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CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Sharma Traders valued its closing inventory using a method that is not appropriate for its business, but it disclosed the method clearly in the accounting policy note. Under AS 1, what is the effect of this disclosure?

Disclosure cannot remedy a wrong or inappropriate treatment. AS 1 says that disclosing accounting policies or changes in them does not correct an item that has been treated wrongly in the accounts, so the inventory valuation remains inappropriate despite the clear note.

  1. AIt cures the inappropriate treatment because the policy is disclosed
  2. BIt cures the treatment only if the auditor agrees to it
  3. CIt cannot remedy a wrong or inappropriate treatment of the item in the accountsCorrect
  4. DIt cures the treatment if the amount is below the materiality level

Explanation

AS 1 states that disclosure of accounting policies, or of changes in them, cannot remedy a wrong or inappropriate treatment of the item in the accounts. Clear disclosure of the method therefore does not make the inappropriate valuation acceptable.

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