1. Introduction
AS 5 specifies the method of classification and disclosure for the following items:
a. Prior period items
b. Extraordinary items
c. Certain specific items w.r.t. profit and loss from ordinary activities
The standard also describes the treatment of changes in accounting estimates and disclosures to be made on account of such changes.
The standard doesn’t deal with tax implication on account of such changes as mentioned above.
2. Application
Why apply – Applying this standard helps in comparison of financial statements among various enterprises. Also, the financial statements of different enterprises can be compared over time when the standard is applied properly.
3. Insight Into the Standard Guidelines
The standard particularly deals with following four specific items:
I. Net Profit or Loss for the Period
II. Prior Period Items
III. Changes in Accounting Estimates
IV. Changes in Accounting Policies
3.I. Net Profit or Loss for the Period
Two broad categories of net profit and loss for the period are Profit or loss from ordinary activities and Profit or loss from extraordinary activities.
Profit or loss from ordinary activities is such which arise in the normal course of business. These activities are a part of business and related activities. Examples: Profit/loss on sale of goods, services.
The transactions and results under this category are shown as usual items in the financial statements for the accounting period.
Profit or loss from extraordinary activities is such which do not arise under the normal course of business. These activities do not occur regularly. Example: – Profit on sale of fixed assets, Loss due to theft.
The transactions and results under this category are to be disclosed separately in financial statements. The disclosure should be in a manner which clearly shows the effect on overall profits/losses due to these activities.
The standard also specifies that if the results of any activity are substantial on the overall performance of the enterprise, then it should be disclosed separately in financial statements as a separate head. Example: – Fixed assets disposal, Restructuring of activities, Settlement of litigations.
3.II. Prior Period Items
While preparing the financial statements, there are certain items which actually correspond to prior accounting periods. The income or losses due to these items are a result of error or omission in the financial statements of the prior period. By nature, these items are not frequent and can be easily identified.
The current period’s financial statements should clearly show the effect of such prior period items.
3.III. Changes in Accounting Estimates
There are certain estimates which are used while preparing the financial statements for any period. For example estimate on the useful life of a machinery, estimate on the realizable value of an item in inventory.
At times, these estimates are required to be revised due to any of the following reasons (inclusive list):
i. Change in circumstances
ii. New information
iii. Subsequent developments
iv. Experience
The effect of such change in estimates is to be taken into account while preparing financial statements. If the change in estimate affects ordinary activities, it is disclosed under ordinary activities other under extraordinary activities.
3.IV. Changes in Accounting Policies
Accounting policies are the accounting principles and method of applying those principles while preparing the financial statements.
A change in accounting policy should be undertaken only in two cases:
i. If the change is required by law or accounting standard; or
ii. If the change helps in better presentation of financial statements
Any change in an accounting policy which has a substantial/material effect has to be disclosed necessarily. The impact of such change should also be shown in financial statements. If the impact can’t be assessed, this fact should also be disclosed.
4. Illustration of AS 5
There was a theft of goods in the warehouse of ABC Pvt. Ltd. in the previous year (2016-17) amounting to Rs. 50 Lakhs. The same was detected in the current year (2017-18) at the time of physical verification of inventory. How do we account for this theft and its discovery in the financial statements of 2017-18?
The theft is not expected to take place on a frequent or regular basis and is not in a normal course of business of ABC Pvt. Ltd. Thus, the same qualifies to be an extraordinary item. Also, the theft took place in the financial year 2016-17 but was discovered in 2017-18. This suggests that although the loss related to 2016-17, it was not shown and the profit was overstated by such amount i.e. Rs. 50 Lakhs. While taking the effect of such loss in the current year (2017-18), this is a prior period item. Thus, the disclosures for the same should be given in the financial statements that due to a theft in 2016-17, goods worth Rs. 50 Lakhs were lost and discovered only in the current year. The value of inventory should be adjusted for such loss (both opening and closing inventory).
5. Comparison with Ind AS (IAS)
The following points are of importance in comparing AS 5 with Ind-AS 8:
Ind-AS (IAS) 8 | AS 5 |
The prior period errors are to be rectified retrospectively. | The prior period errors are to be rectified prospectively. |
Prior period items are not to be shown under separate heads. | Prior period items are to shown under separate heads. |
| The financial statements of previous period are to be adjusted to show the effect of prior period items. | The financial statements of previous period are not required to be adjusted to show the effect of prior period items. |
0 Comments