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

Tara Retail Ltd. has valued inventory at cost for years. In the current year it changed the policy of charging depreciation from straight line method to written down value method. The change is made to comply with a statute and has a material effect. Which statement is correct as per AS 1?

The change and its effect must be disclosed. AS 1 requires disclosure of any material change in accounting policy, with the amount where ascertainable, even when the change is made to comply with a statute. Statutory compulsion justifies the change but does not waive disclosure, and auditor approval is not a substitute.

  1. ANo disclosure is needed because changes required by statute are exempt
  2. BChange is made only for the next year with no disclosure in the current year
  3. CThe change need not be disclosed if the company's auditors approve it
  4. DThe change and its effect should be disclosed in the financial statements, as a change in accounting policy made to comply with a statute is still disclosedCorrect

Explanation

AS 1 states that a change in accounting policy which has a material effect in the current period, or is reasonably expected to in later periods, should be disclosed, with the amount to the extent ascertainable. A change required by statute is a valid reason for change but does not remove the disclosure requirement. Auditor approval is irrelevant to disclosure.

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