Disclosure of accounting policies (as 1)

The prominent feature of Accounting Standard AS 1 announced by the ASB, regarding disclosure is as follows:

(1) Fundamental Accounting Assumptions:

Certain fundamental accounting assumptions undertake the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed.  Fundamental accounting assumptions are:

• Going concern
• Consistency
• Accrual.

If any assumption is not followed the fact should be disclosed.

(2) Accounting Policies:

Accounting policies refer to the specific accounting principles and the methods of applying those principles by enterprises in the compilation and presentation of financial statements. There is not exhaustive list of policies applicable under all circumstances. The varying circumstances under which enterprises operate necessitate the choice of appropriate principles and require considerable expertise of management. The following are the areas in which a choice with regard to policy is made by the enterprise:

• Method of depreciation, depletion and amortisation
• Treatment of expenditure, during the 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.
• This list is not exhaustive.

The objective of the accounting policies is to present 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.

The major considerations while selecting accounting policies are: –

• Prudence
• Substance over form, and
• Materiality.

To ensure proper understanding of financial statements, all significant accounting policies adopted in the preparation should be disclosed.  The disclosure of the significant accounting policies as such should form a part of the financial statements and the significant accounting policies should normally be disclosed at one place. Any change in the accounting policy which has material effect in the current period or which will have a reasonable effect in future should be disclosed.