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

Sunrise Textiles Ltd. prepares its financial statements on the going concern basis. In the current year the management decides to change its method of charging depreciation on machinery from straight line to written down value, because the new method gives a more appropriate presentation of the pattern of benefits. Under AS 1, which of the following correctly describes the required treatment?

A change in depreciation method is a change in accounting policy. Under AS 1, if it has a material effect, the company must disclose the change, the reasons for it and the amount by which the financial statements are affected, to the extent that amount can be ascertained.

  1. ANo disclosure is needed because depreciation method is an estimate and not an accounting policy
  2. BDisclose the change, the reason for it and its effect on the financial statements, if materialCorrect
  3. CDisclose the change only in the directors' report and not in the notes to accounts
  4. DRestate the earlier years' financial statements and make no disclosure in the current year

Explanation

AS 1 requires that any change in an accounting policy having a material effect in the current period, or expected to have a material effect later, must be disclosed. The reason for the change must be given, and the amount by which the financial statements are affected must be shown to the extent ascertainable. Option A is wrong because depreciation method is an accounting policy under AS 1 and its change is disclosed.

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