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CS EXECUTIVE Accounting Standard – 1

AS 1 ---Disclosure of accounting policies

It deals with the disclosures of significant accounting policies followed in preparation and presentation of financial statements.

It covers

  1. Fundamental Accounting Assumptions

  2. Accounting policies

Fundamental Accounting Assumptions

These assumptions underlie the preparation and presentation of financial statements.

Accounting Policies

Accounting policies means the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation financial statements.

Fundamental Accounting Assumptions

  1. Going concern

  2. Consistency

  3. Accrual

Going concern

It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of

curtailing materially the scale of the operations. The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future.

Consistency

Accounting policies are considered to be consistent from one period to another.

Accrual

Revenues and costs are accrued, that is, recognized as they are earned or incurred and recorded in the financial statements of the periods to which they relate.

The next important part is to decide which accounting policy should be adopted.

While selecting an accounting policy consideration should be given

Prudence:

As the future is always uncertain, profits are not anticipated but recognized only when realized though not necessarily by cash.

Here it need to be noted that 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.

While selecting an accounting policy 

  1. Correct determination of profit or loss for the period should be ensured

  2. It should be ensured that true and fair view of the state of affairs of the enterpised as at the balance sheet is disclosed.

Disclosure requirements:

  1. If fundamental accounting assumptions are followed no separate disclosed is needed.

  2. If fundamental accounting assumptions are not followed specific disclosure requied in financial statements.

  3. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.

  4. Disclosure should be a part of financial statement.

  5. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts.

If the company has changed its regular accounting policies, following should be disclosed.

  1. If such change have material effect in the current period

  2. If the amount is ascertained – such amount should be disclosed

  3. If such amount is not ascertainable or ascertained – the fact should be disclosed.

  4. There are some changes which may not be having any change in the current year but can have impact in later periods. In such cases the fact of such change should be clearly mentioned in the current period.

Take away

a) All significant accounting policies. Adopted in the preparation and presentation of financial

statements should be disclosed normally in one place.

b) Such disclosure should form part of the financial statements

c) Any change in the accounting policies having a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed.

d) If having material effect in the current periods, the amount by which any item in the financial

statements is affected by such change should also be disclosed to the extent ascertainable, e.g.

cost formula used for inventory valuation is changed from FIFO to weighted average method, it

may increase or decrease the reported profit.

If amount is not ascertainable, the fact would be indicated, e.g., incidence of excise duty on the

finished goods has been provided and the valuation of finished goods has been increased

accordingly. However, it has no impact on the profit or on the net current assets.

e) If the fundamental accounting assumptions, viz. Going Concern, Consistency and Accrual are not followed, the fact should be disclosed.

f) Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts.

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