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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 Foods Ltd. changed its inventory cost formula from FIFO to weighted average in 2025-26 because it better presents the financial statements. Closing stock for the year is Rs 6,00,000 lower under weighted average than under FIFO. The effect on future periods cannot be estimated. What does AS 5 require?

Sundaram Foods must disclose the change in policy, its reason, and the Rs 6,00,000 effect on current-year profit. Where the effect on later periods cannot be ascertained, that fact must be stated, as AS 5 requires for material policy changes.

  1. ADisclose the change, its reason, and the Rs 6,00,000 effect on current-year profit; state that the future effect is not ascertainableCorrect
  2. BMake no disclosure as the change is immaterial
  3. CRestate the earlier years' accounts and show no effect in the current year
  4. DTreat it as a change in accounting estimate with no disclosure of the reason

Explanation

A change in accounting policy with a material effect must be disclosed, including the amount by which the current period is affected. If the future effect cannot be ascertained, that fact is stated. Treating it as an estimate change or omitting disclosure contradicts AS 5.

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