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CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Mehta Exports Ltd capitalised Rs 8,00,000 of routine repair costs as an asset, which is an inappropriate treatment. In the notes, it carefully disclosed the policy of capitalising such repairs and the amount involved. Which statement is correct under AS 1?

Disclosure cannot remedy a wrong or inappropriate treatment. Under AS 1, even a full note stating the policy and the Rs 8,00,000 amount does not make the incorrect capitalisation of repairs acceptable; the accounts themselves must reflect an appropriate treatment.

  1. AThe disclosure corrects the wrong treatment, so no adjustment is needed
  2. BThe disclosure cannot remedy a wrong or inappropriate treatment of the item in the accountsCorrect
  3. CThe disclosure is sufficient because the amount is stated in the notes
  4. DThe treatment becomes appropriate once the policy is disclosed as a significant policy

Explanation

Paragraph 23 states that disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. The Rs 8,00,000 repair cost remains wrongly treated despite the notes. Claiming that disclosure or stating the amount cures it contradicts this paragraph.

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