A company is engaged in trading of fast moving consumable goods. It has invested more than 50% of its net worth in the shares of other companies. Dividend income on those investments constitutes a significant portion of the total income of the company. The company has not disclosed its accounting policy regarding those investments and dividends thereon in the financial statements.
Whether, the company’s practice is correct as per notified accounting standards?
As per Para 24 of AS 1, “Disclosure of Accounting Policies”, “All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.”
In the given case, investments made by the company involves a significant amount as it constitutes more than 50% of net worth of the company. On the other hand, amount of dividends earned on the investments is a significant portion of the total income of the company. Therefore, accounting policy regarding both investments and dividends should be considered significant. The company should disclose accounting policy regarding investments and dividends.