EPFO APFC 2023 General Studies · Question 42 of 120

Correct — A, (a) Going Concern, Consistency, Accrual. Accounting Standard 1, Disclosure of Accounting Policies, names exactly three fundamental accounting assumptions, and these are they. Going concern means the enterprise is assumed to continue in operation for the foreseeable future, with neither the intention nor the necessity of liquidating or of curtailing materially the scale of its operations. It is the assumption that lets a machine bought for ten years of use sit in the balance sheet at cost less depreciation rather than at what a forced sale would fetch tomorrow. Consistency means that accounting policies are applied in the same way from one period to the next, so that this year's figures can be compared with last year's. Without it a change of method could manufacture a profit. Accrual means that revenues and costs are recognised as they are earned or incurred — not as cash is received or paid — and are recorded in the financial statements of the periods to which they relate. This is the assumption that produces outstanding expenses, prepaid expenses, accrued income and income received in advance. The distinguishing feature of these three is the rule the standard attaches to them: because their acceptance and use are assumed, they need no specific disclosure when they are followed, and disclosure becomes necessary only when one of them is not followed. Nothing else in the standard carries that rule, which is what makes the list closed rather than a loose collection of good ideas. The trap in the option set is conservatism. Prudence, which is the standard's own name for conservatism, does appear in AS-1 — but under a different heading, as one of the three major considerations governing the selection and application of accounting policies, alongside substance over form and materiality. Two lists, three items each, printed a few paragraphs apart in the same standard: assumptions in one, considerations in the other. A candidate who remembers only that prudence is in AS-1 will pick a wrong option here, and this paper sets the same distinction again from the other side later in the accountancy block. The statute keeps the same company. Section 128(1) of the Companies Act, 2013 requires every company to keep its books of account on the accrual basis and according to the double entry system, and section 133 is the provision under which accounting standards are prescribed. Under Ind AS 1 the same three ideas survive in a different form — financial statements are prepared on a going concern basis and on the accrual basis, and presentation and classification must be consistent from period to period.

• (b)Going Concern, Money Measurement, Conservatism — Two substitutions, both drawn from the general vocabulary of accounting theory rather than from the standard's list. Money measurement — the convention that only transactions capable of being expressed in money are recorded, which is why the skill of a workforce never appears in a balance sheet — is a basic accounting concept, and a real one, but AS-1 does not name it as a fundamental assumption. Conservatism, or prudence, is named in AS-1, but as a consideration governing the selection of accounting policies, not as an assumption: the standard asks that profits not be anticipated while provision is made for all known liabilities and losses. Because prudence genuinely appears in the standard, this option catches candidates who remember the document but not the heading they read it under.
• (c)Going Concern, Consistency, Conservatism — The nearest miss in the set, and the one that costs most marks: two of the three are right and only accrual has been displaced by conservatism. The way to keep them apart is to remember what each list does. The assumptions describe the state of the world the accounts are drawn up in — the business will carry on, the methods will not change, and events are recorded when they occur. The considerations describe how a preparer chooses between permissible policies once those assumptions are in place — with prudence, with regard to the substance of a transaction rather than its legal form, and with regard to materiality. Accrual belongs to the first list, prudence to the second, and no arrangement of the two puts them in the same one.
• (d)Going Concern, Accounting Period, Accrual — Accounting period, or periodicity, is the convention that the indefinite life of a business is cut into equal intervals — usually a year — so that performance can be reported. It is presupposed by the whole exercise, and the accrual assumption cannot even be stated without it, since accrual is about assigning revenues and costs to the periods to which they relate. But AS-1 does not list it among the fundamental accounting assumptions; the third place belongs to consistency. This option is the one a candidate reaches for by reasoning from first principles instead of recalling the standard, and it is a reminder that the item asks what the standard says, not what is conceptually necessary.

AS-1, Disclosure of Accounting Policies, is the first of the ICAI's accounting standards and the one that governs what a set of accounts must tell its reader about how it was prepared. It does three things. It identifies the fundamental accounting assumptions — going concern, consistency and accrual — and provides that, since their acceptance and use are assumed, they need not be specifically stated, while the fact that any of them has not been followed must be disclosed. It identifies the three major considerations governing the selection and application of accounting policies — prudence, substance over form and materiality. And it requires that all significant accounting policies adopted in preparing the financial statements be disclosed, in one place, as part of the financial statements, with any change in policy having a material effect disclosed along with its effect wherever ascertainable. The reason a standard begins here rather than with any particular transaction is that identical figures can be produced by different policies: two firms with the same trading history will report different profits if one values inventory at first-in-first-out and the other at weighted average, or if one charges depreciation on the straight line and the other on the written down value. The assumptions fix the ground the reader is standing on, and the disclosure of policies tells the reader which of several permissible routes the preparer took. AS-1 was issued in 1979 and made mandatory for accounting periods beginning on or after 1 April 1991; accounting standards for companies are prescribed under section 133 of the Companies Act, 2013.

This is a recall item of the purest kind — there is no reasoning route to the answer, only the standard's own list — and the Commission has built the distractors out of the vocabulary that sits closest to that list. Money measurement, conservatism and the accounting period are all genuine ideas in accounting theory, and two of the three appear in AS-1 itself under other headings, so a candidate who has read about accounting concepts in general but not about this standard in particular will find three of the four options plausible. That is a deliberate design: EPFO's accountancy block rewards precise reading of a short document over broad familiarity with a subject. The paper returns to the same standard later, asking from the other direction which item is not among the major considerations in selecting accounting policies, so learning the two lists as a pair pays twice. Note the printed form: the booklet prints the name as Accounting Standard–1 with an en dash before the numeral rather than a hyphen, reproduced here as printed.

• AS-1 names three fundamental accounting assumptions — going concern, consistency and accrual — and requires disclosure only when one of them has not been followed.
• Going concern assumes the enterprise will continue in operation for the foreseeable future, with neither the intention nor the necessity of liquidation or of materially curtailing the scale of operations.
• Accrual recognises revenues and costs as they are earned or incurred rather than as cash moves, and records them in the period to which they relate; consistency requires the same policies from period to period.
• The three major considerations governing the selection and application of accounting policies are a separate list in the same standard: prudence, substance over form and materiality. Conservatism is prudence, and it sits on this second list.
• AS-1 also requires that all significant accounting policies be disclosed in one place as part of the financial statements, and that a change of policy with a material effect be disclosed along with that effect wherever ascertainable.
• Section 128(1) of the Companies Act, 2013 requires books of account to be kept on the accrual basis and by double entry; Ind AS 1 carries the same three ideas as the going concern basis, the accrual basis and consistency of presentation.

• Mixing the two lists in AS-1 — the fundamental assumptions and the major considerations governing the selection of policies — because prudence appears in the standard and therefore feels like an assumption
• Treating money measurement or the accounting period as fundamental assumptions because they are genuine accounting concepts; the question asks what AS-1 names, not what the subject presupposes
• Forgetting the disclosure rule that defines the class: the three assumptions need no disclosure when followed, and must be disclosed when not followed
• Assuming consistency forbids any change of policy; it requires that a change be made only for good reason and that it be disclosed with its effect

Accounting standards appear in this paper as one-line recall items with short options, and AS-1 is the standard the Commission draws on most because its content is short, listed and easy to set. Expect the two lists in that standard to be tested against each other, in the positive form here and in a negative form elsewhere in the accountancy block, and expect an individual assumption to be tested indirectly as well, by describing a valuation practice and asking which assumption it rests on.

No directly related past PYQ was found.

• practice — not a real PYQ

  Under AS-1, if a fundamental accounting assumption is not followed in preparing the financial statements, what is required?

  • (a)Nothing, because the assumptions are only recommendatory
  • (b)The fact of not following it must be disclosed
  • (c)The accounts must be recast on the assumption
  • (d)Approval of the shareholders must be obtained in advance

  Answer(b) The fact of not following it must be disclosed — AS-1 provides that the fundamental accounting assumptions need no specific statement when they are followed, because their acceptance and use are assumed, and that disclosure is necessary only when any of them is not followed. That asymmetric disclosure rule is what marks the three assumptions off from every other idea in the standard.

• practice — not a real PYQ

  A firm values its fixed assets at cost less depreciation rather than at the price they would fetch in an immediate sale. This practice rests on which accounting assumption?

  • (a)Accrual
  • (b)Consistency
  • (c)Going concern
  • (d)Materiality

  Answer(c) Going concern — the enterprise is assumed to continue in operation for the foreseeable future, with no necessity of liquidation, so assets held for use are carried at their unexpired cost rather than at break-up value. If the assumption were dropped, the assets would be stated at net realisable value and the departure would have to be disclosed.