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CA Intermediate · Advanced Accounting · AS 1 Disclosure of Accounting Policies

Sundaram Textiles Ltd. changed its method of charging depreciation on machinery from the written down value method to the straight line method. The change is required neither by statute nor by an Accounting Standard, but the management considers it will give a more appropriate presentation. Which statement correctly reflects the disclosure requirement under AS 1 and the treatment of the change?

A voluntary change from WDV to straight line depreciation is a change in accounting policy. If it has a material effect, the effect must be disclosed, and if it cannot be ascertained, that fact must be stated. Disclosure does not depend on whether profit increases or decreases.

  1. ANo disclosure is needed because depreciation is only an estimate
  2. BThe change is a change in accounting policy; its effect, if material, must be disclosed, and if the effect cannot be ascertained, that fact must be indicatedCorrect
  3. CThe change must be disclosed only if it increases profit
  4. DThe change should be made by restating the opening balance of equity share capital

Explanation

AS 1 says any change in an accounting policy that has a material effect in the current period or later periods must be disclosed. The amount by which financial statement items are affected should be disclosed to the extent ascertainable, otherwise the fact that the effect is not ascertainable is stated. Disclosure does not depend on whether profit rises or falls.

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