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Assignment
AS-1
Disclosure of Accounting Policies
Q. No. Questions and Solutions
1. What are the three fundamental accounting assumptions recognized by Accounting
Standard (AS)-1? Briefly describe each one of them.
(ICAI SM/ Nov. 2020 RTP /May 2013)
Sol. Accounting Standard (AS-1) recognizes three fundamental accounting assumptions.
These are as follows: -
1) Going Concern: The financial statements are normally prepared on the assumption
that an enterprise will continue its operations in the foreseeable future and neither
there is intention, nor there is need to materially curtail the scale of operations.
2) Consistency; The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the change
is required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate
presentation of financial statements.
3) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid.
2. In the books of M/s Prashant Ltd., closing inventory as on 31.03.20X2 amounts to
₹1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method for
ascertaining the cost of inventory from the year 20X1-X2. On the basis of weighted average
method, closing inventory as on 31.3.20X2 amounts to ₹1,47,000. Realisable value of the
inventory as on 31.03.20X2 amounts to ₹1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.
(ICAI SM/RTP/Nov. 2015)
Sol. Provision: - 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 chang e should
also be disclosed to the extent ascertainable.
Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
Analysis and Conclusion: - In the given case Prashant 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., 20X1-X2, 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.
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3. XYZ Company is engaged in the business of financial services and is undergoing tight
liquidity position, Since most of the assets of the company are blocked in various
claims/petitions in a Special Court. XYZ has accepted Inter-Corporate Deposits (ICDs) and,
it is making its best efforts to settle the dues.
There were claims at varied rates of interest, from lenders, from the due date of ICDs to
the date of repayment. The company has provided interest, as per the terms of the contract
till the due date and a note for non-provision of interest on the due date to date of
repayment was affected in the financial statements.
On account of uncertainties existing regarding the determination of the amount and in the
absence of any specific legal obligation at present as per the terms of contract, the
company considers that these claims are in the nature of “claims against the company not
acknowledged as debt”. And the same has been disclosed by way of a note in the accounts
instead of making a provision in the profit and loss accounts. State whether the treatment
done by the Company is correct or not.
(ICAI SM/May 2017/Nov. 2013)
Sol. Provision: - As per AS-1 ‘Disclosure of Accounting Policies’ recognises ‘prudence’ as one
of the major considerations governing the selection and application of accounting policies.
In view of the uncertainty attached to future events, profits are not anticipated but
recognised only when realised though not necessarily in cash. Provision is made for all
known liabilities and losses even though the amount cannot be determined with certainty
and represents only a best estimate in the light of available information.
Also, as per AS-1, ‘accrual’ is one of the fundamental accounting assumptions. Irrespective
of the terms of the contract, so long as the principal amount of a loan is not repaid. The
lender cannot be replaced in a disadvantageous position for non-payment of interest in
respect of overdue amount.
Analysis and Conclusion: - In the given case it is apparent that the company has an
obligation on account of the overdue interest. In this situation, the company should
provide for the liability (Since it is not waived by the lenders) at an amount estimated or
on reasonable basis based on facts and circumstances of each case.
However, in respect of the overdue interest amounts, which are settled, the liability should
be accrued to the extent of amounts settled. Non-provision of the overdue interest liability
amounts to violation of accrual basis of accounting.
Therefore, the treatment, done by the company, of not providing the interest amount from
due date to the date of repayments is not correct.
4. ABC Ltd. was making provision for non-moving inventories based on no issues for the last
12 months up to 31.3.20X0.
The company wants to provide during the year ending 31.3.2020 based on technical
evaluation:
Particulars (₹)
Total Value of Inventory 100 lakhs
Provision required based on 12 months issue 3.5 lakhs
Provision required based on technical evaluation 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of
provision?
(May 2020 RTP /Nov. 2018/ March 2021 MTP)
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Sol. Provision: - As per AS-1 ‘Disclosure of Accounting Policies’ recognises ‘Any change in the
accounting policies which have material affect in the current period or which is reasonably
expected to have a material affect in a later period should be disclosed.
Analysis and conclusion: - In the given case the decision of making provision for non-
moving inventories on the basis of technical evaluation does not amount to cha nge in
accounting policy. Accounting policy of a company may require that provision for non-
moving inventories should be made. The method of estimating the amount of provision
may be changed in case a more prudent estimate can be made. In the given case,
considering the total value of inventory.
The change in the amount of required provision of non-moving inventory from ₹3.5 lakhs
to ₹2.5 lakhs is also not material. The disclosure can be made for such change in the
following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the
year 20X0-X1.
5. Jagannath Ltd. had made a rights issue of shares in 20X2. In the offer document to its
members, it had projected a surplus of ₹40 crores during the accounting year to end on
31st March, 20X2. The draft results for the year,
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 on the following:
1) Value year-end inventory at works cost (₹50 crores) instead of the hitherto method of
valuation of inventory at prime cost (₹30 crores).
2) Provide depreciation for the year on straight line basis on account of substantial
additions in gross block during the year, instead of on the reducing balance method.
Was hitherto adopted. As a consequence, the charge for depreciation at ₹27 crores is
lower than the amount of ₹45 crores which would have been provided had the old
method been followed by ₹18 crores.
3) Not to provide for “after sales expenses” during the warranty period. Till the last year.
Provision at 2% of sales used to be made under the concept of “matching of costs
against revenue”. And actual expenses used to be charged against the provision. The
board new decided to account for expenses as and when actually incurred Sales during
the year total to ₹600 crores.
4) Provide for permanent fall in the value of investments- which fall had taken place over
the past five years- the provision being ₹10 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 20X1-20X2
(ICAI SM/May 2021 RTP)
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, www.escholars.in
Sol. Provision: -As per AS-1, ‘Disclosure of Accounting Policies’ recognises 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.
Analysis and conclusion: - In the given case following notes to accounts are prepared-:
Notes to Accounts: -
1) 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 years is increased by
₹20 crore.
2) In view of the heavy capital-intensive method of production introduced during the
year, the company has decided to change the method of providing depreciation from
reducing balance method to straight line method. As a result of this change.
Depreciation has been provided at ₹27 crores which is lower than the charge which
would have been made had the old method and the old rates been applied, b y ₹18
crores. To that extent, the profit for the year is increased by Rs.9 crores.
3) So far, the company has been providing 2% of sales for meeting “after sales expenses
during the warranty period. With the improved method of production, the
probability of defects occurring in the products has reduced considerably. Hence, the
company has decided not to make provision for such expenses but to account for the
same as and when expenses are incurred. Due to this change, the profit for the year
is increased by ₹12 crores than would have been the case if the old policy were to
continue.
4) The company has decided to provide ₹10 crores for the permanent fall in the value
of investments which has taken place over the period of past five years. The
provision so made has reduced the profit disclosed in the accounts by ₹ 10 Crores.
6. State whether the following statements are ‘True’ or ‘False’. Also give reason for
your answer;
1) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because their
acceptance and use are not assumed.
2) If fundamental accounting assumptions are not followed in presentation and
preparation of financial statements, a specific disclosure is not required.
3) All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.
Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.
(May 2020 RTP / April 2021 MTP)
888 888 0402
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Assignment
AS-1
Disclosure of Accounting Policies
Q. No. Questions and Solutions
1. What are the three fundamental accounting assumptions recognized by Accounting
Standard (AS)-1? Briefly describe each one of them.
(ICAI SM/ Nov. 2020 RTP /May 2013)
Sol. Accounting Standard (AS-1) recognizes three fundamental accounting assumptions.
These are as follows: -
1) Going Concern: The financial statements are normally prepared on the assumption
that an enterprise will continue its operations in the foreseeable future and neither
there is intention, nor there is need to materially curtail the scale of operations.
2) Consistency; The principle of consistency refers to the practice of using same
accounting policies for similar transactions in all accounting periods unless the change
is required (i) by a statute, (ii) by an accounting standard or (iii) for more appropriate
presentation of financial statements.
3) Accrual basis of accounting: Under this basis of accounting, transactions are
recognised as soon as they occur, whether or not cash or cash equivalent is actually
received or paid.
2. In the books of M/s Prashant Ltd., closing inventory as on 31.03.20X2 amounts to
₹1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method for
ascertaining the cost of inventory from the year 20X1-X2. On the basis of weighted average
method, closing inventory as on 31.3.20X2 amounts to ₹1,47,000. Realisable value of the
inventory as on 31.03.20X2 amounts to ₹1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.
(ICAI SM/RTP/Nov. 2015)
Sol. Provision: - 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 chang e should
also be disclosed to the extent ascertainable.
Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
Analysis and Conclusion: - In the given case Prashant 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., 20X1-X2, 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.
888 888 0402
1
, www.escholars.in
3. XYZ Company is engaged in the business of financial services and is undergoing tight
liquidity position, Since most of the assets of the company are blocked in various
claims/petitions in a Special Court. XYZ has accepted Inter-Corporate Deposits (ICDs) and,
it is making its best efforts to settle the dues.
There were claims at varied rates of interest, from lenders, from the due date of ICDs to
the date of repayment. The company has provided interest, as per the terms of the contract
till the due date and a note for non-provision of interest on the due date to date of
repayment was affected in the financial statements.
On account of uncertainties existing regarding the determination of the amount and in the
absence of any specific legal obligation at present as per the terms of contract, the
company considers that these claims are in the nature of “claims against the company not
acknowledged as debt”. And the same has been disclosed by way of a note in the accounts
instead of making a provision in the profit and loss accounts. State whether the treatment
done by the Company is correct or not.
(ICAI SM/May 2017/Nov. 2013)
Sol. Provision: - As per AS-1 ‘Disclosure of Accounting Policies’ recognises ‘prudence’ as one
of the major considerations governing the selection and application of accounting policies.
In view of the uncertainty attached to future events, profits are not anticipated but
recognised only when realised though not necessarily in cash. Provision is made for all
known liabilities and losses even though the amount cannot be determined with certainty
and represents only a best estimate in the light of available information.
Also, as per AS-1, ‘accrual’ is one of the fundamental accounting assumptions. Irrespective
of the terms of the contract, so long as the principal amount of a loan is not repaid. The
lender cannot be replaced in a disadvantageous position for non-payment of interest in
respect of overdue amount.
Analysis and Conclusion: - In the given case it is apparent that the company has an
obligation on account of the overdue interest. In this situation, the company should
provide for the liability (Since it is not waived by the lenders) at an amount estimated or
on reasonable basis based on facts and circumstances of each case.
However, in respect of the overdue interest amounts, which are settled, the liability should
be accrued to the extent of amounts settled. Non-provision of the overdue interest liability
amounts to violation of accrual basis of accounting.
Therefore, the treatment, done by the company, of not providing the interest amount from
due date to the date of repayments is not correct.
4. ABC Ltd. was making provision for non-moving inventories based on no issues for the last
12 months up to 31.3.20X0.
The company wants to provide during the year ending 31.3.2020 based on technical
evaluation:
Particulars (₹)
Total Value of Inventory 100 lakhs
Provision required based on 12 months issue 3.5 lakhs
Provision required based on technical evaluation 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of
provision?
(May 2020 RTP /Nov. 2018/ March 2021 MTP)
888 888 0402
2
, www.escholars.in
Sol. Provision: - As per AS-1 ‘Disclosure of Accounting Policies’ recognises ‘Any change in the
accounting policies which have material affect in the current period or which is reasonably
expected to have a material affect in a later period should be disclosed.
Analysis and conclusion: - In the given case the decision of making provision for non-
moving inventories on the basis of technical evaluation does not amount to cha nge in
accounting policy. Accounting policy of a company may require that provision for non-
moving inventories should be made. The method of estimating the amount of provision
may be changed in case a more prudent estimate can be made. In the given case,
considering the total value of inventory.
The change in the amount of required provision of non-moving inventory from ₹3.5 lakhs
to ₹2.5 lakhs is also not material. The disclosure can be made for such change in the
following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the
year 20X0-X1.
5. Jagannath Ltd. had made a rights issue of shares in 20X2. In the offer document to its
members, it had projected a surplus of ₹40 crores during the accounting year to end on
31st March, 20X2. The draft results for the year,
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 on the following:
1) Value year-end inventory at works cost (₹50 crores) instead of the hitherto method of
valuation of inventory at prime cost (₹30 crores).
2) Provide depreciation for the year on straight line basis on account of substantial
additions in gross block during the year, instead of on the reducing balance method.
Was hitherto adopted. As a consequence, the charge for depreciation at ₹27 crores is
lower than the amount of ₹45 crores which would have been provided had the old
method been followed by ₹18 crores.
3) Not to provide for “after sales expenses” during the warranty period. Till the last year.
Provision at 2% of sales used to be made under the concept of “matching of costs
against revenue”. And actual expenses used to be charged against the provision. The
board new decided to account for expenses as and when actually incurred Sales during
the year total to ₹600 crores.
4) Provide for permanent fall in the value of investments- which fall had taken place over
the past five years- the provision being ₹10 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 20X1-20X2
(ICAI SM/May 2021 RTP)
888 888 0402
3
, www.escholars.in
Sol. Provision: -As per AS-1, ‘Disclosure of Accounting Policies’ recognises 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.
Analysis and conclusion: - In the given case following notes to accounts are prepared-:
Notes to Accounts: -
1) 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 years is increased by
₹20 crore.
2) In view of the heavy capital-intensive method of production introduced during the
year, the company has decided to change the method of providing depreciation from
reducing balance method to straight line method. As a result of this change.
Depreciation has been provided at ₹27 crores which is lower than the charge which
would have been made had the old method and the old rates been applied, b y ₹18
crores. To that extent, the profit for the year is increased by Rs.9 crores.
3) So far, the company has been providing 2% of sales for meeting “after sales expenses
during the warranty period. With the improved method of production, the
probability of defects occurring in the products has reduced considerably. Hence, the
company has decided not to make provision for such expenses but to account for the
same as and when expenses are incurred. Due to this change, the profit for the year
is increased by ₹12 crores than would have been the case if the old policy were to
continue.
4) The company has decided to provide ₹10 crores for the permanent fall in the value
of investments which has taken place over the period of past five years. The
provision so made has reduced the profit disclosed in the accounts by ₹ 10 Crores.
6. State whether the following statements are ‘True’ or ‘False’. Also give reason for
your answer;
1) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because their
acceptance and use are not assumed.
2) If fundamental accounting assumptions are not followed in presentation and
preparation of financial statements, a specific disclosure is not required.
3) All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.
Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.
(May 2020 RTP / April 2021 MTP)
888 888 0402
4
