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

Tapti Steel Ltd. has a policy of valuing inventory at cost, which it follows consistently. In the current year, the management is uncertain whether the policy should have been written as 'lower of cost and net realisable value'. Considering the considerations governing selection of accounting policies under AS 1, which of the following is the primary consideration that should guide the choice of policy where there is a conflict?

Under AS 1, prudence, substance over form and materiality are the major considerations in selecting and applying accounting policies, so that the financial statements give a true and fair view. Shareholder preference, maximum profit or copying competitors are not valid bases for the choice.

  1. APrudence, substance over form and materiality, in selecting and applying the policiesCorrect
  2. BPreference of the majority shareholders
  3. CChoosing the policy that shows the highest profit
  4. DFollowing the policy used by the largest competitor

Explanation

AS 1 states that the major considerations governing selection and application of accounting policies are prudence, substance over form and materiality. The aim is a true and fair view. Shareholder preference, highest profit or competitor practice are not recognised considerations.

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