PRIOR PERIOD AND EXTRAORDINARY ITEMS AND CHANGES IN ACCOUNTING POLICIES

The objective of AS-5 on the above subject is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises prepare and present such a statement on a uniform basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises. Accordingly, this Statement requires the classification and disclosure of extraordinary and prior period items and the disclosure of certain items within profit or loss from ordinary activities. It  also specifies the accounting treatment for changes in accounting estimates and the disclosures to be made in the financial statements regarding changes in accounting policies. This Statement does not deal with the tax implications of extraordinary items , change  in accounting estimates, and changes in accounting policies for which appropriate adjustments will have to be made depending on the circumstances.

Net Profit or Loss for the Period
All items of income and expense which are recognised  in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.

The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss :

  1. profit or loss from ordinary activities, and
  2.  extraordinary items.

Prior Period Items
Prior period items are income or expenses which arise in the current period as a result of errors or commissions in the preparation of the financial statements of one or more prior periods. The nature and amount of prior period items should be separately disclosed in the statement of profit  and loss in a manner that their impact on the current profit or loss can be perceived.

Extraordinary Items

Extraordinary items are income or expenses that arise from events or transactions that are clearly  distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived. When items of income and expense within profit and 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.

Profit or Loss from Ordinary Activities

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. Circumstances which may give rise to the separate disclosure of items of income and expense in accordance with the above paragraph include :

  1.  the write down of inventories to net realisable value as well as reversal of such write downs:
  2. a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring:
  3. disposals of items of fixed assets
  4. disposals of long- term investments
  5. legislative changes having retrospective application
  6. litigation settlement: and
  7. other reversals of provisions

Changes in Accounting Estimates – In preparation of financial statements, it is inevitable to estimate certain items due to inherent uncertainties in business activities. For example estimates may be required of bad debts, inventory obsolescence or the useful lives of depreciable assets. A change in accounting estimates is not equivalent to change in accounting policy. For example change from straightline method to WDV method would be treated as change  in accounting estimate. The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:

  1.  the period of the change, if the change affects the period only: or
  2. the period of the change and future periods, if the change affects both.

The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.

Changes in Accounting policies –  As per AS-1, consistency is one of the fundamental accounting assumptions. Moreover, users should be able to compare the financial statements of an enterprise over a period of time in order to identify trends in its financial position, performance and cash flows. Therefore, the same accounting policies are normally adopted for similar events or transactions in each period. A change in an accounting policy should be made only if the adoption of a different accounting standards or if it is considered that the change would result in a more appropriate presentation of the financial statement of the enterprise.  Any change in an accounting policy which has a material effect should be disclosed. The impact of and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change. Where  the effect of such change is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in  which the change is adopted.

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