Unit - 3
Understanding Accounting Standards Issued by the ICAI Related to
Disclosure of Accounting Policies
The Institute of Chartered Accountants of India (ICAI) is the statutory body
responsible for issuing accounting standards (AS) for financial reporting in
India. The disclosure of accounting policies is an essential part of financial
reporting, ensuring transparency and consistency in how businesses present
their financial information.
Accounting policies are the specific principles, rules, and practices adopted by
an organization to prepare and present financial statements. These policies
determine how transactions and events are recognized, measured, and reported.
Disclosure of accounting policies provides users of financial statements with
important information about the methods and assumptions used in preparing
those statements.
In India, the ICAI has issued several accounting standards (AS) that govern how
businesses should disclose their accounting policies. The important
accounting standard related to the disclosure of accounting policies is
Accounting Standard 1 (AS 1), titled "Disclosure of Accounting Policies." AS
1 outlines the principles regarding the disclosure of accounting policies in
financial statements.
Key Points of Accounting Standard 1 (AS 1) - "Disclosure of Accounting
Policies"
AS 1 provides the guidelines for the disclosure of accounting policies that need
to be followed by all entities preparing their financial statements. Below are the
key objectives and provisions of AS 1:
1. Objective of AS 1
• The main objective of AS 1 is to ensure that financial statements are
transparent and consistent, providing users with enough information to
understand the basis on which financial statements have been prepared.
• It aims to enhance the comparability of financial statements of an entity
over time and with other entities in the same industry.
2. Disclosure of Accounting Policies
• AS 1 requires that the significant accounting policies adopted by an
entity should be disclosed in the financial statements.
, • These disclosures must be made in a manner that is clear, consistent,
and easy to understand for the users of financial statements (investors,
creditors, auditors, etc.).
Key areas where accounting policies should be disclosed:
• Basis of preparation of financial statements (e.g., accrual basis,
historical cost basis, etc.).
• Method of inventory valuation (e.g., FIFO, weighted average).
• Depreciation method (e.g., straight-line method, written-down value
method).
• Recognition of income and expenses (e.g., when revenues are
recognized, how expenses are matched with revenues).
• Valuation of investments (e.g., at cost or fair value).
• Foreign currency translation (e.g., how exchange rate fluctuations are
handled).
• Provisions for bad debts and contingencies.
• Treatment of research and development costs (whether capitalized or
expensed).
3. Consistency of Accounting Policies
• AS 1 emphasizes consistency in applying accounting policies over
periods. Accounting policies should generally remain consistent from one
accounting period to the next, unless a change is required by a new
accounting standard or for a better presentation of the financial
statements.
• Any change in accounting policies must be disclosed, along with the
reasons for the change, and the effect of the change on the financial
statements.
4. Materiality
• AS 1 also highlights that only significant accounting policies need to be
disclosed. However, this principle is subject to the materiality concept
— that is, the disclosure should include all material policies, i.e., those
that could affect the decision-making of users of the financial statements.
• Minor or immaterial policies that do not have a significant impact on the
financial statements may not need to be disclosed.
, 5. Form and Content of Disclosure
• The disclosure of accounting policies should be presented in a clear and
understandable manner.
• The policies should be disclosed either in the notes to the financial
statements or as part of the significant accounting policies in the
financial statement itself, depending on the entity's reporting format.
6. Impact of New Accounting Standards
• When a company adopts a new accounting standard issued by the ICAI, it
must disclose the effect of this new standard on its financial statements,
as well as any changes to its accounting policies as a result of adopting
the new standard.
• If the new standard impacts comparability (i.e., results in changes to how
transactions were previously reported), this should be clearly explained.
7. Illustrative Example of Disclosure
• Accounting Policy for Depreciation: A company might disclose its
depreciation policy as follows:
o "Depreciation on fixed assets is provided on the straight-line
method at rates specified in Schedule II of the Companies Act,
2013. Depreciation is calculated on a pro-rata basis for assets
purchased or sold during the year."
• Accounting Policy for Inventory Valuation: A company might
disclose:
o "Inventories are valued at cost or net realizable value, whichever
is lower. Cost is determined using the FIFO (First-In-First-Out)
method."
Other Relevant Accounting Standards for Disclosure
In addition to AS 1, several other accounting standards issued by the ICAI also
provide guidelines regarding the disclosure of accounting policies in specific
situations. Some of these include:
• AS 10 - Property, Plant, and Equipment: Disclosure requirements
related to fixed assets, such as the depreciation method and useful life of
assets.
Understanding Accounting Standards Issued by the ICAI Related to
Disclosure of Accounting Policies
The Institute of Chartered Accountants of India (ICAI) is the statutory body
responsible for issuing accounting standards (AS) for financial reporting in
India. The disclosure of accounting policies is an essential part of financial
reporting, ensuring transparency and consistency in how businesses present
their financial information.
Accounting policies are the specific principles, rules, and practices adopted by
an organization to prepare and present financial statements. These policies
determine how transactions and events are recognized, measured, and reported.
Disclosure of accounting policies provides users of financial statements with
important information about the methods and assumptions used in preparing
those statements.
In India, the ICAI has issued several accounting standards (AS) that govern how
businesses should disclose their accounting policies. The important
accounting standard related to the disclosure of accounting policies is
Accounting Standard 1 (AS 1), titled "Disclosure of Accounting Policies." AS
1 outlines the principles regarding the disclosure of accounting policies in
financial statements.
Key Points of Accounting Standard 1 (AS 1) - "Disclosure of Accounting
Policies"
AS 1 provides the guidelines for the disclosure of accounting policies that need
to be followed by all entities preparing their financial statements. Below are the
key objectives and provisions of AS 1:
1. Objective of AS 1
• The main objective of AS 1 is to ensure that financial statements are
transparent and consistent, providing users with enough information to
understand the basis on which financial statements have been prepared.
• It aims to enhance the comparability of financial statements of an entity
over time and with other entities in the same industry.
2. Disclosure of Accounting Policies
• AS 1 requires that the significant accounting policies adopted by an
entity should be disclosed in the financial statements.
, • These disclosures must be made in a manner that is clear, consistent,
and easy to understand for the users of financial statements (investors,
creditors, auditors, etc.).
Key areas where accounting policies should be disclosed:
• Basis of preparation of financial statements (e.g., accrual basis,
historical cost basis, etc.).
• Method of inventory valuation (e.g., FIFO, weighted average).
• Depreciation method (e.g., straight-line method, written-down value
method).
• Recognition of income and expenses (e.g., when revenues are
recognized, how expenses are matched with revenues).
• Valuation of investments (e.g., at cost or fair value).
• Foreign currency translation (e.g., how exchange rate fluctuations are
handled).
• Provisions for bad debts and contingencies.
• Treatment of research and development costs (whether capitalized or
expensed).
3. Consistency of Accounting Policies
• AS 1 emphasizes consistency in applying accounting policies over
periods. Accounting policies should generally remain consistent from one
accounting period to the next, unless a change is required by a new
accounting standard or for a better presentation of the financial
statements.
• Any change in accounting policies must be disclosed, along with the
reasons for the change, and the effect of the change on the financial
statements.
4. Materiality
• AS 1 also highlights that only significant accounting policies need to be
disclosed. However, this principle is subject to the materiality concept
— that is, the disclosure should include all material policies, i.e., those
that could affect the decision-making of users of the financial statements.
• Minor or immaterial policies that do not have a significant impact on the
financial statements may not need to be disclosed.
, 5. Form and Content of Disclosure
• The disclosure of accounting policies should be presented in a clear and
understandable manner.
• The policies should be disclosed either in the notes to the financial
statements or as part of the significant accounting policies in the
financial statement itself, depending on the entity's reporting format.
6. Impact of New Accounting Standards
• When a company adopts a new accounting standard issued by the ICAI, it
must disclose the effect of this new standard on its financial statements,
as well as any changes to its accounting policies as a result of adopting
the new standard.
• If the new standard impacts comparability (i.e., results in changes to how
transactions were previously reported), this should be clearly explained.
7. Illustrative Example of Disclosure
• Accounting Policy for Depreciation: A company might disclose its
depreciation policy as follows:
o "Depreciation on fixed assets is provided on the straight-line
method at rates specified in Schedule II of the Companies Act,
2013. Depreciation is calculated on a pro-rata basis for assets
purchased or sold during the year."
• Accounting Policy for Inventory Valuation: A company might
disclose:
o "Inventories are valued at cost or net realizable value, whichever
is lower. Cost is determined using the FIFO (First-In-First-Out)
method."
Other Relevant Accounting Standards for Disclosure
In addition to AS 1, several other accounting standards issued by the ICAI also
provide guidelines regarding the disclosure of accounting policies in specific
situations. Some of these include:
• AS 10 - Property, Plant, and Equipment: Disclosure requirements
related to fixed assets, such as the depreciation method and useful life of
assets.
