Professional Documents
Culture Documents
NO SINGLE LIST OF AP apply to all circumstances due to complex & diverse Economic
Activities
Choice of AP calls for JUDGEMENT BY THE MANAGEMENT
MEANINGFUL COMPARISON
BETTER UNDERSTANDING of FS
between FS of Different Entities
FAA
PRUDENCE MATERIALITY
SUBSTANCE OVER FORM
In view of future FS should disclose all
Accounting treatment and
uncertainty, Profits “MATERIAL” items, i.e.
presentation in of
are NOT Anticipated. items the
transactions & events in
Provision IS MADE for knowledge of which
FS should be governed by
All Know Liabilities & might influence the
their substance and not
Losses, even on decisions of the user of
merely by the legal form
estimated basis the financial statements.
Solution
As per AS 1 Disclosure of Accounting Policies, any change in the Accounting Policy which
has a material effect should be disclosed in the financial statements. The amount by which
any item in the Financial Statement has been affected should also be disclosed. Where the
amount is not ascertainable wholly or in part the fact should be disclosed.
In the current case, M/s Prashant Ltd. has changed its Accounting
Policy of valuing inventory from First In First Out (FIFO) method to Weighted Average
method. Prashant Ltd. should disclose the change in Accounting Policy by way of a note,
as under:
“The company values its inventory at Cost or Net Realisable Value (NRV), whichever is
lower.” In the current year, the company has changed the method of valuing inventory
from First In First Out (FIFO) method to Weighted Average method, as the management
believes this reflects the consumption pattern of inventory in a better way.
As a consequence of such change, the value of inventory as per
Weighted Average method is Rs. 1,47,000 as against Rs. 1,63,000 had the inventory
been valued as per First In First Out method. As a result of such change Profit for the
current period is lower by Rs. 16,000.
Question 1
ABC Ltd. was making provision for non-moving inventories based on issues for the last
12 months up to 31.3.2016. The company wants to provide during the year ending
31.3.2017 based on technical evaluation:
Total value of inventory: Rs. 100 lakhs
Provision required based on 12 months issue: Rs. 3.5 lakhs
Provision required based on technical evaluation: Rs. 2.5 lakhs
Solution
The decision of the management of making provision for non-moving items on the basis
of technical evaluation instead of earlier practice of provision based on twelve months
issue does not amount to change in the Accounting Policy.
The Accounting Policy of the company may require provision for
non-moving items of inventory should be made. The method used to arrive at the amount
of provision can be changed based on facts and circumstances.
If the company based on the materiality believes that the disclosure of change in the
process or method of determining the amount is to be made, the following note ca be
presented in the Financial Statement.
“In the current year, the company has changed the method of
determining the provision for non-moving inventory from the earlier method of making
provision based on 12 months of issue to provision based on technical evaluation. As a
consequence of such change, the amount of provision is lower by Rs. 1,00,000.