CA Intermediate · Advanced Accounting

AS 1 Disclosure of Accounting Policies: formula sheet

Full chapter guide

Key formulas

Definition of accounting policies: Accounting policies = specific accounting principles + methods of applying them, adopted in preparing and presenting financial statements; Write this in your own words in the exam. Add two examples to earn full marks.
Policy versus estimate: Policy = the method chosen; Estimate = the uncertain amount judged using that method; Example: WDV depreciation is a policy; a 5-year life is an estimate.
Where policies are disclosed: Significant accounting policies are disclosed in one place, as part of the financial statements; Disclosure is required for significant policies, not every trivial one.
Three fundamental assumptions: Going concern, consistency, accrual; If followed, no separate disclosure is needed. If not followed, the fact must be disclosed.
Going concern: Enterprise continues in operation for the foreseeable future → no intention or need to liquidate or curtail operations materially; Basis for carrying assets at cost less depreciation, not at break-up value.
Consistency: Same accounting policies from period to period; A change is allowed only as AS 1 permits, and must be disclosed.
Accrual: Revenue recognised when earned, costs when incurred, irrespective of cash receipt or payment; Items are recorded in the books and reported in the period they relate to.
Disclosure rule: Assumption followed → no disclosure needed; assumption not followed → fact must be disclosed; Core rule examiners test.
Objective of selecting policies: Policies chosen and applied → true and fair view; Use this as the closing line in every theory answer.
Prudence: Provide for known liabilities and expected losses, even if the amount is only an estimate; do not recognise anticipated profits; Applies to uncertain items. It does not permit deliberate understatement of profit or overstatement of provisions.
Substance over form: Account by economic reality, not by legal form alone; Typical examples: finance lease, sale with buy-back, transactions with side arrangements. The conclusion depends on the facts.
Materiality: Disclose items whose omission or misstatement could influence users' decisions; Depends on the size or nature of the item, or both, in the circumstances. No fixed percentage is laid down in AS 1.
Fundamental assumptions: Going concern, consistency, accrual; If followed, no separate disclosure is needed. If not followed, the fact must be disclosed.
Where to disclose policies: All significant accounting policies → one place, as part of the financial statements; Usually the first note in the notes to accounts.
Change with material effect in current period: Disclose: (1) the change, (2) the reason for the change, (3) amount of effect on items, to extent ascertainable, (4) say so if the amount is not ascertainable; Applies to a change in policy that materially affects the current period.
Change with no material effect now, but expected later: Disclose the fact of the change in the current period; Applies when the effect is reasonably expected to be material in later periods.
Fundamental assumptions: Going concern, consistency, accrual: disclosure only if NOT followed; If followed, disclosure is not required.
Three considerations in choosing policies: Prudence, substance over form, materiality; Policies should represent a true and fair view.

Quick revision

An accounting policy is the specific principles, bases, conventions, rules and practices an entity adopts to prepare and present its financial statements.
The three fundamental assumptions are going concern, consistency and accrual.
If the fundamental assumptions are followed, no separate disclosure is needed; if one is not followed, the fact must be disclosed.
Going concern: the entity will continue in operation for the foreseeable future, with no intention or need to liquidate or cut back its scale sharply.
Consistency: the same policies are followed from one period to the next unless there is a good reason to change.
Accrual: revenues and costs are recognised when they are earned or incurred, not when cash is received or paid.
Prudence: provide for all known liabilities and losses, even though the amount cannot be determined with certainty and represents only a best estimate based on available information; profits are not anticipated.
Substance over form: record a transaction by its economic reality, not only its legal form.
Materiality: financial statements should disclose all material items, the omission or misstatement of which could influence the decisions of users. It is one of the three considerations in selecting and applying policies, and its main effect is on disclosure.
The main considerations in selecting and applying policies are prudence, substance over form and materiality.
Significant accounting policies should be disclosed together in one place as part of the financial statements.
A change in policy is made only if required by statute, for compliance with an accounting standard, or if it results in a more appropriate preparation and presentation of the financial statements. A change with a material effect must be disclosed with its effect. If the effect is not ascertainable, wholly or in part, that fact is indicated.

Common mistakes

Treating useful life of an asset as an accounting policy. Fix: Method of depreciation is the policy. Useful life and residual value are estimates.
Saying accounting policies and financial statements are the same thing. Fix: Financial statements are the output. Policies are the rules applied to produce them.
Saying disclosure is always required for the three assumptions. Fix: Write: disclosure is required only if an assumption is not followed. If followed, it is presumed.
Treating accrual as only expenses payable. Fix: Remember accrual covers both revenue earned and costs incurred, whether or not cash has moved.
Treating prudence as permission to understate profits or create secret reserves. Fix: Say prudence covers real uncertainty only. Deliberate understatement conflicts with a true and fair view.
Recognising an expected gain because it looks certain. Fix: Recognise gains only when realised or when the recognition criteria are met. Provide for expected losses even when the amount is only an estimate.
Treating a new policy for a new kind of transaction as a change in accounting policy. Fix: A change means a different policy for the same kind of transaction. A policy adopted for transactions that differ in substance from earlier ones, or for events that did not occur earlier, is not a change.
Omitting the amount of the effect. Fix: Always give the amount affected, or state that it is not ascertainable.

Exam tips

Learn the definition of accounting policies in your own words and always add two examples.
In MCQs, use the 'how or how much' test to classify items quickly.
For a difference question, write at least three points in two columns of thought: nature, example and effect of change.
Remember that policies are disclosed when significant, and that the three fundamental assumptions need disclosure only if not followed.
Link this topic to AS 5 for changes in policies and estimates, as questions often mix them.
Memorise the disclosure rule in one sentence. It is the most tested point.
In MCQs, check whether the scenario describes a followed or a not-followed assumption before choosing the disclosure option.
Define each assumption in the exact sense of AS 1. Keep each definition to one or two lines.