AS-5: NET PROFIT OR LOSS FOR THE PRIOD, PRIOR PERIOD ITEMS & CHANGES IN

ACCOUNTING POLICIES
CA TEJAS SUCHAK
NET PROFIT OR LOSS FOR THE PERIOD

Net Profit or Loss for the period includes the following components
1. Profit or Loss from ordinary activities; and
2. Extraordinary items.

Both these components should be disclosed on the face of statement of profit and loss.

EXTRAORDINARY ACTIVITIES ORDINARY ACTIVITIES

Extraordinary activities are items of
incomes or expenses that arise from events or
transactions that are
• clearly distinct from the ordinary
activities of the enterprise,
• Not expected to recur frequently or
regularly.
• Nature & Amount of extraordinary
activities should be separately disclosed
in the statement of profit and loss.
− Such disclosure should be made in a
manner that its effect on current
profit or loss can be perceived.
Examples of extraordinary activities:
• Govt. grant becomes refundable.
• Loss due to earthquake.
• Attachment of property.
• Government grant with no related costs.
PRIOR PERIOD ITEMS
− Incomes or expenses which arise in the
current period
− as a result of errors or omissions in
preparation of F.S. of one or more prior
periods.
− Nature & amount should be separately
disclosed.
Ordinary activities are activities that are
• Undertaken by the enterprise as
part of its business.
• Related activities in which the
enterprise engages in
− furtherance of,
− incidental to, or
− arising from
these activities.
• It also includes activities of
exceptional nature.
ORDINARY ACTIVITIES OF EXCEPTIONAL
NATURE
When items of income & expense are of
such nature, incidence or size 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.
Examples:
− Write down of invent. to NRV.
− Reversal of the above writedowns.
− P&L from disposal of fixed assets.
− P&L from disposal of L.T.Invest.
− Legislative changes.
− Litigation settlements.

ERRORS OR OMMISSIONS

Errors or omissions may arise as a result of:

• Mathematical mistakes.
• Mistakes in application of accounting policies.
• Misinterpretation of facts.
• Oversight.
 AS-5: NET PROFIT OR LOSS FOR THE PRIOD, PRIOR PERIOD ITEMS & CHANGES IN
ACCOUNTING POLICIES
CHANGE IN ACCOUNTING POLICIES
A change in accounting policy should be made
only if:
• Such change is required by the statute.
• For compliance with an AS.
• It leads to more appropriate
presentation of the F.S.
Following are not considered to be change in
accounting policies:
- When an accounting policy is adopted for
events or transactions that
• differ significantly in substance from
earlier events or transactions.
• Did not occur earlier
• Were earlier immaterial.
CA TEJAS SUCHAK
EFFECT OF CHANGE IN ACCOUNTING
POLICIES
• Effect (i.e. impact & its resulting
adjustments) should be shown in the
F.S. of the period in which change is
made.
• If effect is not ascertainable such
fact should be disclosed.
• If such change is not expected to
have a material effect in the current
period but it will have a material
effect in later periods, the fact of
such change should be disclosed in
the period in which the change will
have effect.

CHANGE IN ACCOUNTING ESTIMATE

An estimate may have to be revised if:

• There is a change in the circumstances on the basis of which such estimate is made.
• The enterprise now possesses new information, more experience.
• There have been subsequent developments after the initial estimate was made.

NOTE: Such a revision is not treated as an extraordinary item or a prior period item.
NOTE: If sometimes it is difficult to distinguish between a change in accounting policy or a
change in accounting estimate, the entire change should be treated as a change in accounting
estimate.

EFFECT OF CHANGE IN ACCOUNTING ESTIMATE

Effect of change in accounting estimate should be disclosed in
• The period of change, if it affects current period only.
• The period of change & the future periods, if it affects both.