Corporate Accounting and Financial Management · Accounting Standards

AS 1 Disclosure of Accounting Policies for CS Executive

Updated 11 October 2026 · Fact-checked

AS 1 requires a company to disclose the significant accounting policies it follows in preparing financial statements. It rests on three fundamental assumptions: going concern, consistency and accrual. If any is not followed, that fact must be disclosed. A change in policy with a material effect must be disclosed with its amount.

Understand AS 1 Disclosure of Accounting Policies

Every set of financial statements is built on choices. How do you value stock? How do you charge depreciation? When do you record revenue? These choices are accounting policies. A reader cannot understand the numbers unless the policies are disclosed.

AS 1 works in two parts. First, it sets out three fundamental accounting assumptions. These are taken as followed unless the statements say otherwise. Second, it asks for clear disclosure of the significant policies and of any change in them.

The three assumptions in AS 1 are these. Going concern: the entity is assumed to continue in operation for the foreseeable future, with no intention or need to liquidate or cut back its operations materially. Consistency: accounting policies are followed from one period to the next. Accrual: revenues and costs are recognised as they are earned or incurred, not as cash is received or paid.

The Ind AS Conceptual Framework is a separate document from AS 1. It applies to Ind AS, not to AS 1. Its wording is useful for understanding the same ideas, so it is quoted here only as an illustration. Para 3.9 on going concern says that if an intention or need to liquidate or cease trading exists, the statements may have to be prepared on a different basis, and the basis used is then described. Para 2.26 says consistency is not the same as comparability. Consistency means using the same methods for the same items, and comparability is the goal that consistency helps to achieve. Para 1.17 says accrual accounting depicts the effects of transactions in the periods in which they occur, even if the cash moves in another period. This gives a better basis for judging performance than cash flows alone.

On selection of policies, the guiding ideas are prudence, substance over form and materiality. Prudence means you provide for expected losses but do not anticipate profits. Substance over form means you record the real economic effect, not just the legal shape. Materiality means you disclose items that could influence a user's decision.

The Preface to the Statements of Accounting Standards says that standards cannot override the local regulations that govern the preparation and presentation of financial statements. It also says disclosure may be made by way of explanatory notes. Such notes are only clarifications and need not be treated as adverse comments on the related financial statements.

Key rules to remember

Fundamental assumptions: Going concern + Consistency + Accrual; Assumed to be followed. Disclosure is needed only if one is not followed.
Disclosure of policies: Significant accounting policies = disclosed in one place, usually a note; Disclose the policies actually adopted, not generic statements.
Change in policy: Change with material effect → disclose the change, the amount of its effect and the reason; If the amount cannot be worked out, say so. A change with no current effect but likely later effect must also be disclosed.
Selection criteria: Prudence, Substance over form, Materiality; Use these to choose and apply policies.
Accrual idea: Revenue and expenses recognised when earned or incurred, not when cash moves; Cash flow timing does not decide the period.

How to solve AS 1 Disclosure of Accounting Policies questions

Use this method for any AS 1 question, whether theory or a short case.

1Identify what is asked: an assumption, a policy disclosure, or a change in policy.
2Name the relevant concept in one line, such as going concern or consistency.
3Apply it to the facts. Check if the entity follows the assumption or has departed from it.
4For a departure or change, decide if the effect is material.
5State the required disclosure: the policy, the fact of change, the reason and the amount of effect.
6If the amount cannot be quantified, say that the fact must still be disclosed.
7Write a clear conclusion in one sentence.

Quickest way: Three-question check

When to use it: Use this for short case questions where time is tight.

Ask: is any fundamental assumption not followed? If yes, disclose it.
Ask: was a policy changed? If yes and the effect is material, disclose the change, reason and amount.
Ask: is the policy significant? If yes, include it in the policy note.
Write the answer in the order: rule, facts, conclusion.

Common mistakes in AS 1 Disclosure of Accounting Policies

Saying the three fundamental assumptions must always be disclosed.
Students mix up the assumptions with the policies.
Fix: Remember they are assumed. Disclose only when an assumption is not followed.
Treating consistency and comparability as the same thing.
Both words sound alike.
Fix: In AS 1, consistency means following the same policies from period to period. Comparability is a separate idea. The Ind AS Conceptual Framework (para 2.26) calls it the goal that consistency helps achieve.
Confusing accrual with cash basis.
Daily life runs on cash.
Fix: Record the effect in the period it occurs, even if cash moves in another period.
Ignoring materiality when a policy changes.
Students think every change needs full disclosure.
Fix: Disclose when the effect is material, and say the amount. If it cannot be found, state that.
Writing generic policy notes such as 'prepared as per GAAP'.
It feels safe.
Fix: Name the actual method, for example inventories valued at lower of cost and net realisable value.
Assuming the standard overrides the Companies Act.
Students overrate standards.
Fix: The Preface says standards cannot override local regulations on preparation and presentation. Disclosure may be by explanatory notes, which are clarifications and not adverse comments.

Worked examples

Example 1

Sharma Textiles Ltd valued closing stock on FIFO until last year. This year it changed to weighted average cost. The change reduces profit by ₹4,50,000. Advise on disclosure.

Show the solution

Rule: a change in accounting policy with a material effect must be disclosed, with the reason and the amount of its effect.
Facts: the method of stock valuation changed from FIFO to weighted average, and profit falls by ₹4,50,000.
Analysis: the change affects profit and is likely material for users.
Disclosure needed: the fact of the change, the reason for it and the effect of ₹4,50,000 on profit.

Answer: Sharma Textiles Ltd must disclose the change in stock valuation method, the reason, and the ₹4,50,000 reduction in profit.

Example 2

Explain with an example how the accrual assumption affects a company which received rent of ₹60,000 in March for April, in a year ending 31 March.

Show the solution

Rule: under accrual, effects are recognised in the period they occur, even if cash moves in another period.
Facts: the rent relates to April, which falls in the next year. Cash was received in this year.
Analysis: the income is earned in the next year, so it is not this year's income.
Treatment: show ₹60,000 as income received in advance, a liability, at the year end.

Answer: The ₹60,000 is not income of the current year. It is shown as rent received in advance and taken to income in the next year.

Exam tips

Learn the one-line definition of each fundamental assumption. Examiners often ask for these in short notes.
When asked about a policy change, always give three things: the change, the reason and the amount of effect.
Use a simple example, such as stock valuation or depreciation method, to make the answer concrete.
Close case answers with a clear conclusion sentence.
Remember the Preface point that standards cannot override local law.

Practice questions from Accounting Standards

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 are the fundamental accounting assumptions in AS 1?

They are going concern, consistency and accrual. They are assumed to be followed in the financial statements. If any is not followed, that fact must be disclosed.

When must a change in accounting policy be disclosed?

When the change has a material effect. You disclose the change, the reason and the amount of the effect. If the amount cannot be worked out, you state that.

What is the difference between consistency and comparability?

In AS 1, consistency means following the same accounting policies from one period to the next. The Ind AS Conceptual Framework (para 2.26) adds that consistency is not the same as comparability. Comparability is the goal, and consistency helps to reach it.

What happens if the going concern assumption fails?

Under AS 1, if the assumption is not followed, that fact must be disclosed. The Ind AS Conceptual Framework (para 3.9) explains the idea this way. If the entity intends or needs to liquidate or cease trading, the statements may have to be prepared on a different basis, and they then describe the basis used.