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Unit 3: Accounting Standards

Considerations in the Selection of Accounting Policies Notes
16. 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 accounting policies
should represent a true and fair view of the state of affairs of the enterprise as at the
balance sheet date and the profit or loss for the period ended on that date.

17. For this purpose, the major considerations governing the selection and application of
accounting policies are:
(a) Prudence: In view of the uncertainty attached to future events, profits are not
anticipated but recognised only when realised though not necessarily in cash.
Provision is made for all known liabilities and losses even though the amount
cannot be determined with certainty and represents only a best estimate in the light
of available information.

(b) Substance over Form: The accounting treatment and presentation in financial
statements of transactions and events should be governed by their substance and
not merely by the legal form.
(c) Materiality: Financial statements should disclose all “material” items, i.e. items the
knowledge of which might influence the decisions of the user of the financial statements.

Disclosure of Accounting Policies

18. 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.

19. Such disclosure should form part of the financial statements.
20. It would be helpful to the reader of financial statements if they are all disclosed as such in
one place instead of being scattered over several statements, schedules and notes.

21. Examples of matters in respect of which disclosure of accounting policies adopted will be
required are contained in paragraph 14. This list of examples is not, however, intended to
be exhaustive.
22. 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.
23. Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item in the accounts.

Accounting Standard

(The Accounting Standard comprises paragraphs 24-27 of this Statement. The Standard should be
read in the context of paragraphs 1-23 of this Statement and of the ‘Preface to the Statements of
Accounting Standards.)
24. All significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed.

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