Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Changes in Accounting Policies under AS 5

Updated 4 October 2026 · Fact-checked

A change in accounting policy under AS 5 is allowed only if a statute requires it, an accounting standard requires it, or it gives a more appropriate presentation. You disclose the change and its material impact in the year of change. If the impact cannot be worked out, you say so. A change in estimate affects the current and affected future periods and is not applied retrospectively.

Understand Changes in Accounting Policies

Accounting policies are the specific principles and methods a business uses to prepare its financial statements. Examples are FIFO or weighted average for inventory, or straight-line or written-down value for depreciation. Once chosen, a policy should be followed year after year. This is the consistency assumption, and it keeps accounts comparable.

AS 5 lets you change a policy in only three situations:

The change is required by a statute.
The change is required for compliance with an accounting standard.
The change will result in a more appropriate presentation of the financial statements.

A wish to show higher profit is not a valid reason.

When you change a policy, the impact must be shown in the financial statements of the period in which the change is made, if the impact is material. You also disclose the change itself. If the effect cannot be ascertained, wholly or in part, you state that fact. If the change has no material effect now but is reasonably expected to have a material effect in later periods, you disclose the fact of the change in the period of adoption.

Two things are not a change in policy. First, adopting a policy for transactions that differ in substance from earlier ones. Second, adopting a policy for events or transactions that did not occur earlier or were immaterial. For example, a new type of transaction needs a policy, but that is not a change.

A change in accounting estimate is different. An estimate is an approximation, such as useful life, bad debts or warranty cost. Revising it because of new information affects the current period, and future periods if they are affected. It is not applied to the past. If you cannot tell whether a change is a policy change or an estimate change, AS 5 treats it as a change in estimate. Disclose the nature and amount of the estimate change if it is material.

Key rules to remember

Valid reasons for change: Statute required OR Accounting Standard required OR More appropriate presentation; Any one reason is enough. A policy change for any other reason is not permitted.
Impact of change in policy: Impact on profit = Profit under new policy − Profit under old policy; For inventory, work out the difference in closing stock and the difference in opening stock. Impact = closing difference − opening difference.
Disclosure rule: Disclose change + material impact in the period of change; If the impact is not ascertainable, wholly or partly, state that fact. If no material effect now but expected later, disclose the fact of change.
Policy vs estimate: Policy change: how to measure or present. Estimate change: revised approximation. If unclear, treat as estimate change.; Estimate changes affect the current and affected future periods. They are not applied retrospectively.
Change in depreciation method: Surplus or deficiency = Depreciation under new method since asset was first used − Depreciation already charged (a negative result is a surplus); AS 6 treats this as a change in accounting policy. AS 6 permits the change only if it is required by statute, is needed to comply with an accounting standard, or would result in a more appropriate preparation or presentation of the financial statements. Depreciation is recomputed under the new method from the date the asset came into use. The surplus (credited to the statement of profit and loss) or deficiency (charged to it) is adjusted in the year of change. The change is treated as a change in accounting policy, and its effect is quantified and disclosed. The new method then applies from that year on.

How to solve Changes in Accounting Policies questions

Use this order for any question on a change in accounting policy. It covers both theory and numerical questions.

1Identify what has changed. Decide whether it is a method or basis (policy) or a revised approximation (estimate). If you cannot tell, treat it as an estimate.
2Check whether it is a new policy for new or immaterial items. If so, it is not a change in policy.
3Test the reason: statute, accounting standard or more appropriate presentation. If none applies, say the change is not permitted.
4For numbers, compute the figure under both the old and the new policy for the same period, including any opening balance effect.
5Take the difference to get the impact on profit and on the asset or liability. Adjust the current year's statement of profit and loss for it.
6Write the disclosure: nature of the change, reason, amount of the material impact, and a statement if the impact is not ascertainable.
7If it was an estimate change, apply it to the current and affected future periods only, and disclose nature and amount if material.

Quickest way: Three-check method for MCQs and written answers

When to use it: Use this for MCQs and for theory-with-numbers questions under time pressure. Marks usually come from the correct classification and the disclosure.

MCQ: look for the keyword. Statute, standard or more appropriate presentation means the change is valid. Better profit or tax saving alone means it is not.
MCQ: a revised life, residual value or bad debt percentage is an estimate change, so there is no restatement of earlier years.
MCQ: if the impact figure is asked, compute the new minus the old only for the items that changed and ignore the rest.
Written: use three lines. Line 1 classify with the reason. Line 2 show the computation. Line 3 write the disclosure note.
Written: always add the sentence about non-ascertainable impact when the question says data is not available.
No negative marking applies, so never leave an MCQ blank.

Common mistakes in Changes in Accounting Policies

Treating a change in useful life or residual value as a change in accounting policy.
Both affect depreciation, so they look alike.
Fix: Ask whether the method changed or only an input changed. A new method is a policy change. A revised life or residual value is an estimate change.
Allowing a policy change just because it improves profit.
Students focus on the numerical benefit and forget the three permitted reasons.
Fix: Always test for statute, accounting standard or more appropriate presentation. Improved profit is not a reason.
Calling a policy for a new type of transaction a change in policy.
Students see 'new policy' and assume 'change'.
Fix: AS 5 says a policy for transactions different in substance from earlier ones, or for events that did not occur before or were immaterial, is not a change.
Restating earlier years' profits for a change in estimate.
Students mix up the treatment of the two.
Fix: Estimate changes affect the current period and affected future periods only. Do not rework past periods.
Computing only the closing stock difference when inventory policy changes.
The opening stock effect is easy to forget.
Fix: Profit impact = difference in closing stock − difference in opening stock, both under the two methods.
Omitting disclosure when the impact cannot be quantified, or when it is nil now but material later.
Students think disclosure is needed only when there is an amount.
Fix: State the fact when the impact is not ascertainable. Also disclose the change if it is expected to have a material effect in later periods.

Worked examples

Example 1

Y Ltd changed its inventory valuation method from weighted average to FIFO in the current year because it gives a more appropriate presentation. Profit for the year under the old method is ₹10,00,000. Opening stock is ₹4,00,000 under weighted average and ₹4,30,000 under FIFO. Closing stock is ₹5,00,000 under weighted average and ₹5,60,000 under FIFO. Compute the impact and revised profit, and state the disclosure.

Show the solution

Check validity: the reason given is a more appropriate presentation, so the change is allowed under AS 5.
Restate the opening stock on the new basis: take opening stock at ₹4,30,000 (FIFO) instead of ₹4,00,000 (weighted average). Opening and closing stock are then both on FIFO, so the impact is computed on a consistent basis.
Closing stock difference = ₹5,60,000 − ₹5,00,000 = ₹60,000 (increases profit).
Opening stock difference = ₹4,30,000 − ₹4,00,000 = ₹30,000 (decreases profit, as opening stock is added to cost of goods sold).
Net impact on profit = ₹60,000 − ₹30,000 = ₹30,000 increase.
Revised profit = ₹10,00,000 + ₹30,000 = ₹10,30,000.
Disclosure: state that inventory valuation changed from weighted average to FIFO, give the reason, and disclose that profit for the year is higher by ₹30,000 (material impact).

Answer: The change is permitted. With opening stock restated on the FIFO basis, profit increases by ₹30,000 to ₹10,30,000, and the change and its impact must be disclosed in the year of change.

Example 2

A machine costing ₹10,00,000 was bought on 1 April 2025. It has a 10-year life and no residual value. Up to 31 March 2026 it was depreciated at 20% on written-down value. From 2026-27 the company changes to the straight-line method at 10% on cost, applying it from the date of purchase, because the change results in a more appropriate presentation of the financial statements. Show the treatment for 2026-27.

Show the solution

Classify: AS 6 treats a change in depreciation method as a change in accounting policy. AS 6 permits it only if a statute requires it, an accounting standard requires it, or it would result in a more appropriate preparation or presentation of the financial statements. Here the stated reason is a more appropriate presentation, so the change is permitted. Depreciation is recomputed under the new method from the date the asset came into use.
Depreciation charged for 2025-26 under WDV = 20% of ₹10,00,000 = ₹2,00,000.
Depreciation for 2025-26 under straight line = 10% of ₹10,00,000 = ₹1,00,000.
Surplus on retrospective recomputation = ₹2,00,000 − ₹1,00,000 = ₹1,00,000. This is adjusted in 2026-27, the year of change, by crediting it to the statement of profit and loss.
Depreciation for 2026-27 under straight line = 10% of ₹10,00,000 = ₹1,00,000. This is charged as the normal depreciation for the year.
The ₹1,00,000 surplus is the retrospective adjustment, a one-off catch-up of earlier years' depreciation. Quantify and disclose it as the effect of the change in policy.
Separately, compare the current-year charge with the old method. Under the old method the 2026-27 charge would have been 20% of ₹8,00,000 = ₹1,60,000. The new charge of ₹1,00,000 is ₹60,000 lower. So 2026-27 profit is ₹60,000 higher from the lower charge plus ₹1,00,000 from the surplus, which is ₹1,60,000 higher in total than under the old method.
Disclose the change, the reason and its effect: the ₹1,00,000 surplus adjusted in the year of change, and note that the 2026-27 charge is ₹60,000 lower than under the old method.

Answer: Charge depreciation of ₹1,00,000 for 2026-27 and credit the ₹1,00,000 surplus from retrospective recomputation to the statement of profit and loss in the same year. The surplus is the retrospective adjustment. Separately, the 2026-27 charge is ₹60,000 lower than under the old method, so profit is ₹1,60,000 higher in total than under the old method. Disclose the change, the reason and its effect.

Exam tips

Start every theory answer with the three permitted reasons. It is a high-probability, easy-mark point.
Questions often hide the answer in the facts. A revised useful life is an estimate change. A new method is a policy change. Read the verb carefully.
For inventory questions, show the opening and closing stock differences separately. Step marks are given for each.
Always end with a disclosure line. Include the non-ascertainable impact statement when the question says data is unavailable.
Link it to AS 1 and AS 6. Many questions combine consistency, depreciation method change and AS 5 disclosure.

Practice questions from AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Changes in Accounting Policies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Changes in Accounting Policies: frequently asked questions

When can an accounting policy be changed as per AS 5?

Only in three cases: when a statute requires it, when an accounting standard requires it, or when the change results in a more appropriate presentation of the financial statements. Any other reason, such as showing higher profit, is not acceptable.

What is the difference between a change in accounting policy and a change in accounting estimate?

A policy is the principle or method used, such as FIFO or straight-line depreciation. An estimate is an approximation, such as useful life or bad debts. Estimate changes affect the current and affected future periods. If it is hard to tell which one applies, AS 5 treats the change as a change in estimate.

What must be disclosed for a change in accounting policy?

If the change has a material effect, disclose it and show its impact in the financial statements of the period of change. If the amount cannot be ascertained, wholly or partly, state that fact. If there is no material effect now but one is expected later, disclose the fact of the change in the period of adoption.

Is a change in the method of depreciation a change in policy or estimate?

AS 6 treats it as a change in accounting policy. It is permitted only if a statute requires it, an accounting standard requires it, or it would result in a more appropriate preparation or presentation of the financial statements. Depreciation is recomputed under the new method from when the asset was first used. The surplus or deficiency is adjusted in the year of change, and the effect of the change is quantified and disclosed.