What Is AS 1?
Accounting Standard 1 (AS 1), titled "Disclosure of Accounting Policies," was issued by the Institute of Chartered Accountants of India (ICAI) and is mandatory for all enterprises preparing financial statements in India. The standard was notified under the Companies (Accounting Standards) Rules, 2006 and continues to apply to companies not required to follow Ind AS.
AS 1 recognises that financial statements are prepared on the basis of certain accounting policies — the specific principles, methods, conventions, rules and procedures adopted by an enterprise. Since the choice of policies can significantly affect the financial statements, users must be informed about these policies to understand and compare financial performance across enterprises.
"The purpose of AS 1 is to promote better understanding of financial statements by requiring disclosure of significant accounting policies and the manner of applying them."
Scope of AS 1
AS 1 applies to all enterprises that prepare and present financial statements, regardless of their size, nature, or form of organisation. It covers:
- All significant accounting policies adopted in the preparation and presentation of financial statements
- Any change in an accounting policy that has a material effect on the current period or is reasonably expected to have a material effect in later periods
Fundamental Accounting Assumptions
AS 1 identifies three fundamental accounting assumptions that underlie the preparation of financial statements. These assumptions are so basic that they are presumed to be followed unless stated otherwise:
1. Going Concern
The enterprise is assumed to continue in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. If this assumption is not valid, the financial statements must be prepared on a different basis — such as liquidation value or net realisable value — and the basis must be disclosed.
2. Consistency
Accounting policies are assumed to be consistent from one period to another. This means that the same methods, principles and procedures are applied year after year. The consistency assumption enables users to compare financial statements across different accounting periods and identify meaningful trends. If there is a change in policy, it must be disclosed along with its financial impact.
3. Accrual
Revenues and costs are recognised when they are earned or incurred (not when money is received or paid) and are recorded in the financial statements of the periods to which they relate. This assumption ensures that financial statements reflect the true financial performance and position of the enterprise, regardless of cash flow timing.
If any of the three fundamental assumptions is not followed, the fact must be specifically disclosed in the financial statements.
Nature of Accounting Policies
The accounting policies of an enterprise refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements. There is no single list of accounting policies that is applicable to all circumstances. The differing circumstances in which enterprises operate make alternative accounting policies acceptable, and the choice of the appropriate policy requires the exercise of judgement.
Areas Where Different Accounting Policies May Be Adopted
The following are examples of areas where different accounting policies may be adopted by different enterprises:
| Area | Alternative Policies |
|---|---|
| Depreciation | Straight Line Method (SLM), Written Down Value (WDV), Units of Production |
| Inventory Valuation | FIFO, Weighted Average Cost, Specific Identification |
| Revenue Recognition | Percentage of Completion, Completed Contract |
| Foreign Currency Translation | Average Rate, Closing Rate, Transaction Date Rate |
| Investment Valuation | Cost, Lower of Cost or Fair Value, Fair Value |
| Borrowing Costs | Expensed immediately, Capitalised for qualifying assets |
Selection of Accounting Policies
The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such policies should represent a true and fair view of the state of affairs and profit or loss of the enterprise. For this purpose, the major considerations governing the selection are:
- Prudence — In the face of uncertainty, assets and income should not be overstated, and liabilities and expenses should not be understated. However, the exercise of prudence does not allow the deliberate creation of hidden reserves or excessive provisions.
- Substance over Form — Transactions and events should be accounted for in accordance with their economic substance and financial reality, not merely their legal form.
- Materiality — Financial statements should disclose all "material" items — information whose omission or misstatement could influence the economic decisions of users.
Disclosure Requirements
AS 1 requires the following disclosures:
- All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed
- Such disclosure should form part of the financial statements — usually as a separate schedule or note forming part of Notes to Accounts
- If the fundamental accounting assumptions (going concern, consistency, accrual) are followed, no specific disclosure is required. However, if any of these assumptions is not followed, the fact must be disclosed along with the reasons
- Any change in an accounting policy that has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. If a change is made, the amount by which any item in the financial statements is affected should be disclosed to the extent ascertainable. Where such amount is not ascertainable, the fact should be indicated.
Disclosure under Companies Act 2013
Schedule III of the Companies Act 2013 requires that significant accounting policies and notes forming part of the accounts must be disclosed. The notes shall contain information required to be given under the Companies Act or under the applicable Accounting Standards. This reinforces the requirements of AS 1 by making policy disclosure a statutory obligation for all companies.
Changes in Accounting Policies
A change in an accounting policy should be made only if:
- It is required by statute or by an accounting standard, or
- It is considered that the change would result in a more appropriate preparation or presentation of the financial statements
A change in an accounting policy is not the same as:
- Adoption of a new policy for new events or transactions — this is not a change
- Adoption of a policy for events that did not occur previously or were immaterial — this is also not a change
- A change in an accounting estimate — estimates may change as new information is available, but this is not a policy change
Practical Example
Company X has been using the Written Down Value (WDV) method for depreciation. In FY 2025-26, it decides to switch to the Straight Line Method (SLM). Under AS 1, Company X must:
- Disclose the change from WDV to SLM in the notes to accounts
- State the reason for the change (e.g., to better reflect the pattern of economic benefit consumption)
- Quantify the impact of the change on the current year's profit — e.g., "Depreciation for the year is lower by Rs 5,00,000 as a result of the change in depreciation method"
Conclusion
AS 1 is the foundational accounting standard in India. It ensures transparency by requiring enterprises to disclose the accounting policies they follow, explain any changes, and maintain the three fundamental assumptions unless explicitly stated otherwise. For CA students, accountants, and business professionals, a thorough understanding of AS 1 is essential for interpreting and preparing accurate financial statements.
At TaxClue, our team of qualified CAs assists businesses with accounting policy formulation, compliance with accounting standards, and preparation of financial statements. Contact us for expert assistance.