 9. Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. 42 AS 1 (issued 1979) 10. The following have been generally accepted asfundamental accounting assumptions:— a. Going Concern The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations. b. Consistency It is assumed that accounting policies are consistentfrom one period to another. c. Accrual Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money isreceived or paid) and recorded in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt with in this Statement.) Nature of Accounting Policies 11. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. 12. There is no single list of accounting policies which are applicable to all circumstances. The differing circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise. 13. The various statements of the Institute of Chartered Accountants of India combined with the efforts of government and otherregulatory agencies and progressive managements have reduced in recent years the number of acceptable alternatives particularly in the case of corporate enterprises. While continuing efforts in this regard in future are likely to reduce the number still further, the availability of alternative accounting principles and methods of Disclosure of Accounting Policies 43 applying those principles is not likely to be eliminated altogether in view of the differing circumstances faced by the enterprises. AreasinWhich Differing Accounting Policies are Encountered 14. The following are examples of the areas in which different accounting policies may be adopted by different enterprises. • Methods of depreciation, depletion and amortisation • Treatment of expenditure during construction • Conversion or translation of foreign currency items • Valuation of inventories • Treatment of goodwill • Valuation of investments • Treatment of retirement benefits • Recognition of profit on long-term contracts • Valuation of fixed assets • Treatment of contingent liabilities. 15. The above list of examples is not intended to be exhaustive. Considerations in the Selection of Accounting Policies 16. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policiesshould represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit or loss for the period ended on that date. 17. For this purpose, the major considerations governing the selection and application of accounting policies are:— 44 AS 1 (issued 1979) a. Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. b. Substance over Form The accounting treatment and presentation in financial statements of transactions and eventsshould be governed bytheirsubstance and notmerely by the legal form. c. Materiality Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions ofthe user ofthe financial statements. Disclosure of Accounting Policies 18. To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 19. Such disclosure should form part of the financial statements. 20 It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of being scattered over several statements, schedules and notes. 21. Examples of mattersin respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive. 22. Any change in an accounting policy which has a material effectshould be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the factshould be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is Disclosure of Accounting Policies 45 reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. 23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. Accounting Standard 24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. 25. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place. 26. Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. 27. If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.