AS 1 --Disclosure of Accounting Policies

Introduction:

      Although the standardizing of accounting has reduced the possibilities of different alternatives of profit which could be reflected in a single transaction, it is not possible to control all the possible ways. Because of the diversity in the business a single set of policy will not apply to all the enterprises that’s why accounting standards permits more than one policy and thus the enterprise of the same industry are using different policies and the net effect is that the users of financial statements are finding difficulty in comparing both company, and here comes the need of AS 1. This standard says that all the enterprises should disclose his accounting policies in its financial statements so that the users are aware of that and compare accordingly.

First, what are the accounting policies?

Every enterprises have some rules and principals for how the transaction should be recoded in their books of accounts and once they create their rules, they follow this every time when the same transaction takes place--these rules and principals are called the accounting policies,  like whether inventories are valued at weighted average method or LIFO method, Depreciation is charged on WDV method or straight line method, assets are charged on historical cost method or in releasable value, revenue is recognized on the transfer of property or immediately after the sale, etc etc ..so these are some of the accounting policies that every enterprise state in its financial statements in the heading “significant accounting policies” 

Commencement:

This AS was first issued in 1979 and came into effect in respect of accounting period commencing on or after 1 April 1991.

Applicability:

This standard applies to all the enterprises.

Fundamental Accounting Assumption:

AS 1 gives three accounting assumptions viz Going concern, Accrual basis and consistency.

Going concern-

This assumption has a very deep meaning students generally learn the first line and think they understand the whole meaning.

Its says that an Enterprise prepares its financial statements on the assumption that it will carry on its business for longer period and neither it has intention nor need to shut the business or reduce the business operation.

It is because of this going concern assumption that we keep some amount out of profit as depreciation so that when  the value of fixed assets will nil the depreciation money will be accumulated enough to purchase that asset…

Its because of going concern that we keep the some amount separate as provision for liability..so that when liability exists enterprise suffers no problem in paying them from their provisions.

Consistency-

 Assumption of consistency says that the enterprise should maintain the same accounting policy for recording the transaction in every year i.e if inventories are valued at LIFO  method then in every year LIFO  method will be carried on. If depreciation in WDV method, then every year depreciation will be calculated on WDV --they can’t change different accounting policy in different year consistency should be maintain. it will change when require especially by AS OR GOVERNMENT OR other STAUTORY LAW.

Accrual basis –

 Its says that all the transactions are recognized(written) in the financial statements as soon as it occurred whether or not real cash is paid/received.Thus the accrual basis says that how much business company has done during the accounting year not how much cash company has earn..so  the accrual basis gives the clear idea of the workings of the business.

  DISCLOSURE REQUIREMENT OF THESE ASSUMPTION IN THE FINANCIAL STATEMENT:

Actually these are the assumption and not required to be disclose it will require only if these assumption are not followed by an enterprise in any accounting year and on that case it will disclose in the auditors report which is a part of the financial statement.

Selection of accounting policy:

This standard require that while selecting accounting policies the following points should be care

1) prudence:

 It says that as the future is uncertain all the probable loss is to be considered but not probable gain. it means while choosing the accounting policy enterprise should consider the point of prudence..example..creation of provision for the liability is normally an accounting policy and whether to create the provision for the particular liability in the balance sheet is a matter of prudence

But the applying prudence doesn’t mean that enterprise can create an unnecessary provisions for losses and understate the profit,… they will record the losses only when the chances of happening loss in future is more than chances of not happening loss.

2) Materiality:

It says all the significant items that can influence the decisions of the user of financial statement, will be disclosed in the financial statements by the way of notes to accounts. while choosing the accounting policies enterprise should take in to consideration about the materiality of the financial items.

Rememberàrevised provisions of the company act has made mandatory for the company to  disclose separately the expenses which is equal or more than 1%of total revenue or 100000 whichever is higher, in its financial statements by the way of notes to accounts …(here the provision is called accounting policy and while deciding policy we took in consideration the concept of materiality……this is the exact process the AS 1 is requiring from the entity..)

Manner of disclosure:

This AS tells that all the significant accounting policies will be disclosed in one place in the financial statements.

Disclosure for change in the accounting policy:

This AS says that the when the enterprises change the accounting policies which have a material effect on the financial statement or will have the material (significant)effect on future they should  disclosed that policy in the financial statement in the year in which the changes takes place and in such way that the effect is noticeable by a users. For example:

If an entity changed its policy from straight line to WDV, it should disclose clearly the amount by which  current year profit is effected from such change. It should determine the amount of depreciation as per straight line and as per WDV, so that users have clear idea about that.

This AS  says that just by only stating (say for example) “current year we have changed the depreciation valuation from WDV to straight line "--is not enough.

Important point:

Contradiction of consistency and AS 1

Student should note that the AS 1 says, Fundamental Accounting Assumption if followed, It should not be disclosed--- if not followed, it should be disclosed in the financial statements.One of the accounting assumption is consistency which says that enterprise should use same accounting policy in all the accounting period for a same transaction.

One can ask that”it means when in any year enterprise change its accounting policy it can disclosed that…’ fundamental accounting assumption are not followed’… since it has broken the consistency”….answer is …consistency would be broken if the enterprises changed the accounting policies frequently year after year and it was not mandatory for the enterprise to do this.

Here this AS 1 is talking about the changes which enterprises are bound to do in order to bring the true and fair view of their balance sheet. So for this they need to disclose the effect of change in their financial statements as per rule ,and no relation with FAA.  

So this was all about AS 2 soon I'm coming with the next important concept of Accounting.