AS 1, or accounting standard 1, covers the disclosure of accounting policies in preparing financial statements.
Why it’s important to disclose accounting policies
Accounting policies differ between enterprises, and the profit or loss can drastically affect accounting policies. Organizations must prepare financial statements of their financial position, and recognize the importance of disclosing accounting policies in order to make financial statements understandable. This disclosure is in fact required by law in certain circumstances.
Recently, some organizations in India have begun to include a separate statement of their accounting policies in their annual shareholder reports.
However, there tends to be no consistency in disclosures among enterprises. Some enterprises leave the accounting policies in the bottom notes of financial statements, while others do not. Some make the disclosure a part of the account, while others list it as only supplementary information.
Accounting standard 1 is crucial to establish a better understanding of financial statements by providing a uniform standard for disclosing accounting policies. Disclosure will speed up the comparing of financial statements between enterprises and make reading financial statements easier.
Accounting assumptions
AS 1 requires that in preparing financial statements, organizations must make certain assumptions. Usually, these are left vague and unstated since they are assumed to be understood by all. The disclosing of accounting policies is only deemed necessary when the policies are not followed.
To make things easier on those who are not familiar with these assumptions, here’s a brief list:
- Going concern
The going concern of many organizations is whether it will be able to continue operations for the foreseeable future. The assumption here is that the organization has no intent to end or shut down in the near future.
- Consistency
The consistency of accounting policies should not change from one reporting period to the next. Here, it’s assumed that changes to policies are few and far between, and should not be expected.
- Accrual
The revenues must be earned or incurred, not received or paid
Accounting policies 101
The nature of accounting policies refers to a plethora of principles and methods for applying these principles. According to AS 1, each organization adopts its own principles in the preparing of financial statements.
It is worth mentioning that no single list of accounting policies can be used in all circumstances. Different organizations create different accounting principles to sustain their own unique operations. Appropriate principles are determined by the organization’s management.
Provisions for differing accounting policies
These are a few occasions in which different accounting policies can be adopted by different organizations:
- Depreciation, amortization and depletion methods
- Expenditure treatment during construction
- Translation of currency, especially foreign items
- Inventory valuation
- Goodwill treatment
- Investment valuation
- Detailing profit on long-term contracts
- Retirement benefit treatment
- Contingent liability treatment
Accounting Policies: Things to Consider
No matter what, in accounting standard 1, the primary concern of any organization in filling out financial statements should be to present an honest and fair portrait of the goings on during a financial period.
All statements should be true and accurate to the best of the ability of the prepare. For this reason, the main keys to proper preparation are these:
Prudence
Profits can only be recognized, according to the accounting standard, when earned since there is a fair amount of uncertainty regarding future events. Provision for all understood liabilities should be made, but cannot be diagnosed with certainty. AS 1 requires that all representations or forecasts for the future on paper are estimates at best.
Substance over form
The treatment of accounting and the presentation of transactions must be ruled by their substance and not just their form.
Materiality
All financial statements are required to disclose “material” items, which reflect the knowledge of what might influence future decisions.
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