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

Anand Motors Ltd. changed its inventory cost formula from FIFO to weighted average in 2025-26 to comply with a better presentation. The change reduces closing inventory value by Rs 3,20,000 for the current year, and the effect on future periods is not ascertainable. What should the company disclose under AS 5?

The company must disclose the change in policy and the Rs 3,20,000 effect on current year items, and state that the effect on future periods is not ascertainable. AS 5 requires quantification where ascertainable and a statement where it is not.

  1. ANo disclosure since the change is within AS 2
  2. BDisclose the change and the Rs 3,20,000 effect on current period; state that future effect is not ascertainableCorrect
  3. CRestate the previous years' financial statements and make no disclosure
  4. DDisclose only the nature of the change; amounts are not required

Explanation

AS 5 requires disclosure of a change in accounting policy that has a material effect, with the amount by which financial statement items are affected to the extent ascertainable. Where the effect is not ascertainable, that fact is indicated. So the current effect and the statement are required.

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