CMA Intermediate · Financial Accounting

Disclosure of Accounting Policies (AS 1) for CMA Inter

AS 1 requires an enterprise to disclose all significant accounting policies used to prepare its financial statements. It names three fundamental assumptions (going concern, consistency, accrual) and three selection considerations (prudence, substance over form, materiality). To solve questions, identify the concept being tested, quote its rule, and apply it to the facts given.

What this chapter covers

This chapter covers AS 1, a short and mostly theory-based standard. It deals with the significant accounting policies an enterprise follows when it prepares and presents financial statements. It does not tell you how to value stock or depreciate assets. It tells you how to choose policies and how to disclose them.

The standard has three parts. First, the fundamental accounting assumptions: going concern, consistency and accrual. Second, the considerations in selecting policies: prudence, substance over form and materiality. Third, the disclosure rules: what must be disclosed, where, and how a change in policy is reported.

This chapter is the base for the rest of Financial Accounting. When you later study inventories, depreciation, revenue or fixed assets, you will use these ideas again. A question on provisions applies prudence. A question on a change in depreciation method applies consistency and the disclosure rule for changes. Learn this chapter well and the other chapters become easier to reason through.

AS 1 is short, so you can learn it fully in a few sittings. It is a good source of straightforward MCQs, because each concept has a precise definition that can be tested as a statement-based or match-the-following question. It also supports short written answers, where you define a concept, quote the rule and give an example. Since the same ideas run through other accounting standards, time spent here improves your accuracy in later chapters. Most marks are lost by confusing similar-sounding concepts, not by difficulty.

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

1AS 1 Introduction, Scope and Meaning of Accounting PoliciesStart here to know what the standard covers: the disclosure of significant accounting policies followed in preparing and presenting financial statements.
2Fundamental Accounting AssumptionsThese three assumptions are the easiest to define and are usually assumed, so learn them before the selection rules that build on them.
3Selection and Consideration of Accounting PoliciesPrudence, substance over form and materiality are applied to choose policies, so they come after the assumptions, under the true and fair view principle.
4Disclosure of Accounting Policies and Changes in PoliciesStudy this last because it pulls everything together: what to disclose, where, and how to report a change in policy.

How to prepare Disclosure of Accounting Policies (AS 1)

This is a theory chapter, so your aim is exact recall of each concept plus the ability to apply it to a short situation. Plan two or three short sessions.

Read the scope in one pass: AS 1 deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements.
Make a two-column list of the three fundamental assumptions and the three selection considerations. Write each in one line of your own words.
Memorise the key rule for assumptions: if they are followed, no specific disclosure is needed; if one is not followed, the fact must be disclosed.
Learn the primary consideration in selecting policies: the statements must show a true and fair view of the state of affairs at the balance sheet date and of the profit or loss for the period.
Practise identifying the concept in small scenarios. For example, a provision for a known loss tests prudence; treating a lease by its economic reality tests substance over form.
Learn the disclosure rules: policies form part of the financial statements, are best shown in one place, and a material change must be disclosed with its effect where ascertainable.
Finish with 20 to 30 MCQs, then write two short answers in the format: definition, rule, example.

Common mistakes in Disclosure of Accounting Policies (AS 1)

Confusing fundamental assumptions with the considerations for selecting policies.
Fix: Keep two separate lists of three. Assumptions: going concern, consistency, accrual. Considerations: prudence, substance over form, materiality.
Saying fundamental assumptions must always be disclosed.
Fix: Remember that disclosure is needed only if an assumption is not followed. If they are followed, no specific disclosure is required.
Defining accrual as recording only when cash is received or paid.
Fix: Accrual means recognising revenues and costs as earned or incurred, and not as money is received or paid.
Thinking prudence allows creating hidden reserves or understating profit freely.
Fix: State prudence exactly: profits are not anticipated, and provision is made for known liabilities and losses as a best estimate. The aim is a true and fair view.
Believing that disclosing a policy fixes a wrong treatment.
Fix: Recall that disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of an item.
Writing long theory answers without a structure.
Fix: Use a fixed format: definition, rule as per AS 1, one short example, and a closing line linking to true and fair view.

Last-day revision: Disclosure of Accounting Policies (AS 1)

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.

Disclosure of Accounting Policies (AS 1) practice questions

Disclosure of Accounting Policies (AS 1) in other exams

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

Disclosure of Accounting Policies (AS 1): frequently asked questions

What is the main objective of AS 1?

AS 1 deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. It aims to ensure the statements are properly understood by users.

Do I need to disclose going concern, consistency and accrual in every balance sheet?

No. If these fundamental assumptions are followed, specific disclosure is not required. If any one is not followed, that fact must be disclosed.

How should a change in accounting policy be reported?

A change with a material effect must be disclosed, along with the amount by which any item is affected, to the extent ascertainable. If the amount cannot be ascertained, wholly or partly, the fact should be stated. A change with no material effect now but expected to be material later is disclosed in the period of change.

Is AS 1 only theory or are there numericals?

AS 1 is mainly theory, so expect MCQs and short descriptive answers. Practise identifying which concept applies to a given situation.