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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 Ltd. changed its method of inventory valuation from weighted average to FIFO, as the change is required to present the financial statements more appropriately. The effect on the current year's profit is an increase of Rs 2,50,000 and the effect on earlier years' profit is an increase of Rs 6,00,000. What does AS 5 require?

AS 5 requires disclosure of the change in accounting policy and its effect on the current period, here Rs 2,50,000, and if the amount cannot be ascertained that fact must be stated. The change is not a prior period item, and undisclosed adjustment of reserves is not permitted.

  1. ADisclose the change and the Rs 2,50,000 impact in the current year; if the amount of the effect is not ascertainable, say soCorrect
  2. BAdjust Rs 6,00,000 to opening reserves and not disclose the change
  3. CDisclose the change but ignore any quantification since the effect is a profit
  4. DTreat the Rs 6,00,000 as a prior period item in the current year

Explanation

A change in accounting policy is made when required by a statute, by an accounting standard, or for more appropriate presentation. Its material effect must be disclosed, the amount being shown where ascertainable, and if not ascertainable that fact is stated. It is not a prior period item, so the Rs 6,00,000 is not charged or credited to current profit as such. Hiding the change is wrong.

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