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CA Intermediate · Advanced Accounting · AS 1 Disclosure of Accounting Policies

Rohan Engineering Ltd. is preparing its financial statements and has to select and apply accounting policies where there are several alternatives. Management wants to choose the policy that makes the profit appear highest. Under AS 1, the major considerations governing selection of accounting policies are:

AS 1 lists prudence, substance over form and materiality as the major considerations governing selection and application of accounting policies. Choosing a policy only to show the highest profit would breach prudence. Comparability, relevance and reliability are qualitative characteristics of the Framework, not the AS 1 selection considerations.

  1. APrudence, substance over form and materialityCorrect
  2. BComparability, relevance and reliability
  3. CConsistency, conservatism and simplicity
  4. DProfitability, liquidity and solvency

Explanation

AS 1 states that the major considerations governing the selection and application of accounting policies are prudence, substance over form and materiality. Choosing a policy only to show the highest profit conflicts with prudence. Option B lists qualitative characteristics from the Framework, not the AS 1 considerations.

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