Accounting Standard (AS) 5, Net Profit or Loss for The Period, Prior Period Items and Changes in Accounting Policies
The objective of AS 5 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.
AS 5 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.
This Statement does not deal with the tax implications of extraordinary 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.
Net Profit or Loss for the Period
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.
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:
Profit or loss from ordinary activities
- 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.
- For example profit on sale of merchandise, loss on sale of unsold inventory at the end of the season.
- 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.
- 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.
- Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
- attachment of property of the enterprise
- an earthquake
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.
- The write-down of inventories to net realisable value as well as the reversal of such write-downs
- A restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring.
- Disposals of items of fixed assets
- Disposals of long-term investments
- Legislative changes having retrospective application Litigation settlements
- Other reversals of provisions
Prior Period Items
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.
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 Estimates
An estimate may have to be revised if changes occur in the circumstances based on which the estimate was made, or as a result of new information, more experience or subsequent developments.
Accounting estimates by their nature are approximations that may need revision as additional information becomes known.
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.
The effect of a change in an accounting estimate that was previously included as an extraordinary item is reported as an extraordinary item.
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.
Changes in Accounting Policies
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.
Accounting Policies can be changed only:
- when the adoption of a different accounting policy is required by statute; or
- for compliance with an Accounting Standard; or
- when it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.
The following are not changes in accounting policies:
- 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;
- The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial.
Any change in an accounting policy which has a material effect should be disclosed.
Example of various disclosures under AS-5
1. change in depreciation method: change in accounting policy
2. useful life reduced but no change: change in accounting estimate in depreciation method
3. arithmetical error in depreciation computation: prior period item
4. due to oversight depreciation incorrectly computed: prior period item
5. fixed asset destroyed in earth quake: extraordinary item
6. major disposal of fixed items: ordinary activity (exceptional item)
7. maintenance provision no longer required since major part of the assets no longer exist: the write-back. if material should be disclosed as exceptional item and not as extraordinary’ or prior period item.