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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

Malabar Spices Ltd. has used the weighted average method for inventory valuation. From 2025-26 it switches to FIFO as it believes this gives a fairer presentation. The effect of the change on 2025-26 profit is an increase of Rs 4,50,000. Which treatment is correct under AS 5?

The company must disclose the change from weighted average to FIFO and the Rs 4,50,000 effect on profit. AS 5 allows a policy change for more appropriate presentation but requires disclosure of the change and its material impact; it is not an estimate change or prior period item.

  1. ANo disclosure is needed since the effect is an increase in profit
  2. BDisclose the change, and the Rs 4,50,000 impact on profit, in the financial statementsCorrect
  3. CRestate the previous years' profits and treat the Rs 4,50,000 as a prior period item
  4. DTreat the change as a change in accounting estimate and disclose nothing

Explanation

A change in accounting policy is permitted if required by law, by a standard, or if it gives a more appropriate presentation. AS 5 requires disclosure of the change and its material effect, here Rs 4,50,000 on profit, and if the amount is not ascertainable, that fact. It is not a prior period item and no retrospective restatement is prescribed.

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