Financial statements are not just a collection of numbers. Behind every figure lies a set of accounting policies that determine how those numbers are measured, recognised, and presented. Accounting Standard 1 (AS 1) recognises this reality and therefore places strong emphasis on the disclosure of accounting policies and changes in accounting policies.
The objective of disclosure under AS 1 is to ensure that users of financial statements clearly understand which accounting policies have been followed, whether those policies have changed, and how such changes have affected the financial results.
Meaning of Disclosure of Accounting Policies
Disclosure of accounting policies means clearly stating the significant accounting policies actually adopted by an enterprise while preparing its financial statements.
Merely complying with accounting standards is not enough. Enterprises must disclose:
- Which accounting policies they have chosen
- How those policies have been applied
- Whether any policy has been changed during the period
Such disclosure enables users to correctly interpret financial statements.
Why Disclosure of Accounting Policies Is Necessary
Accounting policies have a direct impact on:
- Profit or loss
- Valuation of assets and liabilities
- Financial position of an enterprise
Since different accounting policies can lead to different results for the same transactions, disclosure becomes essential to maintain transparency and comparability.
Without disclosure:
- Financial statements may appear misleading
- Comparisons between enterprises become unreliable
- Users may draw incorrect conclusions
AS 1 addresses this issue by mandating disclosure.
What Accounting Policies Should Be Disclosed?
AS 1 requires disclosure of all significant accounting policies adopted in the preparation and presentation of financial statements.
Significant accounting policies are those policies that:
- Have a material effect on financial statements
- Are essential for understanding the reported figures
Insignificant or routine policies need not be disclosed.
Manner of Disclosure of Accounting Policies
AS 1 prescribes a clear manner of disclosure to ensure clarity and usefulness.
Key Requirements:
- Disclosure should form part of the financial statements
- Significant accounting policies should normally be disclosed in one place
- Disclosure should not be scattered across different notes
This approach makes it easier for users to locate and understand the accounting policies followed by the enterprise.
Importance of Disclosure in One Place
When accounting policies are disclosed at one place:
- Users can easily refer to them
- Comparability improves
- Interpretation becomes simpler
Scattered disclosure may confuse readers and reduce the effectiveness of financial reporting.
Disclosure of Changes in Accounting Policies
AS 1 also deals extensively with disclosure of changes in accounting policies.
A change in accounting policy may occur due to:
- Statutory requirements
- New accounting standards
- More appropriate presentation of financial statements
Such changes must be disclosed properly.
When Is Disclosure of Change Required?
Disclosure is required in the following cases:
- When the change has a material effect in the current accounting period
- When the change is reasonably expected to have a material effect in future periods, even if the current impact is not material
This ensures that users are informed of all important changes.
What Should Be Disclosed in Case of Change?
When an accounting policy is changed and the change has a material effect, the enterprise should disclose:
- The nature of the change
- The reason for the change
- The amount by which financial statements are affected, if ascertainable
If the effect cannot be determined wholly or partly, the fact should be disclosed.
A simple statement that “accounting policy has changed” is not sufficient.
Illustration 1: Change in Inventory Valuation Method
Case Details -
- Closing inventory as per FIFO: ₹1,63,000
- Closing inventory as per Weighted Average: ₹1,47,000
- Net realisable value: ₹1,95,000
The company changes its inventory valuation method from FIFO to Weighted Average.
Disclosure Requirement
As per AS 1, the company must disclose:
- That inventory valuation method has changed
- The reason for change
- The effect of the change
Effect: Profit and inventory value reduced by ₹16,000.
This disclosure allows users to understand why profit figures have changed.
Illustration 2: Change Affecting Profit Significantly
Case Summary
A company had projected a surplus but draft results showed a deficit. The board decided to:
- Value inventory at factory cost instead of prime cost
- Provide for permanent diminution in value of investments
Disclosure as Per AS 1
The notes to accounts must disclose:
- Change in inventory valuation method
- Increase in profit due to inventory revaluation
- Provision made for diminution in investment value
- Net effect on profit
This ensures full transparency and prevents misleading reporting.
Illustration 3: Non-Provision of Interest Liability
Case Summary
A company did not provide interest on overdue deposits due to uncertainty and disclosed it as a contingent claim instead.
AS 1 Treatment
AS 1 recognises:
- Prudence as a key principle
- Accrual basis as a fundamental assumption
Since interest liability existed and was not waived, the company should have provided for the liability.
Failure to do so amounts to violation of accrual basis of accounting. Hence, the treatment was not correct.
This illustration highlights the importance of proper disclosure and application of accounting principles.
Disclosure of Changes Having No Current Material Effect
Even if a change in accounting policy:
- Has no material impact in the current period
- But is expected to affect future periods
The fact of such change must be disclosed in the current period.
This ensures forward-looking transparency.
Disclosure of Deviations from Fundamental Accounting Assumptions
AS 1 also requires disclosure when fundamental accounting assumptions are not followed.
The fundamental assumptions are:
- Going Concern
- Consistency
- Accrual
Disclosure Rule:
- If followed: No disclosure required
- If not followed: Disclosure is mandatory
This rule ensures that users are not misled by incorrect assumptions.
Why AS 1 Emphasises Disclosure So Strongly
AS 1 does not aim to restrict accounting choices. Instead, it aims to:
- Make accounting choices visible
- Improve comparability
- Enhance trust in financial statements
Disclosure ensures that flexibility does not turn into manipulation.
Impact of Proper Disclosure on Users
Proper disclosure helps users:
- Understand financial statements accurately
- Compare results across enterprises
- Analyse performance over time
- Make informed economic decisions
Thus, disclosure is central to financial reporting quality.
Role of Disclosure in True and Fair View
Financial statements present a true and fair view only when:
- Accounting policies are appropriate
- Changes are disclosed transparently
- Effects are explained clearly
AS 1 ensures that disclosure supports the true and fair presentation of financial statements.
Conclusion
Disclosure of accounting policies and changes therein is one of the most important requirements under Accounting Standard 1. AS 1 recognises that diversity in accounting policies is unavoidable, but ensures that such diversity does not mislead users.
By mandating clear, complete, and meaningful disclosure, AS 1 enhances transparency, comparability, and reliability of financial statements. The illustrations under AS 1 further demonstrate how disclosure should be made in real-life situations.
For students and professionals alike, understanding disclosure requirements under AS 1 is essential for both examination success and practical accounting application.
FAQs -
1: What is disclosure of accounting policies as per AS 1?
Answer: Disclosure of accounting policies means clearly stating the significant accounting policies adopted by an enterprise in preparing its financial statements.
2: Why is disclosure of accounting policies important?
Answer: Disclosure helps users understand how financial figures are calculated and improves comparability between financial statements of different enterprises.
3: Which accounting policies should be disclosed?
Answer: Only significant accounting policies that have a material effect on the financial statements should be disclosed as per AS 1.
4: Where should accounting policies be disclosed?
Answer: AS 1 requires that significant accounting policies should normally be disclosed in one place as part of the financial statements.
5: When should changes in accounting policies be disclosed?
Answer: Changes should be disclosed when they have a material effect in the current period or are reasonably expected to have a material effect in future periods.
6: Is it enough to say that an accounting policy has changed?
Answer: No, a simple statement is not sufficient. The nature, reason, and financial impact of the change must also be disclosed, if ascertainable.
7: What if the effect of change cannot be determined?
Answer: If the effect of a change in accounting policy cannot be fully or partly determined, the fact should be disclosed in the financial statements.
8: Is disclosure required if fundamental accounting assumptions are followed?
Answer: No, if the fundamental accounting assumptions are followed, no specific disclosure is required. Disclosure is mandatory only if they are not followed.
