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

Kaveri Foods Ltd. changed its method of valuing inventory from FIFO to weighted average in the current year. The change has a material effect on the current year, and its effect on the profit for the year is ₹4,50,000 (reduction), while the effect on future periods is not ascertainable. Which disclosure is required under AS 1?

AS 1 requires disclosure of the policy change and its material effect. Kaveri Foods must disclose the change and the ₹4,50,000 reduction in current profit. Since the future effect cannot be ascertained, it must state that fact. Quantifying the effect is mandatory where ascertainable, so merely mentioning the change is insufficient.

  1. ADisclose the change and the ₹4,50,000 amount; for future periods, if the effect is not ascertainable, state that factCorrect
  2. BNo disclosure is needed because inventory valuation is a matter of estimate
  3. CDisclose the change only, without the amount, to avoid revealing profit details
  4. DRestate the previous years' accounts and disclose nothing in the current year

Explanation

AS 1 requires that a change in accounting policy having a material effect be disclosed, together with the amount by which any item is affected to the extent ascertainable. Where the amount is not ascertainable wholly or in part, that fact must be indicated. Option C is wrong because the amount must be quantified where ascertainable.

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