Determina f(x) sabent que la derivada tercera és

 They are items that cannot be measured with precision but can be estimated based on judgments  Examples

– Provision for bad debts

– Estimating the life of a fixed asset – Computation of income tax provision

Change in Accounting Estimate

 The effect of a change in accounting estimate should be disclosed in the P&L account of

The period of change if the change affects the current period only (example- estimation of provision for bad debts)

The period of change & the future periods if the change affects both periods (e.g. valuation of fixed assets)

Change in Accounting Policy

 Meaning of accounting policy

AS by CA Kisan Rajpurohit

AS 5- Net Profit or Loss for the period, Prior period item, changes…

8008149787, 9908063153

– SLM to WDV

– FIFO to Weighted Average

 Change in accounting policy may be required in the following three circumstances For compliance with an accounting standard

For compliance with any statute

For better & appropriate presentation of financial statements

 Any change in an accounting policy which has a material effect should be disclosed

 This impact should be disclosed in the period in which the policy is changed. Where such impact cannot be ascertained then such fact should be disclosed

 If the change has no impact on the current period but materially affect future periods then the fact of such change must be disclosed in the year of change

AS 5 SUMMARY

Net profit or loss for the period •Include all items of

income & expense for the period •Disclose separately

•Ordinary items •Extraordinary

items

Prior period items •Disclose separately •The nature •Amount so that impact can be understood Change in accounting estimate •Not a prior period

or extra ordinary item

•Disclose the impact on current as well as future periods Change in accounting policy •Disclose separately material effect of change on •Current period •Future periods •If impact unascertainable then disclose the fact

AS by CA Kisan Rajpurohit

AS 5- Net Profit or Loss for the period, Prior period item, changes…

8008149787, 9908063153 ILLUSTRATION 1.

Please classify into prior period items, change in accounting estimate, extra ordinary items

Expenses of Rs 50000 of the previous year which were omitted from books of account of the previous year due to mistake- Prior Period Item

There is a loss of Rs 50 lacs due to an earthquake- Extra-ordinary item Last year stock was overvalued by Rs 530000- Prior Period Item

Bad debt provision last year was 5%. This year the company want to make it 8%- Change in Accounting Estimate

ILLUSTRATION 2.

The company found in 2002-2003 that stock sheet as on 31-3-2000 has included twice an item of Rs 200000. Comment

Solution

As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, omission of two pages containing details of inventory worth Rs.20 lakhs in 31.3.2010 is a prior period item. Prior period items are normally included in the determination of net profit or loss for the current period. Accordingly, Rs.20 lakhs must be added to opening stock of 1.4.2010. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss.

ILLUSTRATION 3.

The company has to pay delayed cotton clearing charges over and above the negotiated price for taking delayed delivery of cotton from the Suppliers' Godown. Up to 2009-10, the company has regularly included such charges in the valuation of closing stock. This being in the nature of interest the company has decided to exclude it from closing stock valuation for the year 2009-10. This would result into decrease in profit by Rs 7.60 lakhs

Solution

As per AS 5 (Revised) ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” a change in an accounting policy should be made only in the following circumstances:

1. The adoption of a different accounting policy is required by statute or 2. For compliance with an accounting standard or

3. It is considered that the change would result in a more appropriate presentation of the financial statements of an enterprise.

Therefore the change in the method of stock valuation is justified in view of the fact that the change is in line with the recommendations of AS 2 (Revised) ‘Valuation of Inventories’ and would result in more appropriate preparation of the financial statements. As per AS 2, this accounting policy adopted for valuation of inventories including the cost formulae used should be disclosed in the financial statements. Also, appropriate disclosure of the change and the amount by which any item in the financial statements is affected by such change is necessary as per AS 1, AS 2 and AS 5. Therefore, the under mentioned note should be given in the annual accounts.

ILLUSTRATION 4.

Fuel surcharge is billed by the State Electricity Board at provisional rates. Final bill for fuel surcharge of Rs 5.30 lakhs for the period October, 2005 to September, 2009 has been received and paid in February, 2010.

Solution

The final bill having been paid in February, 2010 should have been accounted for in the annual accounts of the company for the year ended 31st March, 2010. However it seems that as a result of error or omission in the preparation of the financial statements of prior period i.e., for the year ended 31st March 2010, this material charge has arisen in the current period i.e., year ended 31st March, 2011. Therefore it should be treated as 'Prior period item' as per AS 5. Prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit

AS by CA Kisan Rajpurohit

AS 5- Net Profit or Loss for the period, Prior period item, changes…

8008149787, 9908063153

or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss. It may be mentioned that it is an expense arising from the ordinary course of business. Although abnormal in amount or infrequent in occurrence, such an expense does not qualify an extraordinary item as per Para 10 of AS 5 (Revised). For better understanding, the fact that power bill is accounted for at provisional rates billed by the state electricity board and final adjustment thereof is made as and when final bill is received may be mentioned as an accounting policy.'

ILLUSTRATION 5.

A limited company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the financial statements for the year 2011-2012.

Subsequently on a review of the credit period allowed and financial capacity of the customers, the company decided to increase the provision to 8% on debtors as on 31.3.2012. The accounts were not approved by the Board of Directors till the date of decision. While applying the relevant accounting standard can this revision be considered as an extraordinary item or prior period item?

Solution

The preparation of financial statements involves making estimates which are based on the circumstances existing at the time when the financial statements are prepared. It may be necessary to revise an estimate in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate, by its nature, does not bring the adjustment within the definitions of a prior period item or an extraordinary item [AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies].

In the given case, a limited company created 2.5% provision for doubtful debts for the year 2011-2012. Subsequently in 2012 they revised the estimates based on the changed circumstances and want to create 8% provision. As per AS-5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item.

However, as per the standard, a change in accounting estimate which has material effect in the current period, should be disclosed and quantified. Any change in the accounting estimate which is expected to have a material effect in later periods should also be disclosed.

ILLUSTRATION 6.

A company wrote down its inventory to 50% since it was damaged. However in the subsequent it found that the inventory can be used completely. It wants to write back the amount under prior period. Please comment.

Solution

As per AS 5, write down of inventory is an ordinary item. However where item of income or expense

 Falls within the meaning of P&L from ordinary activities

 Are of special size, nature & incidence

 Disclosure is necessary to explain the performance of the enterprise for the period

Then disclosure is required in the notes to accounts. Therefore the disclosure of write down of inventory is necessary in light of the above circumstances.

ILLUSTRATION 7.

A company signed an agreement with the Employees Union on 1.9.2007 for revision of wages with retrospective effect from 30.9.2006. This would cost the company an additional liability of Rs. 5,00,000 per annum. Is a disclosure necessary for the amount paid in 2007-08?

Solution

It is given that revision of wages took place on 1st September, 2007 with retrospective effect from 30.9.2006. Therefore wages payable for the half year from 1.10.2006 to 31.3.2007 cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item. Additional wages liability of Rs. 7,50,000 (for 1½ years @ Rs. 5,00,000 per annum) should be included in current year’s wages. It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Although abnormal in amount, such an expense does not qualify as an extraordinary item. However, as per para 12 of AS 5

AS by CA Kisan Rajpurohit

AS 5- Net Profit or Loss for the period, Prior period item, changes…

8008149787, 9908063153

(Revised), when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.

ILLUSTRATION 8.

Nischit Ltd. has acquired a generator on 1.4.2009 for Rs. 50 lakhs. On 2.4.2009, it applied to IREDA (Indian Renewable Energy Development Authority) for a subsidy of 10% of the cost as the generator was using solar energy. The subsidy was granted in June, 2009 after the accounts for 2008-09 were finalised. The company has not accounted for the subsidy for the year ended 31.3.2009. Give your views on the following:

a. Is this a prior period item?

b. How should the subsidy be accounted in the accounting year 2009-10? Solution

a) As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, prior period items are incomes or expenses arising out of errors in one or more prior accounting periods. The question is "whether co. has committed an error in 2008-09 by not recognising the subsidy?" The answer is there was no error, AS 12 permits recognition of grant only when there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, (ii) the subsidy will be received. Mere making application does not provide the reasonable assurance that the subsidy will be received. Letter of sanction from IREDA is required to provide this assurance. Hence the company was not recognising the grant. Further, AS 4 requires adjustment of events occurring after the balance sheet date only up to the date of approval of accounts by the Board of Directors. In view of this, the company is correct in not adjusting the same in the accounts for the year 2008-09. Hence, this is not a prior period item.

b) The subsidy should be deducted from the cost of the generator. The revised unamortised, amount of generator should be written off over the remaining useful life.

Alternatively, the same may be treated as deferred income and allocated over the remaining useful life in the proportion in which depreciation is charged.