CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Kaveri Industries Ltd. changed its depreciation method on machinery from written down value to straight line from 1 April 2025, as the new method better reflects usage pattern. Depreciation under WDV for 2025-26 would have been Rs 6,00,000 and under SLM is Rs 4,50,000. Depreciation for earlier years under SLM would have been Rs 2,00,000 less than that charged under WDV. Under AS 5 the company should:
A change of depreciation method is a change in accounting policy, applied retrospectively. The company charges Rs 4,50,000 for 2025-26, writes back the Rs 2,00,000 excess depreciation of earlier years, and discloses the change and its quantified effect on profit.
- ACharge Rs 4,50,000 for 2025-26 only, treat the change as an estimate, and ignore earlier years
- BTreat it as a change in accounting policy, recompute depreciation retrospectively, and disclose the effect, including the Rs 2,00,000 excess recouped as a write-back in 2025-26Correct
- CTreat it as a prior period item of Rs 2,00,000 only and keep WDV for the current year
- DTreat it as an extraordinary item of Rs 1,50,000
Explanation
A change in depreciation method is a change in accounting policy (AS 10 / AS 6). It is applied retrospectively: excess depreciation of earlier years (Rs 2,00,000) is written back in the current year and the current charge is Rs 4,50,000. The full quantified impact must be disclosed. Option A ignores retrospective effect.
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