This AS was issued in 1979 and in the initial years, it was recommendatory in character. During this period, this standard was 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. It may be noted that the standard is now mandatory and is applicable for all enterprises.
Irrespective of extent of standardization, diversity in accounting policies is unavoidable for two reasons. Since uniformity is impossible, and accounting standards permit more than one alternative in many cases, it is not enough to say that all standards have been complied with.
For these reasons, accounting standard 1 requires enterprises to disclose accounting policies actually adopted by them in preparation of their financial statements. Such disclosures allow the
Example of Disclosures under AS - 1:
Kingfisher Airlines Limited:
Note 24, Schedule 19:
The company has incurred substantial losses and its net worth has been eroded. However, having regard to improved passenger and cargo load in recent months, improvement in economic sentiment and business prospects, cost saving schemes being implemented etc. the financial statements have been prepared on the basis that the company is a going concern.
users of financial statements to take the differences in accounting policies into consideration and to make necessary adjustments in their analysis of such statements.
AS - 1 deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. The purpose of the Standard 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.
[Para 9, 10]
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.
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 curtailing materially the scale of the operations.
It is assumed that accounting policies are consistent from one period to another.
Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money 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 standard.)
[Para 11, 12, 13]
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.
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 judgment by the management of the enterprise.
The various standards of the Institute of Chartered Accountants of India combined with 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 applying those principles is not likely to be eliminated altogether in view of the differing circumstances faced by the enterprises.
[Para 14, 15]
The following are examples of the areas in which different accounting policies may be adopted by different enterprises:
a) Methods of depreciation, depletion and amortization
b) Treatment of expenditure during construction
c) Conversion or translation of foreign currency items
d) Valuation of inventories
e) Treatment of goodwill
f) Valuation of investments
g) Treatment of retirement benefits
h) Recognition of profit on long-term contracts
i) Valuation of fixed assets
j) Treatment of contingent liabilities.
The above list of examples is not intended to be exhaustive.
[Para 16, 17]
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.
For this purpose, the major considerations governing the selection and application of accounting policies are:-
In view of the uncertainty attached to future events, profits
Example of Disclosures under AS - 1:
Infomedia 18 Limited: [From CFS]
Note 19, Schedule T:
The company has incurred substantial losses and its net worth has been eroded. However, having regard to improved passenger and cargo load in recent months, improvement in economic sentiment and business prospects, cost saving schemes being implemented.etc. the financial statements have been prepared on the basis that the company is a going concern.
are not anticipated but recognised only when realised though not necessarily in cash. 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.
b) Substance over Form
The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form
Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements.
[Para 18 - 23]
I. 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. Such disclosure should form part of the financial statements.
II. 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.
III. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive.
IV. Any change in an accounting policy which has a material 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 is made in the accounting policies which has no material effect on the financial statements for the current period but which is 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.
V. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts.
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.
The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods. The deviation from the principle of consistency therefore means a change in accounting policy, the disclosure requirements for which are covered by paragraph 26 of the standard.