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AS 1: Disclosure of Accounting policies IPCC Paper 1: Accounting Chapter 1 Unit 2 CA. Yagnesh Desai, FCA 1

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Page 1: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

AS 1: Disclosure of Accounting policiesIPCC Paper 1: Accounting Chapter 1 Unit 2

CA. Yagnesh Desai, FCA1

Page 2: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Learning Objectives

2

In this chapter we will learn

What types of policies should an enterprise disclose.

It also mentions consideration in selection of accounting policies

Page 3: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Applicability

3

This standards was introduced in 1979

It is applicable to corporates as well all non corporate entities.

Page 4: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Introduction

• This statement deals with disclosure of significantaccounting policies followed in preparing and presentingfinancial statements;

• Significance:

The accounting policies followed vary from enterprise toenterprise .

Disclosure of significant accounting policies followed isnecessary if the view presented is to be properlyappreciated. 4

Page 5: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Introduction - 2

• In some cases the disclosures of accounting policies arerequired by law as well.

• The nature and degree of disclosures vary considerablybetween the corporate and non-corporate sectors andbetween units in the same sector.

• In some cases statement of accounting policies form partof accounts and in some cases it is given assupplementary information.

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Page 6: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Fundamental Accounting Assumptions

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1• Going Concern

2• Consistency &

3• Accrual

4• Since these are presumed - Only the deviation

are to be disclosed

Page 7: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Assumption 1: Going Concern

• The enterprise is normally viewed as a going concern i.e. as continuing in operation for the foreseeable future – How Long ?

• It is assumed that the enterprise has neither the intention nor necessity of liquidation or of curtailing Materially the scale of operation.

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Page 8: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Assumption 2: Consistency

• It is assumed that the accounting policies are consistent from one period to another.

• Why is this assumption so important ??Because It enables better comparison of Financial Statements of different periods.

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Page 9: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Assumption 3: Accrual

•Revenues and costs areaccrued, i.e., recognised asthey are earned or incurredand recorded in the financialstatements of the periods towhich they relate.

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Page 10: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Areas in which different Accounting Policies vary.

Some examples areas in which different accounting policies may be adopted:

Methods of depreciation, depletion and

amortisation.

Valuation of fixed assets

Valuation of inventories,

Treatment of goodwill

Valuation of investments10

Page 11: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Considerations in selection of Policies

• Financial statements prepared on the basis of accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and that of results of operation for the period in the Statement of Profit & Loss.

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Page 12: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

1. Prudence

In view of inherent uncertainties and inadequate information about future

Profits are NOT anticipated but recognised only when they are realised,

Provision is made for all known liabilities and losses even though only an estimate can be made as it cannot be determined with certainty- probability plays an important role. 12

A sensible & careful attitude that makes you avoid unnecessary risks.

Page 13: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

1. Prudence Ensures

Profits and assets are not overstated

Liability and losses are not understated

Well that does not mean that prudence helps create hidden reserves.

13

Page 14: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

1. Prudence Example

Measuring closing inventory at lesser of cost or net realisable value

In case of construction contracts , recognising anticipated losses in full even if cost not accrued. In such cases, prudence overrides accruals

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Page 15: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

2. Substance Over Form

Their substance & financial

reality

And NOT legal form

15

Transactions & Events should be accounted for and presented in accordance with

Page 16: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

2. Substance over Form –Example.

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For example, an enterprise sales goods Rs. 1,50,000 and concurrently agrees to buy back the same after one month for Rs. 1,55,000

This is more of financing arrangement under garb of sale and purchase agreement.

Page 17: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

3. Materiality

• What do you understand by the term “Materiality” ?Material Items mean items the knowledge of which mightinfluence the decision of the users of the financialstatements

• All material items should be disclosed in the financial statements.

• It is relative term, for example, Rs. one lakhs for an enterprise having turnover of Ten lakhs is materials as compared to enterprise having turnover of Rs. 1,000 crore. 17

Page 18: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

3. Materiality – Nature & Magnitude

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Materiality is NOT just governed by the size ,i.e,the magnitude, but also by the nature

A loss by fraudulent practices of certainemployees can indicate a serious flaws in theenterprise’s internal control system requiringimmediate attention , then loss by theft. In thiscase , materiality is governed by nature and notmagnitude or the quantum

Page 19: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Disclosure of Change in Accounting Policies

One of the very vital disclosures is about Changes in accounting polices which has material effect in the current period or in later period.

Just the fact there is change in accounting polices is not enough.

The effect of changes should be discloses wherever ascertainable. If not ascertainable – the fact should be mentioned.

If the change in policies has no significant impact in current year , but material impact in future years ,the fact should be disclosed in the year of change.

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Page 20: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Disclosures- CAUTION !

• Disclosure of accounting policies or ofchange therein CANNOT remedy a wrongor inappropriate treatment of the items in theaccounts.

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Page 21: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Disclosures

•All significant accounting policies adopted should be disclosed;

•Disclosures should form part of the financial statements, and should be disclosed at one place and not scattered.;

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Page 22: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Disclosures

• The disclosures mentioned earlier are Minimum disclosure.

• Additional Disclosures can always be provided by an entity

• E.G:In case of estimation of figures , disclosures may beprovided regarding the assumptions made and methodfollowed in determining the estimation (for example:Depreciation calculation : Straight line method or Reducingbalance method)

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Page 23: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Accounting Policy – Tata Steel

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Page 24: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Accounting Policy – Tata Steel 2

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Page 25: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Accounting Policy – Tata Steel 3

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Page 26: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Accounting Policy – Tata Steel 4

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Page 27: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Accounting Policy – Tata Steel 5

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Page 28: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Practice Tips

• Students must read the annual reports of the listed companies to get the clear idea of how different companies disclose the accounting polices.

• You should select the companies from different sectors like, banking, manufacturing, entertainment , software etc.

• This will also help you understand practical application of accounting standards.

• . 28

Page 29: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

MCQ.

• As 1 is applicable to

• A) Only to Listed companies • B) Only to Limited Companies• C) To all enterprises , except Partnerships Firms• D) To all enterprises

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Page 30: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

Questions

• Q.1 Give 5 Illustrations of the areas in which different accounting policies may be adopted by different enterprises.

• Q.2 Discuss the importance of accounting policies ?

• Q.3 Write a sample note on disclosure of accounting policies.

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Page 31: AS 1: Disclosure of Accounting policies · Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. 4. Introduction

31

Don’t Waste time – Make the most of it.

Be

Determined

Discipline and

Dedicate – With Best Wishes


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