LEGAL REQUIREMENTS FOR DISCLOSURE OF ACCOUNTING POLICIES

DISCLOSURE OF ACCOUNTING POLICIES

Ø  Nature of Accounting Policies

Accounting policies 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 which are applicable to all circumstances. The different circumstances in which enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific circumstances of each enterprise calls for considerable judgment by the management of the enterprise. The various statements of the Institute of chartered accountants of India combined with the efforts of government and other regulatory agencies and progressive managements have reduced in recent years the number of acceptable alternative particularly in the case of a corporate enterprise. While continuing efforts in this regard in future these are likely to reduce the number still further, the availability of alternative accounting principles and methods of applying those stances faced by the enterprises.

Ø  Areas in which Different Accounting Policies are encountered

The following are examples of the areas as given in AS 1, Disclosure of Accounting Policies in which different accounting policies may be adopted by different enterprises. 

. Methods of depreciation, depletion and amortization

. 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

Ø  Disclosure of Accounting Policies

The view presented in the financial statements of an enterprise of its state of affairs and of the profit or loss can be significantly affected by the accounting policies followed in the preparation and presentation of the financial statements. 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. The disclosure of some of the accounting policies followed in the preparation and presentation of the   financial statements is required by law in some cases.  The purpose of AS-1 is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such  disclosure would  also facilitate a more meaningful comparison between financial statements of different   enterprises.  To ensure proper understanding of financial statements, it is necessary that 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.

It would be helpful to the reader of financial statements if they are all disclosed at one place instead of being scattered over several statements, schedules and notes and form part of financial statements. Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

Ø  Fundamental Accounting Assumptions

Certain fundamental accounting assumptions underlie the preparation and presentation of  financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed.

The following have been generally accepted as fundamental accounting assumptions :

(a) Going Concern : The enterprise is normally viewed as a going concern, that is as continuing in  operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing.

(b) Consistency:It is assumed that accounting policies are consistent from one period to another.

(c) Accrual : Revenues and costs are accrued, that is recognised as they are earned or incurred (and not as money is received or paid) and recognised in the financial statements of the periods to which they relate. (The considerations affecting the process of matching costs with revenues

under the accrual assumption are not dealt with in this statement.)

If the fundamental accounting assumptions, viz., Going concern, Consistency and Accrual are followed in financial statements specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.

Section 211(3A) provides that it is the responsibility of the company to ensure that every profit and loss account and balance sheet of the company shall comply with the accounting standards. In case a company fails to comply with accounting standards, such companies shall disclose in its profit and loss account and balance sheet the deviation from accounting standards, the reasons for such deviation, and the financial effect, if any, arising due to such deviation. Under this sub-clause, a duty has been imposed on auditor to see whether in his opinion, the profit and loss account and balance sheet complied with the accounting standards.

Special requirement in regard to banking, insurance and electricity supply companies - The auditor of a banking company is required by section 30(3) of the Banking Regulation Act also to state the following additional matters viz.,

 (a) whether or not the information and explanations required by him have been found to be satisfactory; (b) whether or not transactions of the company fall within the powers of a banking company; (c) whether or not the returns received from the branch offices of the company have

been found adequate for the purposes of his audit; (d) whether the profit and loss account shows a true balance of profit and loss for the period covered by such account; and (e) any other matter which he  considers should be brought home to the shareholders of the company. Likewise there are special provisions contained in the Insurance Act, 1938 and the Electricity (Supply) Act, 1948 specifying matters on which the auditor should make a report. Similar provisions also are contained in certain other Acts, e.g., Societies Registration Act, 1860. On a consideration of subsections (3), (4) and (5) of section 211, a banking, insurance, electricity supply and other companies  governed by the special Acts as well as those which have been specially exempted by the Central Government from making a disclosure of certain matters or from complying with certain requirements with regard to the balance sheet and profit and loss account, are exempt from drawing up their balance sheet in the form contained in Schedule VI to the Act and from furnishing particulars of income and expenditure specified in Part II of the Schedule.   The statements of account of the company cannot be deemed to have been improperly drawn up or as not disclosing a true and fair view of the state of affairs of the company merely because they  only disclose matters which require disclosure under the special Acts under which they are drawn up or they do not disclose any matter which does not require disclosure by virtue of provisions contained is Schedule VI to the Companies Act or any matter which does not have to be disclosed by virtue of notification issued under sub-section (3) or an order issued under sub-section (4) of section 211. It is thus clear that in the statement of account of a company drawn up under the special Acts, only the information requiring disclosure there under needs to be disclosed.

PRESENTATION OF FINANCIAL STATEMENTS *

Section 211 provides that every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of the said section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case. In preparing the balance sheet due regard shall be had, as far as may be, to the general instructions for preparation of balance sheet under the heading “Notes” at the end of that Part. 

The profit and loss account of a company shall give a true and fair view of the profit or loss of company for the financial year and shall, subject to as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto.

It is further provided that nothing contained in the above provisions shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of balance sheet or profit and loss account, as the case may be, has been specified in or under the Act governing such class of company.

However, if in the opinion of the Central Government it is necessary to grant exemption in the public interest, it may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements of Schedule VI, either unconditionally or subject to such conditions as may be specified in the Notification.

The Central Government is also empowered, either on the application of or with the consent of, the Board of directors of the company, by order, to modify in relation to that company any of the

requirements of this Act as to matters to be stated in the company’s balance sheet or profit and loss account, for the purpose of adapting them to the circumstances of the company.

For the purposes of section 211, any reference to a balance sheet or profit and loss account shall

include any notes thereon or documents annexed thereto, giving information required by the Act, and allowed by the Act to be given in the form of such notes or documents, except where the context otherwise requires.

Schedule VI, which deals with the form of the balance sheet in Part I, with requirements as to the profit and loss account in Part II is discussed hereunder. Part III defines and interprets certain lessons while Part IV contains an abstract of the financial statements and a general business profile of the company.