Question 1 OR (b)

Accounting policies: selection and change

6 marks

Time to write
About 12 minutes
Topic
Conceptual framework items
Notes
Crux notes

Question

Question 1 OR (b) · 6 marks

As per AS 5, what are accounting policies? Explain the considerations in selecting accounting policies. In what conditions should a change in accounting policy be made?

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

12 minfor 6 marks

Read from the question

  • What…?Explain…3 asks, each with its own marks below. Answer all 3.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Meaning of accounting policies 2 marks 2 min
  3. 2 Considerations in selection true and fair; prudence, substance, materiality 2 marks 4 min
  4. 3 Conditions for change statute / standard / more appropriate presentation 2 marks 4 min
  5. Check: every ask answered, key terms underlined 1 min

Easy marks

  • Meaning of accounting policies (step 1, 2 marks): a clear definition and a line on what it covers. It opens the answer, so it takes a minute or two.

Short on time? Keep step 1 short. Trim steps 2 and 3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning (as per AS 5). AS 5 defines accounting policies as the particular accounting principles, and the methods of applying them, that an enterprise adopts when it prepares and presents its financial statements. Different enterprises can properly follow different policies in the same area, for example the methods of depreciation, the valuation of inventories, the treatment of goodwill and the valuation of investments.

Considerations in selection. The main aim is that the financial statements give a true and fair view of the state of affairs and of the profit or loss. To that end the choice of policies is made on the basis of prudence, materiality and substance over form:

  1. Prudence: profits are not anticipated but recognised only when realised, while provision is made for all known liabilities and losses even where the amount is only a best estimate;
  2. Substance over form: the accounting treatment follows the substance and financial reality of a transaction, not merely its legal form;
  3. Materiality: the statements disclose every item knowledge of which could influence users' decisions.

Conditions for a change. Policies are normally applied consistently from one period to the next. Under AS-5 a policy may be changed only if the new policy is required by statute, is needed to comply with an accounting standard, or is expected to give a more appropriate presentation of the financial statements, that is, more relevant or reliable information. A change with a material effect, and its effect, are disclosed.

Where the 6 marks sit

#ComponentMarks
1Meaning of accounting policies2
2Considerations in selection (true and fair; prudence, substance, materiality)2
3Conditions for change (statute / standard / more appropriate presentation)2
Total6
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