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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

Kaveri Foods Ltd. changed its method of valuing inventory from weighted average to FIFO from 1 April 2024. The change is required by a newly issued statute that mandates FIFO. Which statement about AS 5 requirements is correct?

The change to FIFO is permitted because AS 5 allows a change in accounting policy when a statute requires it. The effect on the financial statements, if material, must still be disclosed, and the choice cannot rest on whether profit goes up or down.

  1. AA change in accounting policy is permitted only if required by statute, for compliance with an accounting standard, or for better presentation, so this change is permitted and its effect should be disclosedCorrect
  2. BThe change is not permitted because accounting policies can never be changed
  3. CThe change should be applied only if the effect is a higher profit
  4. DThe effect of the change need not be disclosed if it is required by statute

Explanation

AS 5 permits a change in accounting policy only when required by statute, required by an accounting standard, or when it results in a more appropriate presentation. A statutory requirement qualifies. The impact of the change, if material, must be disclosed, and if the amount is not ascertainable this fact is stated. Choosing based on higher profit is not a valid ground.

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