IAS 1

Accounting Standard (AS) 1


(issued 1979)

Disclosure ofAccounting 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 Standards1.)

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

companies listed on a recognised stock exchange and other large commercial,

industrial and business enterprises in the public and private sectors.2

Introduction

1. This statement dealswith the disclosure of significant 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 policies followed in the preparation and presentation of the financial

statements. The accounting policies followed vary from enterprise to

enterprise.Disclosure of significant accounting policies followed 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 ofCharteredAccountants of India has, in Statements issued

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 financial statements. 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 as fundamental 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 curtailingmaterially

the scale of the operations.

b. Consistency

It is assumed that accounting policies are consistent fromone period to another.

c. Accrual

Revenues and costs are accrued, that is, recognised as they are earned or

incurred (and not asmoney is received 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 combinedwith the efforts of government and other regulatory 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.

Areas inWhichDifferingAccounting 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 policies should 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 viewof the uncertainty attached to future events, profits are not anticipated

but recognised only when realised though not necessarily in cash. Provision

ismade 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 events should be governed bytheir substance and notmerely

by the legal form.

c. Materiality

Financial statements should disclose all “material” items, i.e. items the

knowledge ofwhichmight influence the decisions of the user of the 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 ofmatters in respect ofwhich 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 amaterial effect should

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 fact should be

indicated. If a change ismade in the accounting policieswhich has nomaterial

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.