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

Kaveri Foods Ltd. changed its inventory cost formula from FIFO to weighted average in the current year. The change is required by neither a statute nor an accounting standard, but management believes it gives a better presentation. Closing stock is lower by Rs 4,50,000 under the new method than it would have been under FIFO. Which treatment is consistent with AS 1?

A material change in accounting policy must be disclosed, and the amount by which financial statement items are affected, here Rs 4,50,000, must be shown to the extent ascertainable. The reason for the change should also be stated, as AS 1 requires disclosure of the change and its effect.

  1. ANo disclosure is needed because the effect is only on inventory valuation
  2. BDisclose the change and its reason, and quantify the Rs 4,50,000 effect on the financial statements if ascertainableCorrect
  3. CRestate the opening reserves by Rs 4,50,000 and make no disclosure in notes
  4. DDisclose only the change in the method, since quantifying the effect is prohibited

Explanation

AS 1 requires that any change in accounting policy that has a material effect in the current period be disclosed, with the amount by which financial statement items are affected to the extent ascertainable. Here the effect is Rs 4,50,000, so it must be disclosed along with the change. Option D is wrong because quantification is required, not prohibited.

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