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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. The company is preparing its annual statements. Under the Accounting Standards framework, how should this change be treated?

A change in the depreciation method, such as from written down value to straight line, is a change in accounting policy. Its effect must be quantified and disclosed in the financial statements, so the first option is correct.

  1. AAs a change in accounting policy, with its effect disclosed and quantified in the financial statementsCorrect
  2. BAs a change in accounting estimate, requiring no disclosure at all
  3. CAs a prior period item, adjusted against opening reserves without disclosure
  4. DAs an extraordinary item, shown separately below net profit

Explanation

A change in the method of depreciation is a change in accounting policy. AS 1 and AS 6 (Depreciation Accounting) require that the change be treated as a change in accounting policy, with the effect quantified and disclosed. Treating it as an estimate change and skipping disclosure is wrong because the method itself changed, not just a figure.

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