Description
The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users, in making economic decisions.
Disclosure of Accounting policies
Learning Objectives
In this chapter we will learn What types of policies should an enterprise disclose. It also mentions consideration in selection of accounting policies
2
Applicability
This standards was introduced in 1979 It is applicable to corporates as well all non corporate entities.
3
Introduction
• This statement deals with disclosure of significant • Significance:
? The accounting policies followed vary from enterprise to enterprise . ? Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. accounting policies followed in preparing and presenting financial statements;
4
Introduction - 2
• In some cases the disclosures of accounting policies are
required by law as well.
• The nature and degree of disclosures vary considerably
between the corporate and non-corporate sectors and between units in the same sector.
• In some cases statement of accounting policies form part
of accounts and in some cases it is given as supplementary information.
5
Fundamental Accounting Assumptions
1 2 3 4
• Going Concern • Consistency & • Accrual • Since these are presumed - Only the deviation
are to be disclosed
6
Assumption 1: Going Concern
• The enterprise is normally viewed as a going
concern i.e. as continuing in operation for the foreseeable future - How Long ?
• It is assumed that the enterprise has neither
the intention nor necessity of liquidation or of curtailing Materially the scale of operation.
7
Assumption 2: Consistency
• It is assumed that the accounting policies
are consistent from one period to another.
• Why is this assumption so important ??
Because It enables better comparison of Financial Statements of different periods.
8
Assumption 3: Accrual
•Revenues and costs are
accrued, i.e., recognised as they are earned or incurred and recorded in the financial statements of the periods to which they relate.
9
Areas in which different Accounting Policies vary.
Some examples areas in which different accounting policies may be adopted: ?Methods of depreciation, depletion and amortisation. ?Valuation of fixed assets ?Valuation of inventories, ?Treatment of goodwill ?Valuation of investments
10
Considerations in selection of Policies
• Financial statements prepared on the
basis of accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and that of results of operation for the period in the Statement of Profit & Loss.
11
1. Prudence
A sensible & careful attitude that makes you avoid unnecessary risks.
In view of inherent uncertainties and inadequate information about future
Profits are NOT anticipated but recognised only when they are realised, Provision is made for all known liabilities and losses even though only an estimate can be made as it cannot be determined with certainty- probability plays an important role.
12
1. Prudence Ensures
Profits and assets are not overstated Liability and losses are not understated Well that does not mean that prudence helps create hidden reserves.
13
1. Prudence Example
Measuring closing inventory at lesser of cost or net realisable value In case of construction contracts , recognising anticipated losses in full even if cost not accrued. In such cases, prudence overrides accruals
14
2. Substance Over Form
Transactions & Events should be accounted for and presented in accordance with
Their substance & financial reality
And NOT legal form
15
2. Substance over Form Example.
For example, an enterprise sales goods Rs. 1,50,000 and concurrently agrees to buy back the same after one month for Rs. 1,55,000 This is more of financing arrangement under garb of sale and purchase agreement.
16
3. Materiality
• What do you understand by the term "Materiality" ?
Material Items mean items the knowledge of which might influence the decision of the users of the financial statements
• All material items should be disclosed in the financial
statements.
• It is relative term, for example, Rs. one lakhs for an
enterprise having turnover of Ten lakhs is materials as compared to enterprise having turnover of Rs. 1,000 crore.
17
3. Materiality - Nature & Magnitude
Materiality is NOT just governed by the size ,i.e, the magnitude, but also by the nature A loss by fraudulent practices of certain employees can indicate a serious flaws in the enterprise's internal control system requiring immediate attention , then loss by theft. In this case , materiality is governed by nature and not magnitude or the quantum
18
Disclosure of Change in Accounting Policies
One of the very vital disclosures is about Changes in accounting polices which has material effect in the current period or in later period. Just the fact there is change in accounting polices is not enough. The effect of changes should be discloses wherever ascertainable. If not ascertainable - the fact should be mentioned. If the change in policies has no significant impact in current year , but material impact in future years ,the fact should be disclosed in the year of change.
19
Disclosures- CAUTION !
• Disclosure of accounting policies or of
change therein CANNOT remedy a wrong or inappropriate treatment of the items in the accounts.
20
Disclosures
• All significant accounting policies
adopted should be disclosed; • Disclosures should form part of the financial statements, and should be disclosed at one place and not scattered.;
21
Disclosures
• The disclosures mentioned earlier are Minimum
disclosure.
• Additional Disclosures can always be provided by an
entity • E.G: In case of estimation of figures , disclosures may be provided regarding the assumptions made and method followed in determining the estimation (for example: Depreciation calculation : Straight line method or Reducing balance method)
22
Accounting Policy - Tata Steel
23
Accounting Policy - Tata Steel 2
24
Accounting Policy - Tata Steel 3
25
Accounting Policy - Tata Steel 4
26
Accounting Policy - Tata Steel 5
27
Practice Tips
• Students must read the annual reports of the listed companies
to get the clear idea of how different companies disclose the accounting polices.
• You should select the companies from different sectors like,
banking, manufacturing, entertainment , software etc.
• This will also help you understand practical application of
accounting standards.
•.
28
MCQ.
• As 1 is applicable to • A) Only to Listed companies • B) Only to Limited Companies • C) To all enterprises , except Partnerships Firms • D) To all enterprises
29
Questions
• Q.1 Give 5 Illustrations of the areas in which different
accounting policies may be adopted by different enterprises.
• Q.2 Discuss the importance of accounting policies ? • Q.3 Write a sample note on disclosure of accounting
policies.
30
Don't Waste time - Make the most of it. Be Determined Discipline and Dedicate - With Best Wishes
31
doc_969120227.doc
The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users, in making economic decisions.
Disclosure of Accounting policies
Learning Objectives
In this chapter we will learn What types of policies should an enterprise disclose. It also mentions consideration in selection of accounting policies
2
Applicability
This standards was introduced in 1979 It is applicable to corporates as well all non corporate entities.
3
Introduction
• This statement deals with disclosure of significant • Significance:
? The accounting policies followed vary from enterprise to enterprise . ? Disclosure of significant accounting policies followed is necessary if the view presented is to be properly appreciated. accounting policies followed in preparing and presenting financial statements;
4
Introduction - 2
• In some cases the disclosures of accounting policies are
required by law as well.
• The nature and degree of disclosures vary considerably
between the corporate and non-corporate sectors and between units in the same sector.
• In some cases statement of accounting policies form part
of accounts and in some cases it is given as supplementary information.
5
Fundamental Accounting Assumptions
1 2 3 4
• Going Concern • Consistency & • Accrual • Since these are presumed - Only the deviation
are to be disclosed
6
Assumption 1: Going Concern
• The enterprise is normally viewed as a going
concern i.e. as continuing in operation for the foreseeable future - How Long ?
• It is assumed that the enterprise has neither
the intention nor necessity of liquidation or of curtailing Materially the scale of operation.
7
Assumption 2: Consistency
• It is assumed that the accounting policies
are consistent from one period to another.
• Why is this assumption so important ??
Because It enables better comparison of Financial Statements of different periods.
8
Assumption 3: Accrual
•Revenues and costs are
accrued, i.e., recognised as they are earned or incurred and recorded in the financial statements of the periods to which they relate.
9
Areas in which different Accounting Policies vary.
Some examples areas in which different accounting policies may be adopted: ?Methods of depreciation, depletion and amortisation. ?Valuation of fixed assets ?Valuation of inventories, ?Treatment of goodwill ?Valuation of investments
10
Considerations in selection of Policies
• Financial statements prepared on the
basis of accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and that of results of operation for the period in the Statement of Profit & Loss.
11
1. Prudence
A sensible & careful attitude that makes you avoid unnecessary risks.
In view of inherent uncertainties and inadequate information about future
Profits are NOT anticipated but recognised only when they are realised, Provision is made for all known liabilities and losses even though only an estimate can be made as it cannot be determined with certainty- probability plays an important role.
12
1. Prudence Ensures
Profits and assets are not overstated Liability and losses are not understated Well that does not mean that prudence helps create hidden reserves.
13
1. Prudence Example
Measuring closing inventory at lesser of cost or net realisable value In case of construction contracts , recognising anticipated losses in full even if cost not accrued. In such cases, prudence overrides accruals
14
2. Substance Over Form
Transactions & Events should be accounted for and presented in accordance with
Their substance & financial reality
And NOT legal form
15
2. Substance over Form Example.
For example, an enterprise sales goods Rs. 1,50,000 and concurrently agrees to buy back the same after one month for Rs. 1,55,000 This is more of financing arrangement under garb of sale and purchase agreement.
16
3. Materiality
• What do you understand by the term "Materiality" ?
Material Items mean items the knowledge of which might influence the decision of the users of the financial statements
• All material items should be disclosed in the financial
statements.
• It is relative term, for example, Rs. one lakhs for an
enterprise having turnover of Ten lakhs is materials as compared to enterprise having turnover of Rs. 1,000 crore.
17
3. Materiality - Nature & Magnitude
Materiality is NOT just governed by the size ,i.e, the magnitude, but also by the nature A loss by fraudulent practices of certain employees can indicate a serious flaws in the enterprise's internal control system requiring immediate attention , then loss by theft. In this case , materiality is governed by nature and not magnitude or the quantum
18
Disclosure of Change in Accounting Policies
One of the very vital disclosures is about Changes in accounting polices which has material effect in the current period or in later period. Just the fact there is change in accounting polices is not enough. The effect of changes should be discloses wherever ascertainable. If not ascertainable - the fact should be mentioned. If the change in policies has no significant impact in current year , but material impact in future years ,the fact should be disclosed in the year of change.
19
Disclosures- CAUTION !
• Disclosure of accounting policies or of
change therein CANNOT remedy a wrong or inappropriate treatment of the items in the accounts.
20
Disclosures
• All significant accounting policies
adopted should be disclosed; • Disclosures should form part of the financial statements, and should be disclosed at one place and not scattered.;
21
Disclosures
• The disclosures mentioned earlier are Minimum
disclosure.
• Additional Disclosures can always be provided by an
entity • E.G: In case of estimation of figures , disclosures may be provided regarding the assumptions made and method followed in determining the estimation (for example: Depreciation calculation : Straight line method or Reducing balance method)
22
Accounting Policy - Tata Steel
23
Accounting Policy - Tata Steel 2
24
Accounting Policy - Tata Steel 3
25
Accounting Policy - Tata Steel 4
26
Accounting Policy - Tata Steel 5
27
Practice Tips
• Students must read the annual reports of the listed companies
to get the clear idea of how different companies disclose the accounting polices.
• You should select the companies from different sectors like,
banking, manufacturing, entertainment , software etc.
• This will also help you understand practical application of
accounting standards.
•.
28
MCQ.
• As 1 is applicable to • A) Only to Listed companies • B) Only to Limited Companies • C) To all enterprises , except Partnerships Firms • D) To all enterprises
29
Questions
• Q.1 Give 5 Illustrations of the areas in which different
accounting policies may be adopted by different enterprises.
• Q.2 Discuss the importance of accounting policies ? • Q.3 Write a sample note on disclosure of accounting
policies.
30
Don't Waste time - Make the most of it. Be Determined Discipline and Dedicate - With Best Wishes
31
doc_969120227.doc