PURPOSE OF ACCOUNTING STANDARD:
1. Disclosure of significant accounting policies required for better understanding of financial statements and meaningful comparison between financial statements of different enterprise for same accounting period.
2. It requires disclosure of change in accounting policies to compare financial statements of same enterprise for different accounting periods.
APPLICABILITY OF ACCOUNTING STANDARD:
1. This standard applicable to all enterprise.
1. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.
2. The disclosure of significant accounting policies should form part of financial statements and disclosed at one place.
3. Any change in accounting policies which has a material effect in current period or expect in later periods amount by which any item in the financial statement is affected by such changes should also disclose to the extent ascertainable. Where such amount is not ascertainable wholly or in part the fact should be indicated.
While selecting a accounting policies it should consider following points:
1. PRUDENCE: In associated with future events we can recognize anticipate losses but we shouldn't recognize anticipate profits. We should create provisions for anticipate losses. The exercise of prudence in selection of accounting policies ensure that.
- Assets and profits are not overstated.
- Liabilities and losses are not understated.
2. SUBSTANCE OVERFORM: Accounting treatment and presentation of financial statements of transaction and event should be governed by their substance and not merely by legal form.
3. MATERIALITY: Financial statements should disclose all material item i.e. items which effect decisions of users of financial statements. In certain cases quantitative limits of materiality is specified:
- A company should disclose by way of notes additional information regarding any item of income or expenditure which exceeds 1% of the revenue from operations or RS 1,00,000 whichever is higher.
- A company should disclose in notes to accounts shares in the company held by each shareholder holding more than 5% shares specifying the number of shares held.
4. Fundamental accounting assumption:
There are 3 fundamental accounting assumption they are:
1.GOING CONCERN: Financial statements are normally prepared on the assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention not there is need to materially curtail the scale of operations.
2.CONSISTENCY: It is assumed that Accounting policies are consistent from one period to another.
3.ACCRUAL: Revenue and costs are recognized as they are earned or incurred and recorded in the financial statements of the period which they relate.
Case(1): If enterprise follows fundamental accounting assumption then there is no need to disclose in financial statements.
Case(2): If enterprise not follow fundamental accounting assumption then disclosure required in financial statements.
CONCLUSION: Disclose change in Accounting policies in the year of change only.