CA Intermediate · Advanced Accounting

AS 1 Disclosure of Accounting Policies for CA Inter

AS 1 requires an entity to disclose the significant accounting policies it follows in its financial statements. It rests on three fundamental assumptions: going concern, consistency and accrual. Policies are chosen using prudence, substance over form and materiality. To solve questions, identify the assumption or consideration involved, then state the disclosure required.

What this chapter covers

AS 1 is a short standard, but it sets the base for every other Accounting Standard. It tells you what an accounting policy is, which assumptions the accounts are prepared on, and what must be disclosed so that a reader can understand the numbers.

The chapter has four parts. First, the scope and the meaning of accounting policies: the specific principles and methods an entity adopts to prepare and present its statements. Second, the three fundamental accounting assumptions: going concern, consistency and accrual. Third, the three considerations for choosing policies: prudence, substance over form and materiality. Fourth, disclosure: which policies to show, where to show them, and what to say when a policy changes.

In Advanced Accounting, AS 1 connects to almost every standard that follows. AS 2 on inventories, AS 10 on property, plant and equipment, AS 9 on revenue and AS 5 all work within the ideas you learn here. AS 1 permits a change in accounting policy only on stated grounds: it is required by statute, it is made for compliance with an accounting standard, or it gives a more appropriate preparation and presentation of the financial statements. AS 1 also requires the effect of a change to be disclosed. AS 5 deals with the detailed treatment of changes in accounting policies and prior period items. Company accounts under Schedule III also expect policy disclosure in the notes. Treat this chapter as the vocabulary of the whole paper.

AS 1 is a short, mostly conceptual chapter with a small number of fixed points. In our view, that makes it a good place to pick up marks, but do not treat it as automatic. It is a source of 1 or 2 mark MCQs that test definitions, such as what happens when the fundamental assumptions are followed and nothing is disclosed, and of short descriptive answers that ask you to explain a concept or decide which one applies in a case. The same ideas also help you in later chapters, because many standards give a rule that is really prudence, accrual or materiality applied to a particular item.

Note that materiality is one of the three considerations in selecting and applying accounting policies, along with prudence and substance over form. Its main effect is on disclosure: financial statements should disclose all material items, the omission or misstatement of which could influence users' decisions. Keep this clear in your answers.

AS 1 Disclosure of Accounting Policies: topics in the order to study them

1AS 1 Scope, Meaning and Definitions of Accounting PoliciesStart here to learn what an accounting policy is and what the standard covers, so the rest of the chapter has a base.
2Fundamental Accounting Assumptions: Going Concern, Consistency, AccrualThese three assumptions are presumed followed unless stated, so learn them next before the choices built on top of them.
3Selection and Consideration of Accounting Policies: Prudence, Substance over Form, MaterialityOnce you know the assumptions, you can see how an entity selects and applies policies using prudence and substance over form, and how materiality governs what is disclosed.
4Disclosure of Accounting Policies and Changes in PoliciesFinish with what must be disclosed and when a change is allowed. This pulls the earlier topics together and leads into AS 5, which deals with the detailed treatment of changes in accounting policies and prior period items.

How to prepare AS 1 Disclosure of Accounting Policies

This chapter is small, so you can finish it in a couple of short sittings. Spend your effort on understanding the ideas and applying them to short cases, not on memorising long text.

Read the definition of an accounting policy and note how it differs from an estimate, so you do not mix the two later.
Learn the three fundamental assumptions with one plain example each, and remember that they need no separate disclosure if followed.
Learn prudence, substance over form and materiality with one example each, and note what each one changes in the books or in the disclosure.
List the disclosure rules: significant policies shown in one place, and the effect and reason shown when a policy changes.
Solve short case-style questions where you must name the assumption or consideration and give a reason in two or three lines.
Practise MCQs on definitions and on which concept applies, then check why each wrong option fails.
Revise using a one-page table of concept, meaning and example, written by you.

Common mistakes in AS 1 Disclosure of Accounting Policies

Treating accounting policies and accounting estimates as the same thing.
Fix: Remember that a policy is the method chosen, such as the cost formula for inventory, while an estimate is a judgement of an amount, such as the useful life of an asset.
Saying that the fundamental assumptions must always be disclosed.
Fix: Learn that disclosure is needed only when an assumption is not followed. If it is followed, it is taken as followed.
Mixing up prudence with deliberately understating profits.
Fix: Use the AS 1 wording: prudence means providing 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, and not anticipating profits. As a matter of general good practice, also avoid hidden reserves and excess provisions. That point is not part of the AS 1 text, so do not quote it as the standard's wording.
Explaining substance over form only in general words.
Fix: Keep one short example ready, such as a sale with a buy-back arrangement treated by its economic effect, and use it in written answers.
Writing long theory answers without linking them to the facts given.
Fix: In case questions, name the concept, quote the key facts from the question, and give a one-line conclusion.
Forgetting that a change in policy needs both a valid reason and disclosure.
Fix: Remember that a change is made only if required by statute, for compliance with an accounting standard, or for a more appropriate preparation and presentation of the statements. Disclose its material effect, and if the effect is not ascertainable, wholly or in part, indicate that fact.

Last-day revision: AS 1 Disclosure of Accounting Policies

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.

AS 1 Disclosure of Accounting Policies practice questions

AS 1 Disclosure of Accounting Policies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

AS 1 Disclosure of Accounting Policies: frequently asked questions

What is AS 1 in CA Intermediate?

AS 1 is the Accounting Standard on Disclosure of Accounting Policies. It explains what an accounting policy is, which assumptions underlie the accounts and what must be disclosed. It is the base for the other standards in Advanced Accounting.

Which are the fundamental accounting assumptions under AS 1?

They are going concern, consistency and accrual. If they are followed, no separate disclosure is needed. If any one is not followed, the fact must be disclosed.

How much time should I give AS 1?

Because the chapter is short and conceptual, a few focused hours are usually enough for most students. Spend more time on practising short cases and MCQs than on reading the text again and again.

What is the difference between prudence and materiality?

Prudence guides how you treat uncertain gains and losses, by providing for known liabilities and losses and not anticipating profits. Materiality relates to disclosure, by showing items that could influence the decisions of users of the statements.