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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Kaveri Textiles Ltd. has always valued inventory on FIFO. In the current year, the finance head decides to switch to weighted average cost because it better reflects the flow of goods. The change has a material effect on profit. Which treatment is required under the accounting standards framework?

The change from FIFO to weighted average is a change in accounting policy. Because it materially affects profit, the company must disclose the change and its effect on the financial statements, where ascertainable. It is not an estimate and not a prior period item.

  1. ANo disclosure is needed because inventory valuation is an estimate
  2. BDisclose the change, its amount and the effect on financial statements, since a change in accounting policy is made for a more appropriate presentationCorrect
  3. CRestate only the opening reserves without any disclosure
  4. DTreat the change as a prior period item and charge it to the Statement of Profit and Loss of earlier years

Explanation

A change in accounting policy that has a material effect must be disclosed, with the amount by which financial statements items are affected, where ascertainable. A switch from FIFO to weighted average is a policy change, not an estimate change. Treating it as a prior period item is wrong because prior period items arise from errors or omissions in earlier statements.

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