Skip to content

CA Intermediate · Advanced Accounting · AS 1 Disclosure of Accounting Policies

Ganga Engineering Ltd has been valuing inventory at cost. In the current year it adopts the lower of cost and net realisable value for a new class of goods it never held before (Rs 8,00,000 of goods, cost basis would have given Rs 8,00,000). Separately, it changes from straight-line to written-down-value depreciation, which reduces profit by Rs 2,40,000 and is a material change. Which statement is correct under AS 1?

Adopting a policy for a new class of goods that did not exist earlier is not a change in accounting policy. Changing the depreciation method from straight-line to written-down-value is a change, and being material, it must be disclosed with its Rs 2,40,000 reduction in profit.

  1. ABoth are changes in accounting policy and both need disclosure of effect
  2. BOnly the first is a policy change; the depreciation change needs no disclosure
  3. CAdopting a policy for a new class of transactions is not a change in accounting policy, while the depreciation method change is, requiring disclosure of the Rs 2,40,000 reductionCorrect
  4. DNeither is a change in accounting policy because both relate to routine estimates

Explanation

Adoption of an accounting policy for events or transactions that differ in substance from previous ones, or for ones that did not occur earlier, is not a change in accounting policy. The switch of depreciation method is a genuine change in policy, and since it is material its reason and the Rs 2,40,000 reduction in profit should be disclosed.

Did you get it right without looking?

One question tells you little. A timed set on AS 1 Disclosure of Accounting Policies shows your real accuracy, how long you take and where you lose marks.

Practise AS 1 Disclosure of Accounting PoliciesFree diagnostic mock

More AS 1 Disclosure of Accounting Policies questions