Indian Accounting


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3.07.2012

AS-5 NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING POLICIES





All items of income and expense, which are recognized in a period, should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise.

The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:

(a) profit or loss from ordinary activities; and
(b) extraordinary items.


Ordinary Activities are any activities, which are undertaken by an enterprise as part of its business, and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.

When items of income and expenses within profit or loss from ordinary activities are of such size, nature 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 properly. Examples of such circumstances are:
(Exceptional Items)
- disposal of items of fixed assets
- litigation settlements
- legislative changes having retrospective application
- disposal of long term investments
- reversal of provisions

Extraordinary items are income or expense that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.
Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
- attachment of property of the enterprise;
- an earthquake

However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks.

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.




Prior Period Items:
Prior period items are income or expenses that arise in the current period as a result of ERROR or OMMISSIONS in the preparation of the financial statements of one or more prior periods.

The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived.
Changes in Accounting Policy:
Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.

A change in an accounting policy should be made only if the adoption of a different accounting policy is required:
(a) by statute
(b) for compliance with an accounting standard
(c) if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

Any change in accounting policy which has a material effect, should be disclosed. Such changes should be disclosed in the statement of profit and loss in a manner that their impact on profit or loss can be perceived.

Where the effect of such change is not ascertainable, the fact should be indicated.
If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

The following are not changes in accounting policies:

(a) the adoption of an accounting policy for events which differ in substance from previously occurring events e.g. introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement; and
(b) the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial.

Change in Accounting Estimate:

The nature and amount of a change in an accounting estimate which has a material effect in the current period, or which is expected to have a material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.

The effect of a change in an accounting estimate should be classified using the same classification in the statement of profit and loss as was previously for the estimate.
For example, the effect of a change in an accounting estimate that was previously included as an extraordinary item is reported as an extraordinary item.

Clarifications:
(a) Change in accounting estimate does not bring the adjustment within the definitions of an extraordinary item or a prior period item.
(b) Sometimes, it is difficult to distinguish between a change in an accounting policy and a change in accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosures.
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