Question

Discuss the disclosure requirement on accounting policies, and identify at least two (2) examples of the most commonly required disclosure. Explain the key ways in which the examples you provided are useful to financial statement users.

Answer 1

Definition	The 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.
Examples	(a) Treatment of expenditure during construction (b) Conversion or translation of foreign currency items (c) Valuation of inventories (d) Treatment of goodwill (e) Valuation of investments (f) Treatment of retirement benefits (g) Recognition of profit on long-term contracts (h) Valuation of fixed assets (i) Treatment of contingent liabilities
1.Treatment of goodwill	Goodwill is recorded in the books only when some consideration in money or money’s worth is paid for it. Thus, in the context of a partnership firm, the need for valuation of goodwill arises at the time of: >Change in the profit sharing ratio amongst the existing partners >Admission of a new partner >The retirement of a partner >Death of a partner >Dissolution of a firm where business is sold as going concern. >Amalgamation of partnership firms Methods of Valuation of Goodwill 1.Average Profits Method. 2.Super Profits Method. 3.Capitalization Method. This will help the user to identify the correct valuation of the goodwill, and consider for decision making.
2.Valuation of investments	Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not ‘investments’. Classification of Investments An enterprise should disclose current investments and long term investments distinctly in its financial statements.Further classification of current and long-term investments should be as specified in the statute governing the enterprise. In the absence of a statutory requirement, such further classification should disclose, where applicable, investments in: (a) Government or Trust securities (b) Shares, debentures or bonds (c) Investment properties (d) Others—specifying nature. Carrying Amount ofInvestments Investments classified as current investments should be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. In this case the users can identify whether the assets have been properly utilised through investments.If the assets have a better option other than investments, then the user can take decisions according to that.
Importance	International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs) require that all accounting policies must be disclosed and open to all. This legal requirement is compulsory to be made and publicized. This allows a transparency in the system and helps in maintaining a standard reporting format. Standardization in reporting allows comparing a company/business with other companies/businesses of it’s kind. It eases the process of comparing similar companies in the same industry. It gives a detailed financial position of a company to it’s readers. Net profits, assets, continuing operations, equities, and accounting statements are all influenced by a company’s accounting policies disclosure. Potential investors can study these accounting policies to decide if they would like to invest in the business.