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

Kaveri Foods Ltd changed its method of inventory valuation from weighted average to FIFO this year. The change has a material effect on the current year's profit, which is Rs 12,00,000 after the change. Had the old method been continued, profit would have been Rs 10,50,000. Which treatment complies with AS 1?

The company must disclose the change in policy, the reason for it and the amount of its effect, which is an increase in profit of Rs 1,50,000 (12,00,000 less 10,50,000). AS 1 requires quantification where ascertainable, so omitting the amount or giving no disclosure is not acceptable.

  1. ANo disclosure is required because inventory valuation is a routine estimate
  2. BDisclose the change and its reason, and state that the effect on profit is an increase of Rs 1,50,000Correct
  3. CDisclose the change only and omit the amount of effect to protect competitive information
  4. DRestate the prior year financial statements and make no disclosure in the current year

Explanation

AS 1 requires that a change in accounting policy having a material effect be disclosed along with the reason, and the amount by which any item in the financial statements is affected should be shown to the extent ascertainable. Here the effect is 12,00,000 - 10,50,000 = Rs 1,50,000 increase. Omitting the amount is wrong because it is ascertainable.

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