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Introduction of Accounting Standards
In the initial years, this accounting standard will be recommendatory in
character. During this period, this standard is recommended for use by
companies listed on a recognized stock exchange and other large commercial,
industrial and business enterprises in the public and private sectors.
Meaning of Accounting Standards:
Accounting Standards are written documents, policy documents issued by expert accounting body or Government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transaction in the financial statement. Accounting Standards in India are issued by The Institute of Charted Accountants of India (ICAI).
Disclosure of Accounting Policies
The following is the text of the Accounting Standard (AS) 1 issued by
the Accounting Standards Board, the Institute of Chartered Accountants of
India on ‘Disclosure of Accounting Policies’. The Standard deals with the
disclosure of significant accounting policies followed in preparing
and presenting financial statements
What are Accounting Policies?
Accounting policies refer to specific accounting principles and the method of applying those principles adopted by the enterprises in preparation and presentation of the financial statements.
Need for disclosure of Accounting Policies:
For proper and better understanding of financial statement, it is required that all significant accounting policies followed in preparation of financial statements should be disclosed because assets & liabilities in Balance sheet & Profit & loss A/c are significantly affected by accounting policy followed. All significant Accounting Policies disclosed at one place because it would be helpful to the reader of financial statements.
In recent years, a few enterprises in India have adopted the practice of
including in their annual reports to shareholders a separate statement of
accounting policies followed in preparing and presenting the financial
Nature of Accounting Policies:
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 judgments by the management of the enterprise.
Areas in which different Accounting Policies are encountered:
Methods of Depreciation (AS-6)
- Straight line Method
- WDV Method
Treatment of expenditure during construction (AS-7)
- Written off
Conversion or Translation of Foreign currency item (AS-11)
- Average Rate
- TT Buying Rate
Valuation of Inventories (AS-2)
- Weighted average
- Retail Method
- Standard Cost
Valuation of Investments
Valuation of Fixed Assets
Treatment of Contingent Liability
There are many areas other than aforesaid, where more than one method can be followed in preparation of Balance Sheet & profit & loss Account are disclosed as accounting policies. Hence accounting policies contain the information about the method adopted for the preparation of financial statements. Statements of accounting policy are parts of financial statements.
Selection of Accounting Policies:
Basic objective of selection of accounting policies is that the financial statement should be prepared on the basis of such accounting policies, which exhibit true & fair view of state of affairs of balance sheet & profit & loss account.
Major points, which are considered for the purpose of selection and application of accounting policies, are:
2. Substance over form
Changes in Accounting Policies:
A change in accounting policies should be made in the following conditions.
1. Adoption of different accounting policies is required by statue or for compliance with an accounting standard.
2. It is considered that change would result in more appropriate presentation of financial statement.
Disclosure of Accounting Policies:
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.
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.
Examples of matters in respect of which disclosure of accounting policies
adopted will be required.
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.