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

Mehta Industries Ltd. charged a major repair cost of ₹9,00,000 to the capital asset account in error, though it was revenue in nature. In its notes it fully disclosed the policy of capitalising repairs. Which statement agrees with AS 1?

Disclosing the policy does not cure the error. AS 1 says that disclosure of accounting policies or changes therein cannot remedy a wrong or inappropriate treatment of an item in the accounts, so the ₹9,00,000 repair remains wrongly capitalised.

  1. AThe disclosure corrects the error because the policy is stated in the financial statements
  2. BThe error is cured if the policy is disclosed in a separate board report
  3. CThe treatment is acceptable since the amount is disclosed with the policy
  4. DThe disclosure of the policy cannot remedy a wrong or inappropriate treatment of the item in the accountsCorrect

Explanation

AS 1 states that disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. So the ₹9,00,000 repair remains wrongly treated despite the note. Disclosure in notes does not turn an inappropriate treatment into an acceptable one.

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