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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

Gupta Electricals Ltd. depreciated a machine costing Rs 10,00,000 (purchased 1 April 2023) at 10% straight line with nil residual value, original life 10 years. On 1 April 2025, after a technical review, the remaining useful life was revised to 5 years from that date (so total life 7 years), with residual value nil. What is the depreciation for 2025-26, and how is it treated under AS 5?

Depreciation for 2025-26 is Rs 1,60,000, being the book value of Rs 8,00,000 spread over the revised remaining life of 5 years. The revision of useful life is a change in accounting estimate, so it is charged prospectively to the current period's profit or loss and its effect disclosed if material.

  1. ARs 1,00,000; no change as estimate revisions are ignored
  2. BRs 1,60,000; charged in the profit or loss of 2025-26 as a change in estimate, with the disclosure of its effect if materialCorrect
  3. CRs 1,60,000; charged in the profit or loss of 2025-26 as a prior period item
  4. DRs 1,42,857; written back to opening reserves as a change in accounting policy

Explanation

Depreciation to 31 March 2025 is 10,00,000 x 10% x 2 = Rs 2,00,000, so the book value is Rs 8,00,000. Spread over the revised remaining life of 5 years, annual depreciation is Rs 1,60,000. Revision of useful life is a change in estimate, whose effect goes into the current and future periods' profit or loss with disclosure if material. It is not a prior period item or policy change, and Rs 1,42,857 wrongly spreads 10,00,000 over 7 years.

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