CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Mehta Engineering Ltd. had so far charged depreciation on its machinery using the straight line method. From the current year it changes to the written down value method because the new method is considered to result in a more appropriate presentation. Depreciation under straight line for the current year would have been Rs 4,00,000 and under WDV is Rs 5,50,000. How should the company account for and disclose this change under AS 5?

The company should treat the switch as a change in accounting policy, charge Rs 5,50,000 depreciation this year, and disclose that profit is lower by Rs 1,50,000 because of the change. It is neither a mere estimate change, a prior period item, nor an extraordinary item.

1. ATreat it as a change in accounting policy, charge Rs 5,50,000 in the current year, and disclose the impact of Rs 1,50,000 on the current year's profitCorrect
2. BTreat it as a change in estimate, with no disclosure required
3. CTreat it as a prior period item and adjust the opening reserves by Rs 1,50,000
4. DTreat it as an extraordinary item and show Rs 1,50,000 separately as extraordinary expense