CMA Intermediate · Financial Accounting

Disclosure of Accounting Policies (AS 1): formula sheet

Full chapter guide

Key formulas

Definition of accounting policies: Accounting policies = specific accounting principles + methods of applying those principles; Adopted by the enterprise in preparing and presenting financial statements.
Objective of AS 1: Disclosure of significant policies → better understanding + meaningful comparison; Write both outcomes in a theory answer.
Disclosure rule: All significant accounting policies must be disclosed, and the disclosure must form part of the financial statements; Ideally disclosed together in one place, not scattered over statements, schedules and notes.
Change in policy: Material effect: disclose the change and the amount affected, to the extent ascertainable; if not ascertainable, state that fact; If there is no material effect now but one is reasonably expected later, disclose the fact of the change in the period of adoption.
Fundamental assumptions: Not stated if followed; disclose only if not followed; Their acceptance is assumed.
Limit of disclosure: Disclosure cannot remedy a wrong or inappropriate treatment; A wrongly treated item stays wrong even if the policy is 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-based values and for deferring prepaid items.
Consistency: Same accounting policies followed from period to period; A change is allowed only as per AS 1 conditions (required by statute, by an accounting standard, or for a more appropriate presentation), and its effect must be disclosed.
Accrual: Revenue and costs recognised when earned or incurred, not when cash is received or paid; Applies to both income and expenses and is recorded in the period to which they relate.
Disclosure rule: Assumption followed → no disclosure needed; assumption not followed → disclose the fact; This is the single most tested line of this topic.
Objective of selecting policies: Policies selected and applied → true and fair view of the state of affairs and of profit or loss; Every consideration is a tool to reach this objective. Use it as your closing line in answers.
Three major considerations (AS 1): Prudence + Substance over form + Materiality; Name all three and define each in one line. Do not mix them up with the fundamental assumptions (going concern, consistency, accrual).
Prudence rule: Provide for all known losses and liabilities (even if estimated); do not anticipate profits; Prudence does not permit deliberate understatement of income or assets.
Substance over form rule: Account by economic reality, not legal form; Test: who bears the risks and rewards of ownership?
Materiality rule: Disclose items whose omission or misstatement could influence users' decisions; Judged by size and nature of the item. No fixed percentage cut-off.
Policies to be disclosed: All significant accounting policies adopted in preparing and presenting the financial statements must be disclosed; Paras 18 and 24. The examples in para 14 are not exhaustive (para 21).
Where to disclose: Part of the financial statements + normally in one place; Paras 19, 20 and 25. Do not scatter policies across notes and schedules.
Change with material effect now: Disclose the change + amount affected for each item (to the extent ascertainable) + state the fact if not ascertainable, wholly or in part; Paras 22 and 26.
Change with no material effect now: Disclose the fact of change in the period of adoption if a material effect is reasonably expected in later periods; Paras 22 and 26.
Fundamental assumptions: Going concern, consistency, accrual: disclosure needed only if not followed; Para 9.
Selection considerations: Prudence, Substance over Form, Materiality; Para 17. Prudence: do not anticipate profits, provide for all known liabilities and losses.
Limit of disclosure: Disclosure cannot remedy a wrong or inappropriate treatment; Para 23.

Quick revision

AS 1 deals with disclosure of significant accounting policies followed in preparing and presenting financial statements.
Fundamental assumptions: going concern, consistency, accrual.
If the fundamental assumptions are followed, no specific disclosure is required; if not followed, the fact must be disclosed.
Going concern: the enterprise continues for the foreseeable future, with no intention or necessity of liquidation or material curtailment.
Consistency: accounting policies are assumed to be consistent from one period to another.
Accrual: revenues and costs are recognised as earned or incurred, not as cash is received or paid.
Primary consideration in selecting policies: a true and fair view.
Prudence: do not anticipate profits; provide for all known liabilities and losses, even as a best estimate.
Substance over form: treatment follows the substance, not merely the legal form.
Materiality: disclose all items whose knowledge might influence users' decisions.
All significant policies must be disclosed, as part of the financial statements, preferably in one place.
A material change in policy must be disclosed with its amount where ascertainable; disclosure cannot remedy a wrong treatment.

Common mistakes

Treating an estimate such as useful life of 8 years as an accounting policy. Fix: The method (straight-line or WDV) is the policy. The life and residual value are estimates.
Saying fundamental assumptions must always be disclosed. Fix: They are usually not stated because acceptance is assumed. Disclosure is needed only if they are not followed.
Saying disclosure is needed even when all three assumptions are followed. Fix: Remember that followed assumptions are presumed and need no disclosure. Only non-compliance is disclosed.
Treating consistency as meaning a policy can never change. Fix: A change is allowed if required by law, by an accounting standard, or for more appropriate presentation, and the change must be disclosed.
Treating prudence as permission to understate profit or create secret reserves. Fix: Write that prudence means providing for known losses and not anticipating profits. It does not allow deliberate understatement.
Defining substance over form as 'ignore the legal form completely'. Fix: Say that economic reality governs the accounting treatment, and legal form is still considered but does not override the substance.
Saying policies can be disclosed anywhere in the annual report, such as the Directors' report. Fix: Write: part of the financial statements, normally in one place as a note on significant accounting policies.
Disclosing only the change and omitting the amount by which items are affected. Fix: For a material change, always quantify the effect on affected items to the extent ascertainable.

Exam tips

In MCQs, watch for options saying fundamental assumptions must always be disclosed. That is wrong.
In theory answers, give the definition in the standard's own two-part form: principles plus methods of applying them.
For policy versus estimate questions, use the method versus amount test and give one example of each.
Mention that disclosure should form part of the financial statements and preferably sit in one place.
For change-in-policy questions, cover both current material effect and expected future material effect.
Write the disclosure rule in every answer: followed means no disclosure, not followed means disclose.
In 'differentiate' questions, use two or three clear points such as meaning, what it affects and example.
For MCQs, spot keywords: 'foreseeable future' is going concern, 'period to period' is consistency, 'earned or incurred' is accrual.