Contents
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OBJECTIVE
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|
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SCOPE
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Paragraphs 1-3
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DEFINITIONS
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4
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NET
PROFIT OR LOSS FOR THE PERIOD
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5-27
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Extraordinary
Items
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8-11
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Profit
or Loss from Ordinary Activities
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12-14
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Prior
Period Items
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15-19
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Changes
in Accounting Estimates
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20-27
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CHANGES
IN ACCOUNTING POLICIES
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28-33
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Net Profit or Loss for
the Period 85
Accounting
Standard (AS) 5
Net
Profit or Loss for the Period,
Prior
Period Items and
Changes
in Accounting Policies
(This Accounting Standard
includes paragraphs set in bold italic type and plain type, which
have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of its
objective and the General Instructions contained in part A of the Annexure to
the Notification.)
Objective
The objective of this Standard is to prescribe the
classification and disclosure of certain items in the statement of profit and
loss so that all enterprises prepare and present such a statement on a uniform
basis. This enhances the comparability of the financial statements of an
enterprise over time and with the financial statements of other enterprises.
Accordingly, this Standard requires the classification and disclosure of
extraordinary and prior period items, and the disclosure of certain items within
profit or loss from ordinary activities. It also specifies the accounting
treatment for changes in accounting estimates and the disclosures to be made in
the financial statements regarding changes in accounting policies.
Scope
1.
This
Standard should be applied by an enterprise in presenting profit or loss from
ordinary activities, extraordinary items and prior period items in the
statement of profit and loss, in accounting for changes in accounting
estimates, and in disclosure of changes in accounting policies.
2.
This Standard deals with,
among other matters, the disclosure of certain items of net profit or loss for
the period. These disclosures are made in addition to any other disclosures
required by other Accounting Standards.
3.
This Standard does not deal with the tax implications of
extraordinary
50 AS 5
items, prior period items,
changes in accounting estimates, and changes in accounting policies for which
appropriate adjustments will have to be made depending on the circumstances.
Definitions
4. The following terms are
used in this Standard with the meanings specified:
4.1 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.
4.2 Extraordinary items
are income or expenses 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.
4.3 Prior period items are income or expenses which arise in the current period as a
result of errors or omissions in the preparation of the financial statements of
one or more prior periods.
4.4 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.
Net
Profit or Loss for the Period
5.
All items
of income and expense which are recognised 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.
6.
Normally, all items of
income and expense which are recognised in a period are included in the
determination of the net profit or loss for the period. This includes
extraordinary items and the effects of changes in accounting estimates.
7. 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:
Net Profit or Loss for
the Period 51
(a)
profit or loss from
ordinary activities; and
(b)
extraordinary items.
Extraordinary
Items
8.
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.
9.
Virtually all items of
income and expense included in the determination of net profit or loss for the
period arise in the course of the ordinary activities
of the
enterprise. Therefore, only on rare occasions does an event or transaction give
rise to an extraordinary item.
10.
Whether an event or
transaction is clearly distinct from the ordinary activities of the enterprise
is determined by the nature of the event or transaction in relation to the
business ordinarily carried on by the enterprise rather than by the frequency
with which such events are expected to occur. Therefore, an event or
transaction may be extraordinary for one enterprise but not so for another
enterprise because of the differences between their respective ordinary
activities. For example, losses sustained as a result of an earthquake may
qualify as an extraordinary item for many enterprises. However, claims from
policyholders arising from an earthquake do not qualify as an extraordinary
item for an insurance enterprise that insures against such risks.
11. Examples of events or transactions that generally give rise to
extraordinary items for most enterprises are:
– attachment of
property of the enterprise; or
– an earthquake.
Profit
or Loss from Ordinary Activities
12. 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.
13.
Although the items of income and expense described in paragraph
12
52 AS 5
are not extraordinary items, the nature and amount of such items
may be relevant to users of financial statements in understanding the financial
position and performance of an enterprise and in making projections about
financial position and performance. Disclosure of such information is sometimes
made
14. Circumstances which
may give rise to the separate disclosure of items of income and expense in
accordance with paragraph 12 include:
(a) the write-down of inventories to net realisable value as well as
the reversal of such write-downs;
(b) a restructuring of the activities of an enterprise and the
reversal of any provisions for the costs of restructuring;
(c)
disposals of items of fixed assets;
(d)
disposals of long-term investments;
(e)
legislative changes having retrospective application;
(f)
litigation settlements; and
(g)
other reversals of provisions.
Prior
Period Items
15. 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.
16.
The term ‘prior period
items’, as defined in this Standard, refers only to income or expenses which
arise in the current period as a result of errors or
omissions in the preparation of the financial statements of one
or more prior periods. The term does not include other adjustments necessitated
by circumstances, which though related to prior periods, are determined in the
current period, e.g., arrears payable to workers as a result of revision of
wages with retrospective effect during the current period.
17. Errors in the preparation of the financial statements of one
or more prior periods may be discovered in the current period. Errors may occur
as a result of mathematical mistakes, mistakes in applying accounting policies,
misinterpretation of facts, or oversight.
Net Profit or Loss for
the Period 53
18. Prior period items are generally infrequent in nature and
can be distinguished from changes in accounting estimates. Accounting estimates
by their nature are approximations that may need revision as additional
information becomes known. For example, income or expense recognised on the
outcome of a contingency which previously could not be estimated reliably does
not constitute a prior period item.
19. Prior perio d items are normally included in the
determination of net profit or loss for the current period. An alternative
approach is to show such items in the statement of profit and loss after
determination of current net profit or loss. In either case, the objective is
to indicate the effect of such items on the current profit or loss.
Changes
in Accounting Estimates
20. As a result of the uncertainties inherent in business
activities, many financial statement items cannot be measured with precision
but can only be estimated. The estimation process involves judgments based on
the latest information available. Estimates may be required, for example, of
bad debts, inventory obsolescence or the useful lives of depreciable assets.
The use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability.
21.
An estimate may have to be
revised if changes occur regarding the circumstances on which the estimate was
based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the
adjustment within the definitions of an extraordinary item or a prior period
item.
22.
Sometimes, it is difficult
to distinguish between a change in an accounting policy and a change in an
accounting estimate. In such cases, the change is
treated
as a change in an accounting estimate, with appropriate disclosure.
23. The e ffect of a change in an accounting estimate should be
included in the determination of net profit or loss in:
(a) the period of the change, if the change affects the period only;
or
(b)
the
period of the change and future periods, if the change affects both.
54 AS 5
24. A change in an accounting estimate may affect the current
period only or both the current period and future periods. For example, a
change in the estimate of the amount of bad debts is recognised immediately and
therefore affects only the current period. However, a change in the estimated
useful life of a depreciable asset affects the depreciation in the current
period and in each period during the remaining useful life of the asset. 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 in future periods.
25. 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 used previously for the estimate.
26. To ensure the comparability of financial statements of
different periods, the effect of a change in an accounting estimate which was
previously included in the profit or loss from ordinary activities is included
in that component of net profit or loss. The effect of a change in an
accounting estimate that was previously included as an extraordinary item is
reported as an extraordinary item.
27. The nature and amount of a chang e 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.
Changes
in Accounting Policies
28. Users need to be able to compare the financial statements of
an enterprise over a period of time in order to identify trends in its
financial position, performance and cash flows. Therefore, the same accounting
policies are normally adopted for similar events or transactions in each
period.
29. A change in an accounting policy should be made only if the
adoption of a different accounting policy is required by statute or for
compliance with an accounting standard or if it is considered that the change
would result in a more appropriate presentation of the financial statements of
the enterprise.
30. A more appropriate presentation of events or transactions in
the financial statements occurs when the new accounting policy results in more
relevant
Net Profit or Loss for
the Period 55
or reliable information about the financial position,
performance or cash flows of the enterprise.
31.
The following are not changes in accounting policies :
(a) the adoption of an accounting policy for events or transactions
that differ in substance from previously occurring events or transactions,
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.
32. Any change in an accounting policy which has a material
effect should be disclosed. The impact of, and the adjustments resulting from,
such change, if material, should be shown in the financial statements of the
period in which such change is made, to reflect the effect of such change.
Where the effect of such change is not ascertainable, wholly or
in part, 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 a
material effect in later periods, the fact of such change should
33. A change in accounting policy consequent upon the adoption
of an Accounting Standard should be accounted for in accordance with the
specific transitional provisions, if any, contained in that Accounting
Standard. However, disclosures required by paragraph 32 of this Standard should
be made unless the transitional provisions of any other Accounting Standard
require alternative disclosures in this regard.
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