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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Under the Accounting Standard on depreciation accounting, a change in the method of depreciation is made only if it is required by statute, for compliance with an accounting standard, or for a more appropriate presentation of the financial statements. How is the effect of such a change treated?

A change in depreciation method is treated as a change in accounting policy. Depreciation is recomputed from the date the asset was first used under the new method, the resulting deficiency or surplus is adjusted in the year of change, and the effect is disclosed in the financial statements.

  1. AIgnored completely in the accounts
  2. BAdjusted only in the opening balance of the asset with no disclosure
  3. CDepreciation is recalculated from the date of use of the asset, and any deficiency or surplus is adjusted in the year of change, with disclosureCorrect
  4. DApplied only to assets purchased after the change, with no restatement or disclosure

Explanation

AS 6 requires a change of method to be treated as a change in accounting policy. Depreciation is recomputed from the date the asset came into use under the new method, and the resulting deficiency or surplus is adjusted in the year of change. The change and its effect must be disclosed, so options A, B and D are wrong.

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