AS 1 – Disclosure of Accounting Policies (Accounting Standard 1)

AS 1 – Disclosure of Accounting Policies. The accounting policies followed vary from organisation to organisation. It is important to disclose significant accounting policies followed to make the financial statements understandable. The disclosure is required by law in certain cases.

AS 1 – Disclosure of Accounting Policies

What are accounting policies?

“Specific accounting principles and methods of applying those in preparation and presentation of financial statements of an entity”
Examples:
1. Valuation of inventory:

  • LIFO (Last in First out)
  • FIFO (First in First out)
  • Weighted Average
  • Retail method
  • Standard cost

2.Valuation of investments

3.Depreciation methods:

  • SLM Method (Straight Line Method)
  • WDV Method (Written down Value Method)

Need for disclosure of accounting policies?

It’s mandatory to disclose the accounting policies followed in preparation of financial statements. The reason behind this is for ” better understanding of financial statements and assets and liabilities in balance sheet and profit & loss account are significantly affected by those accounting policies”

What are fundamental accounting policies?

Generally it’s assumed that financial statements are prepared on the basis of fundamental accounting assumptions. Following are the fundamental accounting assumptions:

  1. Going concern:
    It means the entity has an intention of continuing its operations for foreseeable future. Foreseeable future means coming one or two years. In other words neither there is an intention of discontinuance of business, nor necessity of liquidation of organization and discontinuance of major operations of the business.

2. Consistency:

It means that same accounting policies are followed from one period to another.

3. Accrual:

It means that the financial statements are prepared on mercantile basis in which the transactions and other events are recognized when they occur and they are recorded in the accounting period to which they relate

Change in accounting policies:

A change in accounting policies should be made in the following conditions

  1. Adoption of different accounting policies is required by law.
  2. Adoption of different accounting policies is required for compliance of accounting standards.
  3. For more appropriate presentation of financial statements.

# If nothing has been there in the financial statements about the compliance of fundamental accounting policies it can be assumed that they are followed in preparation of financial statements.

What are the points to be considered for selecting accounting policies?

1. Prudence:

It means making estimates which is under the conditions of uncertainty.

2.Substance over form:

It means that the transaction should be accounted for in accordance with actual happening and economic reality and not by the legal form.

3.Materiality:

Financial statements should disclose all the items and facts which are sufficient enough to influence the decisions of users of financial statements.