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

Kaveri Foods Ltd. follows the FIFO method for valuing inventory and charges depreciation on the straight-line method. In the current year, it changes its inventory valuation method to weighted average because the new method is considered to present the financial position better. The effect on profit for the year is a reduction of ₹3,60,000. As per AS 1, what is the required treatment?

The company must disclose the change in inventory valuation policy, the reason for it, and the ₹3,60,000 effect on profit, since it is material. If the amount could not be ascertained wholly or partly, that fact would be stated. Mere disclosure of the new policy alone is insufficient under AS 1.

  1. ANo disclosure is needed because the amount is below the profit for the year
  2. BDisclose the change, the reason, and the ₹3,60,000 effect if material; if the amount is not ascertainable, disclose that factCorrect
  3. CRestate all earlier years' financial statements and make no current year disclosure
  4. DDisclose only the new policy; the change need not be explained as it is a measurement matter

Explanation

Under AS 1, any change in an accounting policy that has a material effect in the current period must be disclosed, along with the amount by which financial statements items are affected, to the extent ascertainable. If the amount is not ascertainable, that fact is indicated. Restating earlier years is not required by AS 1, and the reason for change must be disclosed.

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