AS 1 in 60 seconds
- Objective: make financial statements easier to understand and compare by requiring disclosure of the significant accounting policies used.
- 3 fundamental accounting assumptions: Going concern, Consistency, Accrual. If followed — no disclosure needed. If not followed — disclose the fact.
- Selection of policies: aim is a true and fair view; consider Prudence, Substance over form, Materiality.
- Disclosure: all significant policies, as part of the financial statements, normally in one place.
- Changes: disclose material changes (now or expected later); give the amount of effect where ascertainable, otherwise say so.
- Golden line: disclosure never cures a wrong accounting treatment.
1. Fundamental accounting assumptions Paras 9–10, 27
These are basic assumptions that underlie every set of financial statements. Because users presume they are followed, AS 1 does not ask you to state them — only a departure must be disclosed.
| Assumption | Meaning (exam wording) | Example |
|---|---|---|
| Going concern | The enterprise will continue in operation for the foreseeable future; it has neither the intention nor the need to liquidate or materially curtail its operations. | Assets shown at cost less depreciation, not at break-up value. |
| Consistency | Accounting policies are applied in the same way from one period to the next. | Inventory valued on FIFO every year, so profits are comparable. |
| Accrual | Revenues and costs are recognised as they are earned or incurred (not when cash is received or paid) and recorded in the periods to which they relate. | March salary paid in April is still an expense of March. |
2. What is an accounting policy? Paras 11–13
Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in preparing and presenting financial statements.
- There is no single list of policies that suits every situation — choosing them needs judgement.
- Accounting standards and law have reduced the number of alternatives, but have not eliminated them.
3. Areas where different policies are possible Paras 14–15
AS 1 gives these examples — the list is illustrative, not exhaustive:
- Methods of depreciation, depletion and amortisation
- Treatment of expenditure during construction
- Conversion or translation of foreign currency items
- Valuation of inventories
- Treatment of goodwill
- Valuation of investments
- Treatment of retirement benefits
- Recognition of profit on long-term contracts
- Valuation of fixed assets
- Treatment of contingent liabilities
4. Selection of accounting policies — P-S-M Paras 16–17
The primary consideration is that the financial statements show a true and fair view of the state of affairs (balance sheet) and the profit or loss (P&L). The major considerations are:
Do not anticipate profits; recognise them only when realised (though not necessarily in cash). Provide for all known liabilities and losses even if the amount can only be estimated.
Example: a probable loss on a pending lawsuit is provided for (subject to AS 29); a likely gain is not recognised.Account for transactions according to their substance and financial reality, not merely their legal form.
Example: an asset taken on hire purchase is shown as the buyer’s asset, though legal ownership passes later.Disclose all items whose knowledge might influence the decisions of the users of the financial statements.
Example: a ₹50 stationery item can be expensed; a ₹50 lakh claim must be disclosed.5. Disclosure requirements — main principles Paras 18–27
| Rule | What to write in the exam | Para |
|---|---|---|
| What to disclose | All significant accounting policies adopted in preparing and presenting the financial statements. | 24 |
| Where | As part of the financial statements, normally in one place (not scattered, not only in the directors’ report). | 25 |
| Change — material effect now | Disclose the change and the amount by which any item is affected, to the extent ascertainable. If not ascertainable (wholly or partly), indicate that fact. | 26 |
| Change — effect only later | A change with no material effect now but reasonably expected to have a material effect later must be disclosed in the period of change. | 22, 26 |
| Fundamental assumptions | Followed → no specific disclosure. Not followed → disclose the fact. | 27 |
| No cure by disclosure | Disclosure of a policy or a change does not remedy a wrong or inappropriate treatment. | 23 |
6. Exam traps (where students lose marks)
- Mixing lists: Fundamental assumptions = G-C-A. Selection considerations = P-S-M. Never write “prudence” as a fundamental assumption.
- “Disclosed in notes, so fine” — wrong. Para 23: disclosure does not correct a wrong treatment (e.g. not charging depreciation and only mentioning it in notes).
- Depreciation method change — under AS 10 (revised) it is a change in estimate, not policy.
- Amount not ascertainable — you must still say so; silence is a violation.
- Future effect — a change with zero effect this year still needs disclosure if a material effect is expected later.
- Cash basis for a company — not allowed: section 128(1) of the Companies Act, 2013 requires books on the accrual basis and double-entry system.
7. Practical questions — ICAI style, with model answers
Q1. X Ltd changed inventory valuation from FIFO to weighted average this year. Profit fell by ₹4.5 lakh because of the change. What does AS 1 require?
Answer: This is a change in accounting policy with a material effect in the current period. Under para 26, X Ltd must disclose (i) the fact of the change, and (ii) the amount by which profit and inventory are affected — ₹4.5 lakh. Also remember AS 5: a policy may be changed only if required by statute or an accounting standard, or if the change gives a more appropriate presentation of the financial statements — mention this in your answer for full marks.
Q2. Y Ltd did not provide depreciation this year because of losses, but disclosed this in the notes. Is the treatment correct?
Answer: No. Depreciation must be charged under AS 10 whether or not there are profits. Para 23 of AS 1: disclosure does not remedy a wrong or inappropriate treatment. The accounts must be corrected.
Q3. Z Ltd changed its depreciation method from straight-line to written-down value. Is it a change in accounting policy under AS 1?
Answer: No. Under AS 10 (revised), a change in the depreciation method is treated as a change in accounting estimate and accounted for under AS 5 (prospectively). It should still be disclosed if material.
Q4. A company changes a policy this year with no effect on this year’s profit, but a material effect is expected next year. Should it disclose?
Answer: Yes. Paras 22 and 26 require disclosure in the period in which the change is adopted, even if the material effect will arise only in later periods.
Q5. A company has decided to close down; the board approved liquidation, and the accounts are prepared on realisable values. What does AS 1 require?
Answer: The going concern assumption is not followed. Under para 27 the fact must be disclosed (and the basis used explained), because users otherwise presume going concern.
Q6. A company records rent income on a cash basis. Comment.
Answer: Accrual, a fundamental accounting assumption, is not followed — the fact must be disclosed under para 27. Further, for a company, section 128(1) of the Companies Act, 2013 requires books on the accrual basis, so the treatment itself must be corrected.
8. AS 1 vs Ind AS — one-minute comparison
| Point | AS 1 | Ind AS |
|---|---|---|
| Scope | Disclosure of accounting policies only | Ind AS 1 covers full presentation of financial statements; policies, changes, estimates and errors are in Ind AS 8 |
| Fundamental assumptions | Going concern, consistency, accrual | Going concern and accrual in Ind AS 1; consistency of presentation also required |
| What is disclosed | Significant accounting policies | Since the 2023 amendment to Ind AS 1 (effective 1 April 2023): material accounting policy information |
| Change in policy | Disclose under AS 1; accounting under AS 5 | Generally applied retrospectively under Ind AS 8 (unless impracticable or a standard’s transition rules say otherwise), with detailed disclosures |
Last-day revision — 8 lines
- AS 1 = disclosure of significant accounting policies.
- Policy = specific principles + methods of applying them.
- G-C-A: followed → silent; not followed → disclose (para 27).
- Primary aim of selection: true and fair view.
- P-S-M: Prudence, Substance over form, Materiality.
- Disclose in the financial statements, normally in one place.
- Material change: disclose + amount (or the fact that it is not ascertainable); future effect too.
- Disclosure is no cure for wrong treatment (para 23).
Based on the Accounting Standard (AS) 1 issued by the ICAI and notified in the Companies (Accounting Standards) Rules, 2021, read with AS 10 (revised) and section 128 of the Companies Act, 2013. Notes are a learning aid — always read the standard in the ICAI study material for the exact text. Checked October 2026.