Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

1. Accounting Standard - 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies By: CA. ANIL MATHUR Jaipur

2. Uniformity in certain item in P & L of all enterprises. • To provide classification & disclosure for such purpose • To enhance the comparability of financial statements of enterprises over a period and with other enterprises. • Classification & disclosure of extraordinary & prior period items • Disclosure of Profit / loss from ordinary activities • Specify accounting treatment for changes in accounting estimates & disclosure in financial statements regarding changes in accounting policies. OBJECTIVE

3. It incidentally also deals with # extraordinary items # changes in accounting estimates (However, does not deal with tax implication of other items )

4. To be applied in presenting P & L for • Ordinary activity • Extraordinary items • Prior period items • Accounting for changes in accounting estimates • Disclosure of changes in accounting policies. • Disclosure is in addition to other disclosure by any AS • Tax implication not consider SCOPE

5. DEFINITIONS ORDINARY ACTIVITIES Undertaken as part of Business & other Related/ incidental Activities Or other activity arising There from EXTRAORDINARY ITEMS Income or expenses distinct from Ordinary activities, which are not expected to recur frequently PRIOR PERIOD ITEMS Which arise in current period as a result of errors or omissions in the preparation or F/S of one or more prior periods ACCOUNTING POLICIES Specific principles & methods adopted by enterprises for preparation of F/S

6. All items of income / expense recognized in a period should be included in determination of ‘ net profit….’ unless otherwise required / permitted by an AS DISCLOSE ….. On the face of statement of profit and loss : - profit / loss from ordinary activities - extraordinary items Each extraordinary items: nature / amount of each item Ordinary items : only if significant in size nature & incidence Prior period items : nature, amount Net Profit or Loss for the Period

7. Nature of event or transaction different from ordinary / regular transaction of enterprises. • Separate disclosure in P& L to reflect the impact in current profit / loss • Example :- --- loss due to natural calamity --- Attachment of property Determination of extraordinary items

8. ORDINARY ACTIVITY Better understanding of performance on account of nature/size/ incidence of item May be disclosed by way of notes also Example of separate disclosure :- * write- down of inventory * restructuring of activities * disposal of fixed assets * disposal of long term investments * legislative changes with retrospective * litigation settlements * reversal of provision

9. PRIOR PERIOD ITEMS Income / expenses arising in current period as a result of error or omission in preparation of financial statements of earlier period Does not include adjustment of circumstances determined in current period though related earlier ex. arrear of wages Distinguishable from accounting estimate Disclosure may be above / below the line of profit / loss

10. Why required? Inherent uncertainties in business activities Revision Change in circumstances, new information, more experience, subsequent developments Effect of change To be included in Profit/Loss of period Of change & future period (if affected) Classification Same as was used previously for the estimate Disclosure If material effect : In year of change : nature and amount for the year or subsequent periods .If quantification not practical -fact to be disclosed. Accounting Estimate

11. SHOULD BE MADE ONLY IF Required by statute  For compliance with AS  Change results in more appropriate presentation of F/s FOLLOWING ARE NOT CHANGES IN POLICY  Event / transaction that differ in substance  Event / transaction which previously were Nil or immaterial. Changes in Accounting Policies

12. For changes having material effect  Impact, if material, should be shown in F/S  If not ascertainable, fact must be mentioned  If change has no material effect for current period but expected to be in later period , fact of change to be disclosed in the period in which change adopted  Change due to adaptation of an AS shall be as per specific transitional provision of the AS.  Normal disclosure shall be made unless transitional provision of AS require alternate disclosure . Changes in Accounting Policies….contd.