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CA Final · Financial Reporting · Accounting and Technology

Sagar Retail Ltd uses an AI model to estimate expected credit losses on trade receivables. The provision matrix in the previous year gave a loss rate of 2% on Rs 5,00,000 receivables. After the model is retrained with improved forward-looking data, the rate becomes 3% on the same receivables, with no error in the earlier model. Under Ind AS 8, how should the Rs 5,000 increase be treated?

The Rs 5,000 increase is a change in accounting estimate under Ind AS 8, recognised prospectively in current period profit or loss. A model refined with new information is not an error or a policy change, so no restatement or opening retained earnings adjustment arises.

  1. ARestate the prior period by Rs 5,000 as a prior period error
  2. BChange in accounting policy applied retrospectively
  3. CChange in accounting estimate, recognised prospectively in profit or loss of the current periodCorrect
  4. DAdjust opening retained earnings

Explanation

Refining a technique with new information is a change in accounting estimate. It is applied prospectively in the current period. The increase is 1% of 5,00,000 = Rs 5,000, charged to profit or loss. Treating it as an error is wrong because the earlier model used information reasonably available then.

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