SUMMARY OF AS-5
NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS & CHANGES IN ACCOUNTING POLICY
Profit or Loss of the entity
Profit or Loss of an entity arises from:
- a) Ordinary Items
- b) Extra-Ordinary Items
- c) Prior-Period Items
- d) Change in Accounting Estimate
- e) Change in Accounting Policy
Ordinary Items:
It means income & expenses arising from principal revenue generating items. These items arise due to conduct of business. These items do not require separate disclosure.
However certain items should be disclosed because of the nature, incidence, or size.
Examples:
ü Decline in value of inventories
ü Profit/Loss on sale of Fixed Assets/Investment
ü Litigation Settlement Expense/Income
ü Legal Expenses relating to litigation or law changes
ü Cancellation of provisions considered material or Reversal for re-structuring.
Extra-ordinary Items:
These are income or expenses which are distinct in nature & hence not frequent. These are not ordinary items & do not arise due to conduct of business. These items require separate disclosures in such a way that impact on total profits can be seen.
Prior-Period Items:
These are income or expenses which relate to earlier years, not recognized in earlier years due to error or omission. These items require separate disclosure & should be shown in such a way that impact on profit can be seen.
Profits before extra-ordinary items & prior-period items xxx
+ Extra-ordinary items & Prior-period items xxx
Profit before tax xxx
Change in Accounting Estimate:
Change in accounting estimate means value/figure of estimate used in accounting. If such figure is changed, then such change is called as “Change in Accounting Estimate”.
Example:
Provision for doubtful debts was 3% on debtors in previous year. In the current year, it has been increased to 4%.
Such change should be disclosed if it is material in nature.
Change in Accounting Policy:
It means accounting treatment or method of preparation/presentation have been changed. Whenever such changes are made, then disclose:-
- i) Old Policy
- ii) New Policy
iii) Reason of Change in Policy
- iv) Effect of Change in Policy
Note:
Reasons of Changes (As per AS-1)
ü Better Presentation
ü Compliance with Law
ü Compliance with AS