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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Kaveri Textiles Ltd. changed its method of charging depreciation on machinery from the written down value method to the straight line method, as the change was required to present the financial statements more appropriately. Under the ICAI framework for accounting policies (AS 1 read with AS 5), how should this change be treated?

The change from written down value to straight line depreciation is a change in accounting policy. It must be disclosed with its material effect under AS 1 and AS 5. It is not an estimate change, prior period item or extraordinary item.

  1. AIt is a change in accounting policy; its effect, if material, must be disclosedCorrect
  2. BIt is a change in accounting estimate and needs no disclosure
  3. CIt is a prior period item and must be adjusted against opening reserves without any disclosure
  4. DIt is an extraordinary item to be shown separately in the statement of profit and loss

Explanation

A change in the method of depreciation is a change in accounting policy, not merely an estimate. Under AS 1 and AS 5, the change and its material effect must be disclosed. Treating it as an estimate (option 2) wrongly avoids disclosure, and it is neither a prior period item nor an extraordinary item.

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