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

While preparing 2025-26 accounts, Rohan Retail Ltd. must choose accounting policies where several are acceptable. Management wants to apply the consideration of prudence, substance over form and materiality. Which of these is the correct statement under AS 1?

Materiality means financial statements should disclose all items that are material enough to influence users' evaluations or decisions. Prudence covers anticipated losses, not gains, substance over form favours economic reality, and AS 1 prescribes no fixed percentage threshold.

  1. APrudence means anticipating all possible gains and recording them as income
  2. BSubstance over form means the legal form of a transaction should prevail over its economic reality
  3. CMateriality means financial statements should disclose all items which are material enough to affect evaluations or decisionsCorrect
  4. DMateriality means only items above 10% of profit are to be disclosed

Explanation

AS 1 states that financial statements should disclose all material items, i.e. items the knowledge of which might influence the decisions of users. Prudence provides for anticipated losses, not gains. Substance over form means economic reality prevails over legal form, so the second option is reversed. AS 1 gives no fixed 10% threshold.

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