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

Sundaram Engineering Ltd. changed its method of inventory valuation from weighted average to FIFO in the current year because the new method gives a fairer presentation. The change increases the current year's closing inventory value by Rs 90,000, and the effect on earlier years was Rs 60,000 higher profit had FIFO been used. Which treatment is correct under AS 5?

The shift from weighted average to FIFO is a change in accounting policy, so AS 5 requires disclosing the change and its effect on the current period's items, to the extent ascertainable. If the effect is not ascertainable, that fact must be stated. It is neither an extraordinary item nor a mere estimate.

  1. ANo disclosure is needed since inventory valuation is an estimate
  2. BDisclose the change, and the amount by which the current year's financial statement items are affected, to the extent ascertainable; if the effect on later periods is not ascertainable, state that factCorrect
  3. CRestate the prior years' profits by Rs 60,000 and keep the change undisclosed
  4. DAdjust the Rs 60,000 effect on earlier years against current profit as an extraordinary item

Explanation

A change in accounting policy (weighted average to FIFO) is not a change in estimate. AS 5 requires disclosure of the change and its effect on the financial statements of the current period, to the extent ascertainable, and if not ascertainable, that fact. Treating it as an extraordinary item or hiding it is incorrect.

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