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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Desai Pharma Ltd. changes its inventory formula from FIFO to weighted average in a year because it considers weighted average gives a more appropriate presentation. Considering the Framework's qualitative characteristics, which characteristic is most directly served by disclosing the change, its reason and its effect on profit?

Comparability is most directly served. Users must be able to compare the company's statements over time, and disclosing the policy change, the reason and its profit effect lets them adjust for the inconsistency. The other options do not describe the purpose of such disclosure.

  1. AComparabilityCorrect
  2. BTimeliness only
  3. CNeutrality towards creditors
  4. DVerifiability of tax

Explanation

Disclosing the nature, reason and effect of an accounting policy change lets users compare statements across periods and with other entities. The other options are not the characteristic that policy disclosure primarily serves.

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