AS – 5 = NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES
EXAM QUESTIONS
JAN 2021
State whether the following items are examples of change in Accounting Policy / Change in Accounting Estimates / Extraordinary items / Prior period items / Ordinary Activity :
I. Actual bad debts turning out to be more than provisions.
II. Change from Cost model to Revaluation model for measurement of carrying amount of PPE.
III. Government grant receivable as compensation for expenses incurred in previous accounting period.
IV. Treating operating lease as finance lease.
V. Capitalisation of borrowing cost on working capital.
VI. Legislative changes having long term retrospective application.
VII. Change in the method of depreciation from straight line to WDV.
VIII. Government grant becoming refundable.
IX. Applying 10% depreciation instead of 15% on furniture.
X. Change in useful life of fixed assets.
ANS.
Classification of given items is as follows:
(i) Actual bad debts turning out toChange in Accounting Estimates be more than provisions
(ii) Change from Cost model toChange in Accounting Policy Revaluation model for
measurement of carrying amount
of PPE
(iii) Government grant receivable asExtra -ordinary Items compensation for expenses
incurred in previous accounting
period
(iv) Treating operating lease asPrior- period Items finance lease.
(v) Capitalisation of borrowing costPrior-period Items (as interest on on working capital working capital loans is not
eligible for capitalization)
(vi) Legislative changes having longOrdinary Activity
term retrospective application
(vii) Change in the method ofChange in Accounting Estimates
Sr. No.
Particulars
Remarks
depreciation from straight line to
WDV
(viii) Government grant becoming Extra -ordinary Items
refundable
(ix) Applying 10% depreciation Prior- period Items
instead of 15% on furniture
(x) Change in useful life of fixed Change in Accounting Estimates
assets
MAY 2022
TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive manufacturing sector. In April 2022, the Government enhanced the minimum wages payable to workers with retrospective effect from the 1st January,2022. Due to this legislative change, the additional wages for the period from January 2022 to March 2022 amounted to ` 30 lakhs. The management asked the Finance manager to charge ` 30 lakhs as prior period item while finalizing financial statements for the year 2022-23. Further, the Finance manager is of the view that this amount being abnormal should be disclosed as extra-ordinary item in the Profit and loss account for the financial year 2021-22.
Discuss with reference to applicable Accounting Standards.
ANS
TQ Cycles Ltd. is in the manufacturing of bicycles, a labour intensive manufacturing sector. In April 2022, the Government enhanced the minimum wages payable to workers with retrospective effect from the 1st January,2022. Due to this legislative change, the additional wages for the period from January 2022 to March 2022 amounted to ` 30 lakhs. The management asked the Finance manager to charge ` 30 lakhs as prior period item while finalizing financial statements for the year 2022-23. Further, the Finance manager is of the view that this amount being abnormal should be disclosed as extra-ordinary item in the Profit and loss account for the financial year 2021-22.
Discuss with reference to applicable Accounting Standards.
It is given that revision of wages took place in April, 2022 with retrospective effect from 1st January, 2022. Therefore, wages payable for the period from 1 01.2022 to 31.3.2022
cannot be taken as an error or omission in the preparation of financial statements and hence this expenditure cannot be taken as a prior period item. The full amount of wages payable to workers will be treated as an expense of current year and it will be charged to profit & loss account for the year 2022-23 as normal expenses.
It may be mentioned that additional wages is an expense arising from the ordinary activities of the company. Such an expense does not qualify as an extraordinary item. Therefore, finance manager is incorrect in treating increase as extraordinary item. However, as per AS 5, 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.
Therefore, additional wages liability of ` 30 lakhs should be disclosed separately in the financial statements of TQ Cycles Ltd. for the year ended 31 stMarch, 2023
RTP QUESTIONS
MAY 2021
XYZ Ltd. is in the process of finalizing its account for the year ended 31st March, 2020. The company seeks your advice on the following:
The company's tax assessment for assessment year 2017-18 has been completed on 14th February, 2020 with a demand of `5.40 crore. The company paid the entire due under protest without prejudice to its right of appeal. The company files its appeal before the appellate authority wherein the grounds of appeal cover tax on additions made in the assessment order for a sum of `3.70 crore.
ANS
Since the company is not appealing against the addition of ` 1.70 crore (` 5.40 crore less ` 3.70 crore), therefore, the same should be provided/ expensed off in its accounts for the year ended on 31st March, 2020. However, the amount paid under protest can be kept under the heading ‘Long-term Loans & Advances / Short-term Loans and Advances’ as the case may be alongwith disclosure as contingent liability of ` 3.70 crore.
NOV 2021
(A) There was a major theft of stores valued at ` 10 lakhs in the preceding year which was detected only during current financial year (2020-2021). How will you deal with this information in preparing the financial statements of R Ltd. for the year ended 31st March, 2021.
(B) Management decided to pay pension to those employees who have retired after completing 5 years of service in the organisation. Such employees will get pension of ` 20,000 per month. Earlier there was no such scheme of pension in the organization. Explain whether this will constitute a change in accounting policy or not as per AS 5.
ANS.
(a) Due to major theft of stores in the preceding year ( 2019-2020) which was detected only during the current financial year (2020–2021), there was overstatement of closing inventory of stores in the preceding year. This must have also resulted in the overstatement of profits of previous year, brought forward to the current year. The adjustments are required to be made in the current year as 'Prior Period Items' as per AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Accordingly, the adjustments relating to both opening inventory of the current year and profit brought forward from the previous year should be separately disclosed in the statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived. Alternatively, it may be assumed that in the preceding year, the value of inventory of stores as found out by physical verification of inventories was considered in the preparation of financial statements of the preceding year. In such a case, only the disclosure as to the theft and the resulting loss is required in the notes to the accounts for the current year i.e, year ended 31st March, 2021.
(b) As per AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, will not be considered as a change in accounting policy. Accordingly, the adoption of a
new accounting policy of paying pension to retired employees is a policy for events or transactions which did not occur previously. Hence, it will not be treated as a change in an accounting policy.
MAY 2022
(a) The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2021. Please advise him in the following situations in accordance with the provisions of relevant Accounting Standard;
1. 2. 3. 4.
5.
ANS
(i) In
Subsequently in 2020-21, the company revised the estimates based on the changed circumstances and wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in accounting estimate and is not a change in accounting policy. This change will affect only current year.
(II) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, will not be considered as a change in accounting policy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement is a transaction which is substantially different from the previous policy, will not be treated as change in accounting policy.
(III) Change in useful life of furniture from 5 years to 3 years is a change in accounting estimate and is not a change in accounting policy.
(IV) Adoption of a new accounting policy for events or transactions which did not occur previously should not be treated as a change in an accounting policy. Hence the introduction of new pension scheme is not a change in accounting policy.
(V) Change in cost formula used in measurement of cost of inventories is a change in accounting policy.
NOV 2022
Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in the future. The company decided to sell the land to tide over its liquidity problems and made a profit of `10 Lakhs by selling the said land. Moreover, there was a fire in the factory and a part of the unused factory shed valued at ` 8 Lakhs was destroyed. The loss from fire was set off against the profit from sale of land and profit of `2 lakhs
Provision for doubtful debts was created @ 2% till 31st March, 2020. From the Financial year 2020- 2021, the rate of provision has been changed to 3%.
During the year ended 31st March, 2021, the management has introduced a formal gratuity scheme in place of ad-hoc ex-gratia payments to employees on retirement.
Till the previous year the furniture was depreciated on straight line basis over a period of 5 years. From current year, the useful life of furniture has been changed to 3 years.
Management decided to pay pension to those employees who have retired after completing 5 years of service in the organization. Such employees will get pension of ` 20,000 per month. Earlier there was no such scheme of pension in the organization.
During the year ended 31st March, 2021, there was change in cost formula in measuring the cost of
inventories.
the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2020.
was disclosed as net profit from sale of assets. Do you agree with the treatment and disclosure? If not, state your views.
ANS
As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” 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.
In the given case the selling of land to tide over liquidation problems as well as fire in the factory does not constitute ordinary activities of the Company. These items are distinct from the ordinary activities of the business. Both the events are material in nature and expected not to recur frequently or regularly. Thus, these are Extraordinary Items.
Therefore, in the given case, disclosing net profits by setting off fire losses against profit from sale of land is not correct. The profit on sale of land, and loss due to fire should be disclosed separately in the statement of profit and loss.