Question

A first-time shareholder has approached you requesting some advice. The shareholder has received the company’s annual report and noticed the following statement in the summary of significant accounting policies:

     ‘The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets which is explained in the notes.’

Required

Explain to the shareholder why this statement is included in the accounting policy note.

Answer 1

Accounting policies followed by an organisation are part of financial statements and disclosed in notes to the accounts. They help the users in better understanding of financial statements. Examples of accounting policies include depreciation methods, inventory valuation methods, valuation of fixed assets, etc. Accounting policies helps in preparation of financial statement with consistent methods and make financial statements more reliable to end users.

In the given case the firm is preparing its financial statements as per historical cost principle. The firm has a practice of valuing its noncurrent assets as per different method for which it has accounting policy and it is disclosing the same in notes to financial statements so that users of financial statements are aware of the same. Accounting policies are part of financial statements and they help the users in understanding the impact of accounting policies on the financial statements. The end users can understand the impact of revaluation of noncurrent assets based on accounting policy and analyse financial statements accordingly to take informed decisions.