ACCOUNTING STANDARDS

UNIT – 3RD
Presentation And Disclosure Based Accounting Standards
Accounting Standard 1 : Disclosure of Accounting Policies.
Accounting Standard 1 (AS 1) deals with the disclosure of accounting policies. It is a key standard that
provides guidelines for the presentation of financial statements to ensure transparency and
comparability. Here are the main points:

Objectives

• To ensure that financial statements are prepared consistently and are comparable across
different periods and entities.

• To enhance the understandability of financial statements by providing users with necessary

information about the accounting policies adopted.

Key Elements

1. Definition of Accounting Policies:

o Accounting policies are the specific principles, bases, conventions, rules, and practices
applied by an entity in preparing and presenting financial statements.

2. Disclosure Requirements:

o An entity must disclose the significant accounting policies it has adopted in the
preparation of its financial statements.

o The disclosure should include:

▪ The basis of accounting (e.g., historical cost, fair value).

▪ Recognition of revenue and expenses.

▪ Valuation of assets and liabilities.

▪ Any other policy that is relevant to understanding the financial statements.

3. Consistency:

o Entities should apply accounting policies consistently from one period to another, unless
a change is justified and disclosed.

4. Changes in Accounting Policies:

o Any changes in accounting policies should be disclosed along with the reasons for the
change and the effect on the financial statements.

5. Applicability:
 o AS 1 applies to all entities preparing financial statements, including public and private
companies, and may also be relevant for not-for-profit organizations.

Importance

• By ensuring consistent application and clear disclosure of accounting policies, AS 1 helps users of
financial statements make informed decisions, enhancing the overall integrity of financial
reporting.

In summary, AS 1 is crucial for promoting transparency and comparability in financial statements through
the proper disclosure of accounting policies.

Topic:- Fundamental assumptions of Accounting

The fundamental assumptions of accounting provide the foundation for the preparation of financial
statements. They guide how financial information is recorded and reported. Here are the key
assumptions:

1. Going Concern

• Assumes that an entity will continue its operations for the foreseeable future and will not be
forced to liquidate or significantly reduce its operations. This assumption justifies the use of
historical cost for assets.

2. Accrual Basis

• Revenues and expenses are recognized when they are earned or incurred, regardless of when
cash is received or paid. This provides a more accurate picture of financial performance over a
given period.

3. Consistency

• The accounting policies and practices applied in the preparation of financial statements should
be consistent across reporting periods. If changes are made, they must be disclosed along with
their effects on the financial statements.

4. Economic Entity

• The transactions and financial activities of a business must be kept separate from those of its
owners or other businesses. This assumption ensures clarity in financial reporting.

5. Monetary Unit

• Financial transactions are recorded in a stable currency, and it is assumed that the purchasing
power of that currency remains relatively constant over time. This simplifies reporting and
analysis.
6. Periodicity

• The life of a business is divided into time periods (e.g., months, quarters, years) for reporting
purposes. This allows stakeholders to assess performance and financial position regularly.

These fundamental assumptions underpin the structure of accounting standards and ensure that
financial information is reliable, comparable, and useful for decision-making.

Topic:- Nature of Accounting Policies

Accounting policies are the specific principles and methods that an organization adopts in preparing and
presenting its financial statements. Here’s a closer look at the nature of accounting policies:

1. Basis of Preparation

• Framework: Accounting policies provide the framework for preparing financial statements,
ensuring that they comply with applicable accounting standards (e.g., GAAP, IFRS).

• Consistency: They ensure consistency in financial reporting over time, which aids comparability
between periods and with other entities.

2. Types of Policies

• Recognition Policies: Define when revenues and expenses are recognized in the financial
statements. For example, revenue may be recognized when goods are delivered or services
rendered.

• Measurement Policies: Specify how assets and liabilities are measured (e.g., historical cost, fair
value, or lower of cost or market).

• Classification Policies: Determine how transactions are classified in the financial statements
(e.g., distinguishing between current and non-current assets).

3. Disclosure

• Transparency: Organizations must disclose their accounting policies in the notes to the financial
statements. This enhances the understandability of the financial information.

• Significant Policies: Only significant accounting policies should be disclosed, which are those
that are material to the financial statements and impact the understanding of users.

4. Adaptability

• Changes in Policies: Accounting policies can change based on new standards, regulations, or
business circumstances. When changes occur, entities must disclose the nature of the change,
the reasons for it, and its effects on the financial statements.

• Flexibility: While policies should be consistent, entities have some flexibility in choosing policies
that best reflect their business operations.
5. Judgment and Estimates

• Subjectivity: The selection and application of accounting policies often require management
judgment and the use of estimates. This can affect financial reporting outcomes.

6. Regulatory Compliance

• Standards Alignment: Policies must align with the relevant accounting frameworks and
standards to ensure compliance and provide a true and fair view of the entity’s financial
position.

Importance

• Accounting policies are crucial for maintaining the integrity and reliability of financial reporting.
They help stakeholders, including investors, creditors, and regulators, understand how financial
results are derived and assessed.

Topic:- Areas in which different Accounting Policies are encountered

Different accounting policies can be encountered in various areas of financial reporting. Here are some
key areas where differing accounting policies are commonly applied:

1. Revenue Recognition

• Methods: Different entities may recognize revenue at different points in time (e.g., at the point
of sale, upon delivery, or over time for long-term contracts).

• Policies: Entities may adopt policies that align with industry practices or specific contracts,
affecting how revenue is reported.

2. Inventory Valuation

• Methods: Companies may choose different methods for inventory valuation, such as:

o FIFO (First-In, First-Out)

o LIFO (Last-In, First-Out)

o Weighted Average Cost

• Each method affects cost of goods sold (COGS) and ending inventory values, impacting profit
margins.

3. Property, Plant, and Equipment (PPE)

• Depreciation Methods: Different entities may use various depreciation methods (e.g., straight-
line, declining balance, units of production) for allocating the cost of tangible assets over their
useful lives.

• Revaluation: Some entities may revalue assets periodically, while others may use the historical
cost model.
4. Intangible Assets

• Amortization: The approach to amortizing intangible assets can vary. Some may use straight-line
amortization, while others may amortize based on expected cash flows.

• Impairment: Policies regarding the testing for impairment and recognizing losses can differ
significantly.

5. Financial Instruments

• Classification: Different policies for classifying financial instruments (e.g., as held for trading,
available for sale, or held to maturity) can impact how gains and losses are recognized.

• Hedging: Accounting for hedging activities can vary, including whether to use fair value or cash
flow hedges.

6. Leases

• Operating vs. Finance Leases: The classification of leases can differ, impacting how they are
recorded on the balance sheet and income statement.

• Recognition Policies: Different approaches to recognizing lease liabilities and assets, particularly
under IFRS 16 and ASC 842.

7. Income Taxes

• Deferred Tax Assets and Liabilities: Entities may adopt different approaches for recognizing
deferred tax assets and liabilities based on their tax planning strategies.

• Tax Rates: The effective tax rate applied in calculating deferred taxes can differ based on
jurisdiction and specific tax policies.

8. Foreign Currency Transactions

• Translation Policies: Different policies for translating foreign currency transactions can affect the
financial statements, such as using the current rate or historical rate.

9. Provision and Contingent Liabilities

• Recognition: The criteria for recognizing provisions or contingent liabilities can vary, impacting
financial position and performance reporting.

10. Employee Benefits

• Pension Accounting: Different policies for measuring and recognizing pension liabilities,
including defined benefit vs. defined contribution plans.

Importance

The diversity in accounting policies can lead to variations in financial statements across entities, even if
they operate in similar industries. Understanding these differences is crucial for stakeholders when
analyzing financial performance and making comparisons.
Topic:- Accounting Standard 3: Cash Flow Statement
Accounting Standard 3 (AS 3) pertains to the preparation and presentation of cash flow statements. It
aims to provide information about the cash inflows and outflows of an entity during a specific period,
which is essential for assessing its liquidity and financial flexibility. Here are the key aspects of AS 3:

Objectives

• To provide information about the cash movements of an entity, helping users assess its ability to
generate cash and cash equivalents.

• To enhance the comparability of cash flows among different entities and periods.

Key Components

1. Definition of Cash Flows

o Cash flows are the inflows and outflows of cash and cash equivalents, which include cash
on hand and demand deposits, as well as short-term investments that are readily
convertible to cash.

2. Classification of Cash Flows Cash flows are categorized into three main activities:

o Operating Activities: Cash flows from the principal revenue-generating activities of the
entity. This includes receipts from customers, payments to suppliers, and other cash
transactions that relate to the entity’s core operations.

o Investing Activities: Cash flows related to the acquisition and disposal of long-term
assets and investments. This includes purchases or sales of property, plant, and
equipment, and investments in other entities.

o Financing Activities: Cash flows that result in changes in the size and composition of the
equity and borrowings of the entity. This includes proceeds from issuing shares,
borrowing funds, and repayment of loans.

3. Presentation

o Cash flow statements can be prepared using either the direct method or the indirect
method:

▪ Direct Method: Cash flows from operating activities are presented by disclosing
major classes of gross cash receipts and payments. This method provides more
detailed information.

▪ Indirect Method: Cash flows from operating activities are derived from net
profit or loss by adjusting for non-cash transactions, changes in working capital,
and other items. This is more commonly used due to its simplicity.

4. Disclosure Requirements
 o AS 3 requires entities to disclose significant non-cash transactions, such as acquisitions
of assets through finance leases or the conversion of debt into equity.

o Reconciliation between the cash flow from operating activities and the net profit or loss
for the period is required if the indirect method is used.

Importance

• The cash flow statement provides valuable insights into an entity’s cash management, helping
stakeholders evaluate its ability to meet obligations, invest in growth, and distribute returns to
shareholders.

• It complements the income statement and balance sheet by providing a different perspective on
financial performance and liquidity.

Conclusion

AS 3 plays a crucial role in enhancing the transparency and reliability of financial reporting by focusing on
cash flows, which are vital for decision-making.

Topic:- Accounting Standard 17: Segment Reporting

Accounting Standard 17 (AS 17) pertains to segment reporting, which aims to provide information about
the different business segments of an entity. This standard enhances transparency and helps users of
financial statements assess the performance of various segments. Here’s an overview of its key
components:

Objectives

• To provide information about the different types of business activities and geographical areas in
which an entity operates.

• To help users understand the risks and rewards associated with each segment and evaluate the
entity's overall performance.

Key Components

1. Definition of Segments

o Business Segment: A distinguishable component of an entity that provides products or

services that are subject to risks and returns that are different from those of other
segments.

o Geographical Segment: A distinguishable component of an entity that engages in

activities in a particular economic environment and is subject to risks and returns that
are different from those of segments operating in other economic environments.

2. Identification of Segments
 o Segments must be identified based on the internal reporting structure of the entity. The
management approach is typically used, where segments are reported according to how
they are used for decision-making by the chief operating decision-maker.

3. Reporting Requirements

o Entities must disclose financial information for each reportable segment, including:

▪ Revenue

▪ Segment profit or loss

▪ Assets

▪ Liabilities

▪ Other relevant information, such as capital expenditures

o Segment information must be reconciled to the entity’s consolidated financial

statements.

4. Measurement Basis

o The measurement of segment results should be consistent with the accounting policies
used for the entity's financial statements. This ensures that the information is
comparable across segments and with the overall entity.

5. Quantitative Thresholds

o A segment is considered reportable if it meets certain quantitative thresholds related to

revenue, profit, or assets. Typically, a segment is reportable if:

▪ Its revenue is 10% or more of the total revenue of all segments.

▪ Its segment profit or loss is 10% or more of the combined profit or loss of all
segments.

▪ Its assets are 10% or more of the total assets of all segments.

6. Disclosure Requirements

o Additional disclosures may include information about the factors used to identify
reportable segments, the types of products and services from which each segment
derives its revenues, and the geographical areas in which the entity operates.

Importance

• Segment reporting provides valuable insights into the diverse operations of an entity, allowing
stakeholders to make informed decisions regarding investments, credit, and performance
assessment.

• It enhances accountability and helps management focus on the performance of different

business units.
Conclusion

AS 17 plays a crucial role in promoting transparency in financial reporting by requiring entities to provide
detailed information about their operational segments.

Topic:- Accounting Standard 18: Related Party Disclosure

Accounting Standard 18 (AS 18) addresses the disclosure of transactions and relationships between an
entity and its related parties. The purpose of this standard is to ensure transparency in financial
reporting by requiring entities to disclose relevant information about related party transactions, which
can potentially affect the financial statements. Here’s an overview of its key components:

Objectives

• To provide users of financial statements with necessary information about related party
relationships and transactions to assess the potential impact on the financial position and
performance of the entity.

• To enhance the reliability of financial statements by ensuring that related party transactions are
appropriately disclosed.

Key Components

1. Definition of Related Parties

o A related party is defined as a person or entity that is related to the entity preparing its
financial statements. This includes:

▪ Individuals: Key management personnel, their close family members, and

significant shareholders.

▪ Entities: Entities that are controlled or significantly influenced by the reporting

entity or by individuals described above.

2. Disclosure Requirements

o Entities must disclose:

▪ The nature of the relationship with related parties.

▪ The transactions that occurred during the reporting period, including their
amounts and terms.

▪ Any outstanding balances, including terms and conditions.

▪ The nature of any commitments with related parties.

o Disclosure should be made for both qualitative and quantitative aspects, ensuring clarity
for users.

3. Types of Transactions Covered

 o Related party transactions can include various types of transactions, such as:

▪ Purchases or sales of goods and services.

▪ Leasing arrangements.

▪ Transfers of research and development.

▪ Financial arrangements, such as loans and guarantees.

▪ Management services.

4. Materiality Consideration

o Disclosures should focus on transactions that are material to the entity. This means that
the information provided should be relevant enough to influence the economic
decisions of users.

5. Exemptions

o Some transactions may be exempt from disclosure if they occur between entities within
the same group and if they are conducted under normal commercial terms.

Importance

• AS 18 enhances the understanding of how related party transactions can impact an entity’s
financial performance and position, thereby fostering transparency and accountability.

• By requiring the disclosure of related party transactions, it helps prevent conflicts of interest and
potential misuse of resources.

Conclusion

AS 18 plays a vital role in ensuring that users of financial statements have access to relevant information
about related party transactions, which can influence their assessments and decisions.