Significant accounting policies note: what to write, with sample wording (AS 1)

The draft is ready and note 2 has come across from last year's file unchanged. It says depreciation is on the written-down value method over Schedule II lives, while the fixed asset working uses income-tax rates. It says gratuity is provided on an actuarial valuation, but there is no provision ledger in the trial balance. The note was simply never read against the books. This guide covers what AS 1 and the Companies Act require in a significant accounting policies note, which policies a small company really needs, sample wording for ten of them and a checklist tying each policy to the ledgers. Law as at 31 October 2026; figures are illustrative. The wording is a starting point and must be adapted to the entity's facts. For where this note sits among the others, see the notes to accounts format.

What AS 1, the Act and Schedule III require

Paragraph references are to AS 1 as set out in the Companies (Accounting Standards) Rules, 2021.

• Fundamental assumptions (paras 9, 10, 27). Going concern, consistency and accrual. If followed, no specific disclosure is needed. If one is not followed, the fact must be disclosed.
• Selection of policies (paras 16, 17). The primary consideration is a true and fair view. The major considerations are prudence, substance over form and materiality.
• Disclosure (paras 24, 25). All significant policies are disclosed, as part of the financial statements, and normally in one place. There is no single list that suits every enterprise (para 12); para 14 gives examples such as depreciation, inventories, investments, foreign currency, retirement benefits and contingent liabilities.
• Limit of disclosure (para 23). Disclosing a policy cannot remedy a wrong or inappropriate treatment.

The Act gives this force. Section 129(1) requires financial statements to give a true and fair view, comply with the accounting standards notified under section 133 and follow the form in Schedule III. Under section 129(5), a company that does not comply must disclose the deviation, the reasons and the financial effects. The 2021 Rules were made under section 133, and rule 4 binds both the company and its auditor. In the responsibility statement under section 134(5)(b), the directors confirm that they selected accounting policies and applied them consistently. Under section 143(3)(e), the auditor reports whether the statements comply with the accounting standards.

Schedule III Division I contains no heading for accounting policies. General Instruction 2 makes its disclosures additional to those in the Accounting Standards. On valuation, Part I asks for the mode of valuation of inventories (6O(iii)), the basis of valuation of non-current investments carried at other than cost (6K(ii)) and of individual current investments (6N(ii)(a)). Schedule II adds the depreciation methods used and any useful life different from the Schedule (Part C, Note 3).

Why a note copied from last year fails

Consistency means applying the same policies, not reprinting the same paragraph. The usual problems:

• Dead references. Schedule VI and Schedule XIV; the Companies (Accounting Standards) Rules, 2006, superseded by the 2021 Rules, whose Standards apply to accounting periods from 1 April 2021; AS 6, which is not among the Standards specified (AS 1 to 5, 7 and 9 to 29, rule 3); AS 10 under its old title.
• Old taxes in the revenue clause. Excise, VAT and service tax wording. ICAI's Guidance Note on Division I (para 9.1.6) says revenue is presented net of GST collected.
• The tax year. For FY 2025-26 the Income-tax Act, 1961 applies; the Income-tax Act, 2025 applies from 1 April 2026 (tax year 2026-27). A clause naming the 1961 Act goes wrong when rolled forward.
• Clauses for things the company does not have, such as government grants. The reader assumes they exist.
• Nothing for what is new. A first investment or a new service line still needs a clause, even though it is not a change in policy (AS 5 para 31(b)).
• Wording that the standard does not allow. "Contingent assets are disclosed in the notes" is wrong: under AS 29 para 33 a contingent asset is not disclosed in the financial statements, and is usually disclosed in the Board's report where an inflow is probable.

The policies a small company really needs

Add borrowing costs (AS 16), government grants (AS 12), leases (AS 19), intangible assets (AS 26) or impairment (AS 28) only where the company has them.

A Small and Medium Sized Company (SMC) has relaxations, among them AS 15 paras 119 to 123 (though actuarial assumptions under para 120(l) stay) and AS 29 paras 66 and 67. It must then state in a note that it is an SMC under the 2021 Rules and has complied with the Standards as applicable to an SMC (General Instruction 1.1 of the Annexure). The SMC test is not the small company test in section 2(85); check each separately.

Sample wording for each policy

Square brackets mark a choice or a fact to fill in. Pick what the company does, delete the rest, and do not keep a clause the ledgers cannot support.

2.1 Basis of preparation. These financial statements are prepared on a going concern basis, under the historical cost convention and on the accrual basis. They comply in all material respects with the Accounting Standards specified under section 133 of the Companies Act, 2013 read with the Companies (Accounting Standards) Rules, 2021, and with the relevant provisions of the Act, and are presented as required by Division I of Schedule III. The accounting policies are consistent with those of the previous year[, except as stated in Note 2.11].

2.2 Use of estimates. Preparing these statements requires management to make estimates and assumptions that affect reported assets, liabilities, income and expenses and the disclosure of contingent liabilities. The main estimates relate to [useful lives of assets, doubtful debts, gratuity, warranties]. Actual results may differ. A revision is recognised in the period of revision and, where affected, in future periods.

2.3 Revenue (AS 9). Revenue from sale of goods is recognised when the property in the goods or all significant risks and rewards of ownership have passed to the buyer, the company retains no effective control over them and no significant uncertainty exists about the consideration; this is generally [on dispatch / on delivery]. Revenue from services is recognised on the [proportionate completion / completed service contract] method. Revenue is stated net of GST, trade discounts and returns. Interest is recognised on a time proportion basis and dividend when the right to receive payment is established.

2.4 Property, plant and equipment (AS 10, Schedule II). Items are stated at cost less accumulated depreciation and impairment losses, if any. Cost comprises the purchase price, after trade discounts and excluding recoverable taxes, and costs directly attributable to bringing the asset to its location and condition for use. Depreciation is provided on the [written-down value / straight-line] method over the useful lives in Part C of Schedule II, with a residual value of [5]% of cost, pro rata from the date the asset is available for use and up to the date of disposal. A part with significant cost and a different useful life is depreciated separately. [[Class of asset] is depreciated over [x] years, different from the [y] years in Part C, because [reason], supported by technical advice.]

2.5 Inventories (AS 2). Inventories are valued at the lower of cost and net realisable value, item by item. Cost is determined on the [FIFO / weighted average] formula. The cost of raw materials, stores and stock-in-trade comprises the purchase price, freight inward, other directly attributable costs and taxes that are not recoverable. The cost of work-in-progress and finished goods also includes conversion costs: direct labour and a systematic allocation of production overheads, with fixed overheads allocated on the basis of normal capacity.

2.6 Retirement benefits (AS 15). Contributions to provident fund and employees' state insurance, being defined contribution plans, are charged to the Statement of Profit and Loss for the year in which the service is rendered. Gratuity, a defined benefit plan, [and long-term compensated absences] are provided on an actuarial valuation at the balance sheet date using the projected unit credit method; actuarial gains and losses are recognised immediately in the Statement of Profit and Loss. Short-term employee benefits are recognised at the undiscounted amount in the year the service is rendered.

2.7 Taxes on income (AS 22). Tax expense comprises current tax and deferred tax. Current tax is the amount payable on the taxable income for the year under the income-tax law in force. Deferred tax is recognised on timing differences between taxable income and accounting income, at the tax rates and laws enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised only to the extent of reasonable certainty of sufficient future taxable income and, where there is unabsorbed depreciation or carried forward loss, only to the extent of virtual certainty supported by convincing evidence. They are reviewed at each balance sheet date.

2.8 Provisions and contingencies (AS 29). A provision is recognised when the company has a present obligation from a past event, an outflow of resources is probable and a reliable estimate can be made. It is measured at the best estimate of the expenditure required to settle the obligation and is reviewed at each balance sheet date. A contingent liability is disclosed in the notes unless the possibility of an outflow is remote. A contingent asset is neither recognised nor disclosed in the financial statements.

2.9 Investments (AS 13). Cost includes acquisition charges such as brokerage, fees and duties. Current investments are carried at the lower of cost and fair value, determined [individually / by category]. Long-term investments are carried at cost, with provision for any decline, other than temporary, determined for each investment individually. Reductions, reversals and gains or losses on disposal are taken to the Statement of Profit and Loss.

2.10 Foreign currency (AS 11). Transactions are recorded at the exchange rate on the transaction date. At the balance sheet date, monetary items are reported at the closing rate and non-monetary items carried at historical cost stay at the transaction date rate. Exchange differences on settlement or on reporting monetary items are income or expense of the period. [The premium or discount on a forward contract taken to fix the rupee amount of a transaction is amortised over the life of the contract.]

Adjust where needed. An SMC using the AS 15 relaxation still determines the liability actuarially, with the projected unit credit method and a government bond discount rate, but need not otherwise follow paras 50 to 116. A company that opted for AS 11 para 46A on long-term foreign currency items must say so and show the amount remaining to be amortised. If MAT credit is recognised, add a sentence following ICAI's Guidance Note on it (see Guidance Note on Division I, para 9.8.1.2). The Pillar Two paragraphs added to AS 22 by G.S.R. 169(E) of 10 March 2026 matter only to a company affected by such legislation.

A change in policy, and what is not one

A policy may change only if a statute or an Accounting Standard requires it, or if the new policy gives a more appropriate presentation (AS 5 para 29), meaning more relevant or reliable information (para 30). Where the change has a material effect, AS 1 para 26 and AS 5 para 32 require disclosure, the amount by which items are affected where ascertainable (or a statement that it is not), and the effect shown in the period of change. A change expected to have a material effect only later is also disclosed. Illustrative wording:

2.11 Change in accounting policy. During the year the company changed the cost formula for raw materials from weighted average to FIFO, which it considers gives a more appropriate presentation because [reason]. As a result, closing inventories (₹21,00,000 against ₹18,60,000 on the earlier formula) and the profit before tax for the year are higher by ₹2,40,000.

Two things are not changes in policy. Under AS 5 para 31, adopting a policy for transactions that differ in substance from earlier ones, or that did not occur before, is outside the term. Under AS 10 para 63 a change in depreciation method, such as written-down value to straight-line, is a change in estimate, made where the expected pattern of consumption has changed significantly: it applies from the change onwards, and its nature and effect are disclosed (AS 5 para 27, AS 10 para 84). A note calling it a change in policy, with a catch-up charge, is using the wrong treatment. The line between these and errors is covered in exceptional, extraordinary and prior period items.

When the note and the books disagree: an audit finding

SA 700 (Revised) para 13 asks the auditor to evaluate whether the statements adequately disclose the significant policies selected and applied, and whether those policies are consistent with the framework and appropriate. SA 705 (Revised) paras A3 to A7 treat the selection of policies, their application (including consistency between periods and across similar transactions) and the adequacy of disclosures as possible sources of material misstatement. A mismatch is a misstatement to evaluate and, if material, a modification to consider.

Illustration. A machine costing ₹20,00,000 was bought on 1 April 2025. It falls under general plant and machinery in Part C (15 years). The note says Schedule II lives on the written-down value method with 5% residual value, which works out to about 18.10% a year. The working uses the client's income-tax rate, 15% in this example.

Rewriting the note to say "income-tax rates" does not settle it. Under Schedule II para 3(i), useful life shall not ordinarily differ from Part C, and any difference must be disclosed and justified with technical advice. Correct the charge or get that support. Any earlier-year shortfall caused by a mistake in applying the policy is a prior period item. See also our guide to Schedule II useful lives, SLM and WDV.

Inventories produce the same mismatch: a note saying FIFO over Tally items left on Average Cost is covered in closing stock in Tally vs the balance sheet. A gratuity clause over no provision is a larger issue: if the company does not follow AS 15, section 129(5) calls for the deviation, reasons and effects, and the auditor considers the report.

Checklist: tie each policy to the ledgers

Work with the note and this year's trial balance side by side, and keep the ticked list in the working papers.

Then read the other way: for each large ledger group with no matching clause, ask whether a policy is missing. For the line-item notes themselves, see inventories disclosure and investments disclosure.

Frequently asked questions

Sources

• Companies (Accounting Standards) Rules, 2021, G.S.R. 432(E), 23 June 2021 (Gazette): rules 3 to 5, Annexure General Instruction 1, AS 1, AS 2, AS 5, AS 9, AS 10, AS 11, AS 13, AS 15, AS 22, AS 29
• Companies (Accounting Standards) Amendment Rules, 2026, G.S.R. 169(E), 10 March 2026 (Gazette)
• Companies Act, 2013: sections 129, 133, 134(5), 143(3)(e); Schedule II Parts A and C with Notes; Schedule III Division I General Instructions and Part I 6K, 6N, 6O (India Code, amended text)
• ICAI: AS 1, Disclosure of Accounting Policies
• ICAI: Guidance Note on Division I, Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 9.1.6 and 9.8.1.2
• ICAI: SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, para 13
• ICAI: SA 705 (Revised), Modifications to the Opinion in the Independent Auditor's Report, paras A3 to A7

Audit and accounts updates, practical tips and knowledge: join the Audit and Accounts Update group on WhatsApp.