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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Meera Textiles Ltd. changed its method of valuing inventory from FIFO to weighted average during the year because the new method gives a fairer presentation. The change has a material effect on profit for the year. Which treatment is consistent with the Accounting Standards framework?

The company must disclose the change in inventory valuation method as a change in accounting policy, stating the reason and the effect on profit where ascertainable. It is a policy change, not an estimate change, because the measurement basis itself has changed.

  1. ADisclose the change, its impact on profit where ascertainable, and the reason, as a change in accounting policyCorrect
  2. BTreat it as a change in accounting estimate and give no separate disclosure
  3. CApply it silently because inventory valuation is not an accounting policy
  4. DRestate the previous year's financial statements and avoid any disclosure in the current year

Explanation

A change from FIFO to weighted average is a change in accounting policy. AS 1 and AS 5 require disclosure of the change, the reason and the amount by which the financial statements are affected, where ascertainable. Treating it as an estimate change is wrong because the basis of measurement is altered, not an estimate.

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