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CMA Intermediate · Financial Accounting · Disclosure of Accounting Policies (AS 1)

Sundaram Traders Ltd changed its method of inventory valuation this year. The change has no material effect on the current year's financial statements, but it is reasonably expected to have a material effect in later periods. Under AS 1, what is required?

The company must disclose the fact of the change in the period in which it is adopted. AS 1 requires this when a change has no material current effect but is reasonably expected to be material in later periods, so waiting or staying silent is not permitted.

  1. ANo disclosure, because the current-period effect is not material
  2. BDisclosure of the fact of the change in the period in which the change is adoptedCorrect
  3. CDisclosure only in the period when the material effect actually arises
  4. DRestatement of the previous year's financial statements without any disclosure

Explanation

Paragraph 22 requires that where a change has no material current effect but is reasonably expected to be material in later periods, the fact of the change should be appropriately disclosed in the period of adoption. Waiting until the effect arises is wrong, and no disclosure is also wrong. AS 1 does not prescribe restatement without disclosure.

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