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CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Which of the following is correctly described under AS 5 as a change in accounting estimate rather than a change in accounting policy?

Revising a machine's useful life from 10 to 8 years is a change in accounting estimate because it arises from new information about expected usage. Changing inventory valuation or depreciation methods are changes in accounting policy, not estimates.

  1. ARevising the useful life of a machine from 10 years to 8 years based on new technology informationCorrect
  2. BSwitching from the cost model to a revaluation approach for presenting inventory
  3. CChanging the method of inventory valuation from FIFO to weighted average
  4. DChanging the depreciation method from straight-line to written down value

Explanation

A change in accounting estimate results from new information or experience and revises an approximation, such as useful life, bad debts or warranty obligations. Its effect is included in profit or loss of the period of change and, if relevant, future periods. Changes in inventory valuation method or depreciation method are changes in accounting policy.

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