Accounting Policies Disclosure: A Complete Guide for CA

Accounting policies disclosure refers to the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting its financial statements. Under Ind AS 1, "Presentation of Financial Statements," an entity must disclose all significant accounting policies as part of the notes to financial statements. This requirement is also codified in Section 129 of the Companies Act, 2013, read with Schedule III, which mandates that financial statements give a true and fair view of the state of affairs.

The disclosure is mandatory because users of financial statements—investors, creditors, regulators, and tax authorities—need to understand the basis on which financial information has been prepared. Without this disclosure, comparability between entities and across periods would be compromised. The Institute of Chartered Accountants of India (ICAI) has reinforced this through Accounting Standard (AS) 1, which requires that all significant accounting policies be disclosed at one place.

Under Ind AS 1, an entity must disclose the measurement basis used in preparing the financial statements and each specific accounting policy necessary for understanding the financial statements. The ICAI's Guidance Note on Significant Accounting Policies lists several areas where disclosure is typically required: method of depreciation, valuation of inventories, revenue recognition, foreign currency translation, treatment of retirement benefits, and accounting for taxes on income.

For example, if an entity uses the straight-line method for depreciation, it must disclose this policy along with the estimated useful lives of assets. Similarly, if inventories are valued at lower of cost or net realisable value, the cost formula used (FIFO, weighted average, or specific identification) must be disclosed. Under Schedule III to the Companies Act, 2013, the notes to accounts must include a statement of significant accounting policies, and any change in policy must be disclosed with its financial effect.

Changes in accounting policies are permitted only if required by a statute or an accounting standard, or if the change results in more appropriate presentation of financial statements. Under Ind AS 8, "Accounting Policies, Changes in Accounting Estimates and Errors," a change in accounting policy must be applied retrospectively unless it is impracticable to determine the cumulative effect.

When a change occurs, the entity must disclose: the nature of the change, the reasons for the change, the amount of adjustment for each period presented, and the amount of adjustment relating to periods prior to those presented. For example, if a company changes from weighted average to FIFO for inventory valuation, it must restate prior period financial statements as if the new policy had always been applied, and disclose the impact on opening retained earnings. Under the Companies Act, 2013, any change in accounting policy that has a material effect must be disclosed in the Board's report.

One frequent error is failing to disclose all significant policies in a single place. Ind AS 1 requires that a summary of significant accounting policies be presented as a separate section in the notes. Another common mistake is using boilerplate language that does not reflect the entity's actual practices. For instance, stating "revenue is recognised when earned" without specifying the point of recognition for different revenue streams can mislead users.

CAs also often overlook the requirement to disclose the judgements and estimates involved in applying accounting policies. Under Ind AS 1, an entity must disclose the judgements management has made in applying accounting policies that have the most significant effect on amounts recognised. For example, the criteria used to determine when substantially all risks and rewards of ownership are transferred in revenue recognition must be disclosed. Additionally, failing to disclose the financial effect of a change in accounting policy is a common error that can lead to qualified audit reports.

The Income Tax Act, 1961, does not mandate specific accounting policies for computing taxable income, but it does require that the method of accounting be consistent. Section 145 of the Act provides that income chargeable under the heads "Profits and gains of business or profession" and "Income from other sources" shall be computed in accordance with either the cash or mercantile system of accounting regularly employed by the assessee.

However, differences often arise between accounting policies used for financial reporting and those required for tax purposes. For example, while Ind AS may require straight-line depreciation, the Income Tax Act prescribes rates under the Income Tax Rules. In such cases, the entity must maintain separate records for tax purposes. The CBDT has issued guidelines requiring that where an entity follows Ind AS, it must also maintain books of account as per the previous GAAP for tax purposes, unless the CBDT specifies otherwise. The accounting policies disclosure in financial statements should clearly state the method followed and any deviations from tax requirements.

If you are preparing financial statements for an Indian entity, review the applicable Ind AS or AS requirements along with Schedule III to the Companies Act, 2013. For complex transactions or changes in accounting policies, consult a qualified chartered accountant who can ensure compliance with both accounting standards and tax regulations.

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This page provides preliminary information. It is not legal advice. For your matter, consult a qualified professional.