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Accounting Standard – 1
Disclosure of Accounting Policies
1. Applicability and Nature : This AS is applicable from 01-04-1993 onwards and Mandatory for SMC, NON-SMC and Level-I,II & III (It means mandatory for all)
2. Objective:- The main objective of this AS is to provide better understanding of the F/S by
disclosing the significant accounting policies used in preparation of F/S. This
also helps meaning full comparison between F/S s of different enterprises.
3.
Fundamental
Accounting Assumptions:-
(a)
Going
Concern:- This assumption states that enterprise will not close its
operation in near future. It is assumed that the enterprise has neither the
intention nor the necessity of Liquidation.
(b)
Consistency:-
Accounting policies are consistent from one period to another period.
(c)
Accrual:-
Revenue and costs are recognized when they are earned or incurred and recorded
in F/S of the period to which they are related.
4.
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 of
F/Ss
Ex. To provide depreciation is
an accounting principle and to use WDV or SLM are method of applying this
principle.
5.
Areas
where different accounting policies may be adopted:-
(a)
Inventory valuation- FIFO, LIFO, Weighted
Average etc.
(b)
Depreciation Method- SLM, WDV etc.
(c)
Investment valuation- Cost , Cost or FMV
whichever is lower.
(d)
Fixed Assets Valuation- Historical Cost,
Revaluation Price etc.
(e)
Goodwill valuation – Average Profit method,
Super Profit Method etc.
(f)
Revenue recognition on contract costing
(g)
Translation of foreign currency transaction.
6.
Selection
of Accounting Policies:- Following points must be considered while
selecting accounting policy:
(a)
Prudence:-
Provide for all probable losses but do not recognize unrealized profit. In
other words policy of conservatism should be adopted.
(b)
Substance
Over Form:- The substance of a transaction should matter not merely the
legal form. For example in case of HP transaction the asset purchased legally
belongs to the Hire Vendor until all the instalments are paid still it is
recorded in the books of Hire Purchaser as an assets and he claim for
depreciation.
(c)
Materiality:-
An information should be called material if it influence the decision of the
user of F/S. The F/S should disclose all the material information.
7.
Disclosure
Requirement:-
(a)
All policies adopted in preparation of F/S
should be disclosed. (b) If any fundamental Accounting assumption is not
followed then the facts should be disclosed. (c) All the disclosure should be
at one place. (d) If any accounting policy s changed then all the facts should
be disclosed.
Problems:
DISCLOSURE
OF ACCOUNTING POLICIES
1. Write short notes on fundamental accounting
assumptions and their disclosure requirements.
(Nov-1994, Nov-1997, Nov-1999,
May-2001, May-2013)
2. Recognizing the need to harmonize the
diverse accounting policies and practices, “Accounting Standards are framed”.
Give examples of areas in which in which different accounting policies may be
adopted by enterprises. (Nov-2010)
3. What are the major consideration which
govern the selection and application of accounting policies. (Nov-1995,
Nov-2007)
4. V Ltd sold its Building to another Company
for Rs.60 Lakhs on 18th January and gave possession of the property
to the Buyer company. Documentation and legal formalities are pending, due to
this, V Ltd has not recorded the sale, and has shown the amount received as an
advance. Book value of the building as at the end of the current financial year
is Rs.25 Lakhs. Do you agree with this treatment ? it not, explain reasons
thereof .
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