Financial Accounting · Disclosure of Accounting Policies (AS 1)

Disclosure of Accounting Policies and Changes in Policies under AS 1

Updated 10 October 2026 · Fact-checked

AS 1 requires every significant accounting policy to be disclosed, normally in one place, as part of the financial statements. A change in policy with a material effect must be disclosed with the amount affected, if ascertainable. If the amount cannot be worked out, state that fact. Disclosure cannot fix a wrong treatment.

Understand Disclosure of Accounting Policies and Changes in Policies

An accounting policy is the specific method an enterprise picks to prepare and present its accounts. Examples are how stock is valued, how depreciation is charged, and when revenue is recognised. Two firms with the same facts can show different profits if their policies differ. So readers must be told which policies were used.

AS 1 therefore asks that all significant accounting policies adopted in preparing and presenting the financial statements be disclosed (paras 18 and 24). The purpose is better understanding of the statements and more meaningful comparison between enterprises (para 8). The list of examples in para 14 is not exhaustive (para 21).

The disclosure must form part of the financial statements (paras 19 and 25). It should normally be given in one place, not scattered over several statements, schedules and notes (paras 20 and 25). In practice this is a single note titled 'Significant Accounting Policies'.

Policies can change. A change with a material effect in the current period must be disclosed, along with the amount by which each item is affected, to the extent ascertainable. If the amount is not ascertainable, wholly or in part, you indicate that fact (paras 22 and 26). Even if the change has no material effect now but is reasonably expected to have one in later periods, you disclose the fact of the change in the period it is adopted.

Disclosure is not a cure. Para 23 says disclosing a policy or a change in it cannot remedy a wrong or inappropriate treatment. If the treatment is wrong, correct the accounts. Also, the fundamental assumptions (going concern, consistency, accrual) are usually not stated because their acceptance is assumed. Disclosure is needed only if they are not followed (para 9).

Key rules to remember

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.

How to solve Disclosure of Accounting Policies and Changes in Policies questions

Use this method for any theory or practical question on disclosing policies or policy changes.

1Identify whether the question is about disclosing existing policies or about a change in policy.
2For existing policies, state that all significant policies must be disclosed, as part of the financial statements, normally in one place.
3For a change, decide if the effect is material in the current period, or not material now but expected to be material later.
4If material now, quantify the effect on each affected item, such as profit and the asset value. Use comparable figures under the old and new policy.
5If the amount cannot be worked out fully, say so and indicate that fact in the disclosure.
6If it is not material now but expected to be later, disclose only the fact of the change in the year of adoption.
7Check whether the treatment itself is wrong. If it is, say disclosure cannot remedy it and the accounts must be corrected.
8Write the final disclosure note in a clear sentence or two.

Quickest way: Three-question check for policy changes

When to use it: Use it for short MCQs and 5 to 6 mark theory parts when time is tight.

Is the change material now? If yes, disclose the change and the amount affected.
Is the amount not ascertainable? If yes, state that fact.
Not material now? Disclose the fact of change only if a material effect is reasonably expected later; otherwise no special disclosure is required.

Common mistakes in Disclosure of Accounting Policies and Changes in Policies

Saying policies can be disclosed anywhere in the annual report, such as the Directors' report.
Students remember 'disclose' but forget that the disclosure must be part of the financial statements.
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.
Students treat the change as a descriptive matter only.
Fix: For a material change, always quantify the effect on affected items to the extent ascertainable.
Staying silent when the amount is not ascertainable.
Students think no figure means no disclosure.
Fix: If the amount is not ascertainable, wholly or in part, the fact must be indicated.
Ignoring a change that is immaterial now but expected to be material later.
Students link disclosure only to current-period effect.
Fix: Disclose the fact of change in the period of adoption when a material effect is reasonably expected later.
Believing disclosure makes a wrong treatment acceptable.
Students over-read the importance of notes.
Fix: Quote para 23: disclosure cannot remedy a wrong or inappropriate treatment. The accounts must be corrected.
Stating fundamental assumptions must always be disclosed.
Confusion between assumptions and policies.
Fix: Assumptions are assumed and not usually stated. Disclose only when they are not followed.

Worked examples

Example 1

Sundaram Traders Ltd changed its method of valuing inventory from FIFO to weighted average in the current year. The change reduced closing inventory and profit by ₹3,40,000. Write the disclosure required under AS 1.

Show the solution

The change in policy affects closing inventory and profit, and the effect is material.
AS 1 requires disclosure of the change in policy.
It also requires the amount by which items are affected, to the extent ascertainable. Here it is ascertainable: ₹3,40,000.
The affected items are closing inventory and profit for the year, each lower by ₹3,40,000.
Draft the note in the accounting policies section of the financial statements.

Answer: Note: During the year the company changed its inventory valuation method from FIFO to weighted average. Because of this change, closing inventory and profit for the year are lower by ₹3,40,000.

Example 2

Kaveri Industries Ltd changed its policy for a class of assets this year. The effect on the current year's accounts is not material, but the management reasonably expects a material effect in later years. Also, the effect on one item cannot be measured in part. What should the company disclose?

Show the solution

Current effect is not material, so no amount of current effect is mandatory.
A material effect is reasonably expected later, so the fact of the change must be disclosed in the period in which the change is adopted.
For any part of a material effect that is not ascertainable, the fact that the amount is not ascertainable should be indicated.
Disclosure is only a presentation matter. It does not make an inappropriate policy acceptable.

Answer: The company should disclose the fact of the change in policy in the current year's financial statements, because a material effect is reasonably expected in later periods. Where an amount is not ascertainable, wholly or in part, that fact should be stated.

Exam tips

Learn the para 22 and 26 wording almost word for word. Examiners test the three cases: material now, not ascertainable, and material later.
In MCQs, watch for options saying disclosure can correct a wrong treatment or that policies may be scattered. Both are wrong.
In practical questions, compute the effect as the difference between figures under the old and new policy, and state the effect on both profit and the asset.
Use the headings 'Significant Accounting Policies' and 'Change in accounting policy' in written answers to earn presentation marks.
Link the answer to prudence, substance over form and materiality when the question asks about selection of policies.

Practice questions from Disclosure of Accounting Policies (AS 1)

Disclosure of Accounting Policies and Changes in Policies 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 and Changes in Policies: frequently asked questions

Where should accounting policies be disclosed under AS 1?

They should form part of the financial statements and should normally be disclosed in one place. This is usually a single note on significant accounting policies. AS 1 says this helps the reader more than scattering them across statements, schedules and notes.

What must be disclosed when an accounting policy changes?

A change with a material effect must be disclosed, with the amount by which each item is affected to the extent ascertainable. If the amount is not ascertainable, wholly or in part, you indicate that fact.

Is a change in policy disclosed if it has no material effect this year?

Yes, if a material effect is reasonably expected in later periods. The fact of the change should be disclosed in the period in which the change is adopted.

Can disclosure of a policy correct a wrong accounting treatment?

No. AS 1 says that disclosure of accounting policies or changes in them cannot remedy a wrong or inappropriate treatment of the item in the accounts.