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Thread: 05 Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

  1. #21
    Accounting Standards
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    Default Changes in accounting estimates of Accounting Standard 5 - Net Profit or loss for the Prior Period items - AS 5

    Changes in accounting estimates of Accounting Standard 5 - Net Profit or loss for the Prior Period items - AS 5

    32 As a result of the uncertainties inher ent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required of:


    (a) bad debts;
    (b) inventory obsolescence;
    (c) the fair value of financial assets or financial liabilities;
    (d) the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and
    (e) warranty obligations.


    33 The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.


    34 An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new i nformation or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error.


    35 A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.

    36 The effect of change in an accounting estimate, other than a change to which paragraph 37 applies, shall be recognised prospectively by including it in profit or loss in:

    (a) the period of the change, if the change affects that period only; or
    (b) the period of the change and future periods, if the change affec ts both.


    37 To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.


    38 Prospective recognition of the effect of a change in an accounting estimate means that the change is applied to transactions, other events and conditions from the date of the change in estimate. A change in an accounting esti mate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. For example, a change in the estimate of the amount of bad debts affects only the current period’s profit or loss and therefore i s recognised in the current period. However, a change in the estimated useful life of, or the expected
    pattern of consumption of the future economic benefits embodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the asset’s remaining useful life. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised as income or expense in those future periods

  2. #22
    Accounting Standards
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    Default Disclosure of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

    Disclosure of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5


    39 An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect.


    40 If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact.

  3. #23
    Accounting Standards
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    Default Errors of Accounting Standard 5 - Net Profit or loss for the prior period item - AS 5

    Errors of Accounting Standard 5 - Net Profit or loss for the prior period item - AS 5


    41 Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with ASs if they contain either material errors or immaterial errors made intentionally to achieve a particular pre sentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are approved for issue.
    However, material errors are sometimes not dis covered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period (see paragraphs 42–47).



    42 Subject to paragraph 43, an entity shall correct mat erial prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by:


    (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or

    (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

    Limitations on retrospective restatement

    43 A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error.

    44 When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period).

    45 When it is impracticable to det ermine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable.

    46 The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered. Any information presented about prior periods, including any historical summaries of financial data, is restated as far back as is practicable.


    47 When it is impracticable to determine the amount of an error (eg a mistake in applying an accounting policy) for all prior periods, the entity, in accordance with paragraph 45, restates the comparative information prospectively from the earliest date practicable. It therefore disregards the portion of the cumulative restatement of assets, liabilities and equity arising before that date. Paragraphs 50 –53 provide guidance on when it is impracticable to correct an error for one or more prior periods.

    48 Corrections of errors are distinguished from changes in accounting estimates . Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error.

  4. #24
    Accounting Standards
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    Default Disclosure of prior period errors of Accounting Standard 5 - Net Profit or loss for the prior period Item - AS 5

    Disclosure of prior period errors


    49 In applying paragraph 42, an entity shall disclose the following:


    (a) the nature of the prior period error;

    (b) for each prior period presented, to the extent practicable, the amount of the correction:
    (i) for each financial statement line item affected; and
    (ii) if AS 20 (Revised 20XX) applies to the entity, for basic and diluted earnings per share;

    (c) the amount of the correction at the beginning of the earliest prior period presented; and

    (d) if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Financial statements of subsequen t periods need not repeat these disclosures.

  5. #25
    Accounting Standards
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    Default Impracticability in respect of retrospective application and retrospective restatement of Accounting Standard 5 - AS 5

    Impracticability in respect of retrospective application and retrospective restatement


    50 In some circumstances, it is impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period. For example, data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (including, for the purpose of paragraphs 51–53, its prospective application to prior periods) or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.


    51 It is frequently necessary to make estimates in applying an accounting policy to elements of financial statements recognised or disclosed in respect of transactions, other events or conditions. Estimation is inherently subjective, and estimates may be developed after the reporting period. Developing estimates is potentially more difficult when retrospectively applying an accounting policy or making a retrospective restatement to correct a prior period error, because of the longer period of time that might have passed since the affected transaction, other event or condition occurred. However, the objective of estimates related to prior periods remains the same as for estimates made in the current period, namely, for the estimate to reflect the circumstances that existed when the transaction, other event or condition occurred.


    52 Therefore, retrospectively applying a new accounting policy or correcting a prior period error requires distinguishing information that


    (a) provides evidence of circumstances that existed on the date(s) as at which the transaction, other event or condition occurred, and

    (b) would have been available when the financial statements for that prior period were approved for issue from other information. For some types of estimates (eg an estimate of fair value not based on an observable price or observable inputs), it is impracticable to distin guish these types of information. When retrospective application or retrospective restatement would require making a significant estimate for which it is impossible to distinguish these two types of information, it is impracticable to apply the new accounting policy or correct the prior period error retrospectively.


    53 Hindsight should not be used when applying a new accounting policy to, or correcting amounts for, a prior period, either in making assumptions about what management’s intentions would have been in a prior period or estimating the amounts recognised, measured or disclosed in a prior period. For example, when an entity corrects a prior period error in measuring financial assets previously classified as held-to-maturity investments in accordanc e with AS 30 (Revised 20XX) Financial
    Instruments: Recognition and Measurement , it does not change their basis of measurement for that period if management decided later not to hold them to maturity. In addition, when an entity corrects a prior period erro r in calculating its liability for employees’ accumulated sick leave in accordance with AS 15 (Revised 20XX) Employee Benefits, it disregards information about an unusually severe influenza season during the next period that became available after the fina ncial
    statements for the prior period were approved for issue. The fact that significant estimates are frequently required when amending comparative information presented for prior periods does not prevent reliable adjustment or correction of the comparative information.

  6. #26
    Accounting Standards
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    Default Effective date of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

    Effective date of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5


    54 An entity to which this Accounting Standard is applicable shall apply it for accounting periods commencing on or after the date (to be announced separately) and will be mandatory in nature3 from that date.

  7. #27
    Accounting Standards
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    Default Withdrawal of other pronouncements of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items - AS 5

    Withdrawal of other pronouncements of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items - AS 5


    55 This Standard supersedes AS 5 Net Profit or Loss for the Period, Prior Period Items
    and Changes in Accounting Policies (Revised 1997) in respect of the entities to
    which this Accounting Standard is applicable

  8. #28
    Accounting Standards
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    Default Appendix A of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

    Appendix A of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5


    Click here for Examples and Appendix

    http://www.knowledgebible.com/forum/...nting-Policies

  9. #29
    Accounting Standards
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    Default Appendix B of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

    Appendix B of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5


    Conflicting Legal and Regulatory Issues

    Note: This Appendix is not a part of the Accounting Standard (AS) 5 ( Revised 20XX) Accounting Policies, Changes in Accounting Estimates and Errors . Some of the situations or accounting treatments prescribed in AS 5 ( Revised 20XX) may not be in conformity with the present requirements of applicable laws/regulations in the country. In such cases, the provisions of the applicable laws/regulations will prevail. This App endix contains the following such instances.


    Conflicting Issues with Companies Act, 1956

    The Exposure draft of AS 5 (Revised 20XX), Accounting Policies, Changes in Accounting Estimates and Errors, requires application of change in accounting policy with retrospective effect. The entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. It further requires that an entity should correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by:

    (A) Restating the comparative amounts for the prior perio d(s) presented in which the error occurred; or

    (B) If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.


    Whereas, as per Circular: No.1/2003 dated 13.1.2003 issued by erstwhile company law board, a company could reopen and revise its accounts even after their adoption in the annual general meeting in order to comply with technical requirements of taxation laws and of any other law to achieve t he object of exhibiting true and fair view. It implies that the Companies Act does not permit revision and reopening of accounts for such purposes, once adopted in the annual general meeting. All such adjustments and corrections have to be included in profit or loss of the current period. Moreover, In this case, if comparatives are restated without re -opening and revising the
    accounts, such financial statements would not deem to be in agreement with books of accounts. This will be in contradiction with r equirements of Section 227(3) (c), which requires that the auditors’ report shall state whether the company’s balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

  10. #30
    Accounting Standards
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    Default Appendix C of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5

    Appendix C of Accounting Standard 5 - Net Profit or Loss for the period Prior Period Items and changes in accounting policies - AS 5


    Note: This Appendix is not a part of the Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Accounting Standard (AS) 5 (Revised 20XX) and the corresponding International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors .


    Comparison with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors


    There is no major difference between the Exposure Draft of AS 5 (Revised 20XX), Accounting Policies, Changes in Accounting Estimates and Errors and International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors.

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