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

Himalaya Engineering Ltd. changed its policy of valuing a class of spares from cost to net realisable value basis from 1 April 2025. The effect on the year's profit cannot be ascertained, but the effect is expected to be material in future periods too. Closing stock of that class stands at ₹6,00,000 at cost. Which is the most appropriate AS 1 response?

The company must disclose the change in policy and state that the effect on the year's profit is not ascertainable. Because a material effect is expected in later periods, that too should be disclosed. Inability to measure the effect never removes the AS 1 disclosure obligation.

  1. AMake no disclosure because the effect cannot be measured
  2. BDisclose the change, and since the amount cannot be ascertained, indicate that fact; also disclose that the change may have a material effect in later periodsCorrect
  3. CRestate the previous year's balance sheet to ₹6,00,000 NRV
  4. DDisclose the change only in the auditor's report

Explanation

AS 1 requires disclosure of a policy change that has a material effect in the current period or is reasonable to expect to have a material effect in later periods. Where the amount is not ascertainable wholly or in part, the fact is indicated. Hence the unmeasurable effect does not remove the disclosure requirement, making option A wrong.

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