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CS Executive · Corporate Accounting and Financial Management · Introduction to Corporate Accounting

Narmada Ltd has used the written down value method of depreciation for years. In the current year, it switches to the straight-line method without any change in law or in the pattern of asset use, and does not disclose the change. Which convention or assumption is primarily violated, and what is the correct accounting expectation?

Consistency is violated. Accounting policies should be applied uniformly from period to period for comparability. A change, such as switching depreciation methods, is acceptable only if required by law or standards or for a more appropriate presentation, and it must be disclosed with its effect.

  1. AConsistency; policies should be followed from period to period, and any change must be justified and disclosedCorrect
  2. BMateriality; small changes in method need not be disclosed
  3. CFull disclosure; only the cash effect must be shown
  4. DGoing concern; the entity must be treated as ending shortly

Explanation

Consistency requires the same accounting policies to be applied period to period so that results are comparable. A change is permitted only when required by law or a standard, or when it gives a more appropriate presentation, and its effect must be disclosed. Materiality is not a licence to hide a policy change that affects comparability.

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