AN INTRODUCTION TO ACCOUNTING STANDARDS

ACCOUNTING STANDARD -1: DISCLOSURE OF ACCOUNTING POLICIES

APPLICABILITY:

THIS STANDARD APPLIES TO EVERY ORGANISATION WHETHER

(i) SMALL AND MEDIUM COMPANIES (SMC)

(ii) NON SMC

(iii)LEVEL 1, 2 OR 3 ENTERPRISE

PURPOSE:

This standard deals with disclosure requirements in preparation and presentation of financial statements.

WHAT ARE ACCOUNTING POLICIES?

ACCOUNTING POLICIES are the procedures according to which the financial statements of an entity are prepared. It includes any method, systems and procedures for presenting disclosures of financial information. Every business follows different accounting policies according to its nature, e.g., an entity dealing with perishable goods should follow LIFO system of inventory rather than FIFO, etc.

WHY DISCLOSURE NEEDED?

As financial policies vary from entity to entity therefore it becomes necessary to disclose all the policies at a place so that it is appreciated by its users and can be properly understood by the users.

Also, sometimes disclosure is required by statute in some cases e.g., translation policies in respect of foreign currency items.

IS EVERY POLICY ADOPTED REQUIRED TO BE DISCLOSED SEPARATELY?

NO, not every policy is required to be disclosed in financial statements. Some disclosures are presumed by law and are known as FUNDAMENTAL ACCOUNTING ASSUMPTIONS. However they are required to be reported only if they are not followed.

Following are the FUNDAMENTAL ACCOUNTING ASSUMPTIONS

1. GOING CONCERN: An entity is presumed to carry out its operations for the foreseeable future. It is assumed that an entity don’t have any intention of closing down its business in the near future.
2. CONSISTENCY: It is also assumed that the policies once followed by the entity are consistently followed by it. This is the necessary to ensure comparability feature of financial statements.
3. ACCRUAL: It means that revenues and costs are recognized as soon as they are earned or incurred. An enterprise can recognize its costs and revenues as they are incurred or earned in the period to which it relates, e.g., if tax is due but not paid in the current year, it should be recorded in the present year instead of next year.                                                                     

The use of above discussed assumptions are presumed by law, however they need to be disclosed clearly in the financial statements only in case they are not followed.

EXAMPLES WHERE DIFFERENT ACCOUNTING POLICIES ARE USED:

•          Methods of depreciation, depletion and amortization 
•          Treatment of expenditure during construction
•          Conversion or translation of foreign currency items
•          Valuation of inventories
•          Treatment of goodwill
•          Valuation of investments

WHAT SHOULD BE CONSIDERED WHILE SELECTING ACCOUNTING POLICIES OF AN ENTITY?

The primary considerations while selecting any accounting policy to be followed are:

1. Prudence:

In the business world nothing can be predicted for future, therefore it will be a better decision that anticipated profits/ gains and revenues should not be recognized unless there is sure shot surety that they will be recovered, however if there is any expected future losses or expenses they should be accounted for immediately ,e.g. provisions for doubtful debts, etc.

2. Substance over form:

This implies that a financial transaction should clearly underlie realities of accounting standards. It just means that a financial transaction should show the clear evident position of the business and not merely complying legal entries. This principle is applied to ensure that real intent of the transaction is valid and the transaction is having some economic substance and is not merely done to hide TRUE AND FAIR VIEW of the statements from its stakeholders for some unethical task.

So, it can be said that real intention of the party should be taken in to consideration instead of just its legal compliance.

This principle plays a very important role in ensuring that the financial statements prepared are free from material misstatement and is representing TRUE AND FAIR VIEW of entity’s position.

3. Materiality:

Material items are those items, the knowledge of which may affect the financial decisions of its users. Since these items may affect the financial decisions of its users therefore, financial statements should be free from material errors or should show all the material items.

POSTED BY, 

VARUN MAHEY

EDITOR AT CHARTERED BLOOD