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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Ganga Steels Ltd. gives the following for the year: profit after tax ₹90 lakh; ₹10 lakh of that profit is an extraordinary-looking item, a fire insurance claim receipt that is ordinary activity income, not extraordinary. In addition, during the year it found that depreciation for the previous year was understated by ₹4 lakh due to a computation error that is material and is classified as a prior period item. Per AS 5, what is the net profit to be shown before adjustment for the prior period item, and how is the prior period item shown, assuming the correction is charged this year?

The ₹4 lakh understated depreciation is a prior period item and must be shown separately in the current statement of profit and loss, so the profit of ₹90 lakh before it becomes ₹86 lakh after it. The insurance receipt remains ordinary income. The item is not buried in current depreciation.

  1. ANet profit ₹86 lakh with the prior period item included in current depreciation without separate disclosure
  2. BNet profit ₹90 lakh before the item, with the ₹4 lakh shown separately in the statement of profit and loss as a prior period item, giving ₹86 lakh after itCorrect
  3. CNet profit ₹80 lakh, as the ₹10 lakh is excluded, with the ₹4 lakh adjusted in reserves
  4. DNet profit ₹94 lakh, with the ₹4 lakh added back

Explanation

AS 5 requires prior period items to be separately disclosed in the current statement of profit and loss, with their nature and amount, so their impact on current profit can be seen. The insurance receipt is ordinary activity income and stays in profit. So profit ₹90 lakh less prior period depreciation ₹4 lakh gives ₹86 lakh, shown with the ₹4 lakh separately. Option A is wrong as no separate disclosure is made.

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