Accounting-Standard-1-Disclosure-of-Accounting-Policies.pptx

AS 1

1. Accounting Standard 1: Disclosure of Accounting Policies Accounting Standard 1 (AS 1) is a fundamental guideline in financial reporting that deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. This standard, issued by the Institute of Chartered Accountants of India, aims to promote better understanding and comparability of financial statements across different enterprises. AS 1 emphasizes the importance of transparent disclosure of accounting policies, as these can significantly affect the view presented in financial statements regarding an enterprise's state of affairs and profit or loss. By establishing consistent disclosure practices, AS 1 facilitates more meaningful comparisons between financial statements of different enterprises, enhancing the overall quality and reliability of financial reporting in India. By – Dibakar Sarkar ( 23MB4001) Aditya Kumar Mondal ( 23MB4012)

2. Fundamental Accounting Assumptions AS 1 outlines three fundamental accounting assumptions that underlie the preparation and presentation of financial statements. These assumptions are so foundational that they are usually not explicitly stated, as their acceptance and use are presumed. However, if an enterprise deviates from these assumptions, disclosure becomes necessary. Going Concern This assumes the enterprise will continue operations for the foreseeable future, without intention or necessity to liquidate or significantly curtail operations. Consistency This assumes that accounting policies remain consistent from one period to another, ensuring comparability of financial statements over time. Accrual This assumes revenues and costs are recognized as they are earned or incurred, not when cash is received or paid, and are recorded in the relevant accounting periods.

3. Nature of Accounting Policies Accounting policies refer to the specific principles and methods adopted by an enterprise in preparing and presenting its financial statements. These policies are not universal; they vary based on the unique circumstances of each enterprise, reflecting the complex and diverse nature of economic activity. Policy Selection The choice of appropriate accounting policies requires considerable judgment from management, considering the specific circumstances of the enterprise. Standardization Efforts Efforts by regulatory bodies and progressive managements have reduced the number of acceptable alternatives, particularly for corporate enterprises. Ongoing Evolution While the number of alternatives may continue to decrease, some variation is likely to persist due to differing enterprise circumstances.

4. Areas of Differing Accounting Policies AS 1 recognizes that different enterprises may adopt varying accounting policies in certain areas. This diversity reflects the complex nature of business operations and the need for policies that best represent the financial reality of each enterprise. 1 Asset Valuation and Depreciation Methods of depreciation, depletion, and amortization for fixed assets, as well as valuation approaches for inventories and investments. 2 Foreign Currency and Construction Treatment of foreign currency transactions and translation, along with handling of expenditure during construction phases. 3 Intangibles and Long-term Contracts Approaches to valuing and amortizing goodwill, and methods for recognizing profit on long-term contracts. 4 Employee Benefits and Contingencies Treatment of retirement benefits and the approach to recognizing and valuing contingent liabilities.

5. Considerations in Selecting Accounting Policies The selection of accounting policies is a critical process that directly impacts the fair presentation of an enterprise's financial position and performance. AS 1 emphasizes that the primary consideration in policy selection should be to ensure that financial statements provide a true and fair view of the enterprise's state of affairs and profit or loss. Prudence This principle advocates for conservative accounting practices. It requires that profits are recognized only when realized, while provisions are made for all known liabilities and losses, even if the exact amount is uncertain. Substance Over Form This principle emphasizes that transactions should be accounted for and presented based on their economic substance rather than just their legal form, ensuring that financial statements reflect the true economic reality. Materiality This principle requires the disclosure of all "material" items - information that could influence the economic decisions of users of the financial statements.

6. Disclosure Requirements for Accounting Policies AS 1 mandates comprehensive disclosure of accounting policies to ensure proper understanding of financial statements. This transparency is crucial for stakeholders to make informed decisions based on the financial information presented. 1 Comprehensive Disclosure All significant accounting policies adopted in preparing and presenting financial statements must be disclosed. 2 Integrated Presentation The disclosure should form an integral part of the financial statements, preferably consolidated in one place for ease of reference. 3 Change Notification Any change in accounting policies with a material effect in the current period or expected material effect in future periods must be disclosed, along with its financial impact where ascertainable. 4 Fundamental Assumptions If the fundamental accounting assumptions (Going Concern, Consistency, and Accrual) are followed, specific disclosure is not required. However, any deviation from these assumptions must be explicitly stated.

7. Q)In the books of Rani Ltd., closing inventory as on 31.03.2020 amounts to ₹1,75,000 (valued on the basis of FIFO method). The Company decides to change from FIFO method to weighted average method for ascertaining the costs of inventory from the year 2019-20. On the basis of weighted average method, closing inventory as on 31.03.2020 amounts to ₹ 1,59,000. Realizable value of the inventory as on 31.03.2020 amounts to ₹2,07,000. Discuss disclosure requirements of change in accounting policy as per AS 1.

8. Ans)As per AS 1 "Disclosure of Accounting Policies", any change in an accounting policy which has a material effect should be disclosed in the financial statements. 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. Thus Rani Ltd. should disclose the change in valuation method of inventory and its effect on financial statements. The company may disclose the change in accounting policy in the following manner: "The company values its inventory at lower of cost and net realizable value. Since net realizable value of all items of inventory in the current year was greater than respective costs, the company valued its inventory at cost. In the present year i.e. 2019-20, the company has changed to weighted average method, which better reflects the consumption pattern of inventory, for ascertaining inventory costs from the earlier practice of using FIFO for the purpose. The change in policy has reduced current profit and value of inventory by 16,000 (1,75,000-1,59,000 )."

9. Q)The draft results of Surya Ltd. for the year ended 31st March, 2020, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of 10 crores. The board in consultation with the managing director, decided to value year-end inventory at works cost (50 crores) instead of the hitherto method of valuation of inventory at prime cost (30 crores). As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for inclusion in the annual report for 2019-2020

10. Ans)As per AS 1, any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, 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. Accordingly, the notes on accounts should properly disclose the change and its effect. Notes on Accounts During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost as was the practice till last year. This has been done to take cognizance of the more capital intensive method of production on account of heavy capital expenditure during the year. As a result of this change, the year-end inventory has been valued at 50 crores and the profit for the year is increased by 20 crores."

11. Implementation and Best Practices Effective implementation of AS 1 requires a systematic approach to policy selection, documentation, and disclosure. Best practices include regular review of accounting policies, clear communication with stakeholders, and alignment with industry standards. Best Practice Description Benefit Regular Policy Review Annual assessment of accounting policies Ensures relevance and compliance Clear Documentation Detailed recording of policy rationales Facilitates audits and transitions Stakeholder Communication Proactive disclosure of policy changes Enhances transparency and trust Industry Alignment Benchmarking against peer practices Improves comparability of statements

12. Impact and Future Outlook The implementation of AS 1 has significantly enhanced the quality and comparability of financial reporting in India. By promoting transparency and consistency in accounting policy disclosure, it has improved stakeholder confidence and facilitated more informed decision-making. Looking ahead, the evolution of AS 1 is likely to continue, aligning with international standards and adapting to emerging business models and technologies. Future revisions may focus on enhanced digital reporting, integration with sustainability reporting, and more granular disclosure requirements to address the growing complexity of business operations. Digital Transformation Advanced technologies are reshaping financial reporting, enabling more dynamic and interactive disclosures. Integrated Reporting The future may see a closer integration of financial and non-financial disclosures, providing a more holistic view of enterprise performance. Global Harmonization Continued efforts towards global accounting standards convergence will likely influence future revisions of AS 1.