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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 would be a change in accounting estimate under AS 5 rather than a change in accounting policy?

Revising the provision for doubtful debts from 5% to 8% because of new information is a change in accounting estimate. Its effect goes into profit or loss of the period of change. Switching inventory formula or the measurement model is a change in policy, and a new policy for a new type of event is not a change.

  1. ARevising the provision for doubtful debts from 5% to 8% of debtors on the basis of new informationCorrect
  2. BSwitching from FIFO to weighted average for inventory valuation
  3. CAdopting a new policy for an event that did not occur earlier
  4. DChanging from the cost model to a revaluation model for a class of fixed assets

Explanation

Estimates such as doubtful debts, inventory obsolescence and useful lives are revised when circumstances change or new information arises. Revising the percentage from 5% to 8% is therefore a change in estimate, with its effect included in the period of change. Switching inventory formula and changing the measurement model are changes in policy. Adopting a policy for events that did not occur earlier is not a change in policy at all.

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