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Quick Reference on Accounting Standard (AS) 5

Download Quick Reference on Accounting Standard (AS) 5 Net Profit or Loss for the Period Prior Period Items and Changes in Accounting Policies

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.

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.

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.

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.

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; and
    • extraordinary items.

Extraordinary items – 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. Example, attachment of property of the enterprise, or an earthquake.

Profit or loss from ordinary activities – 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.

Prior period items – 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

  • 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.
  • Refer AS 1 for disclosures with respect to changes in accounting policies.

Changes in Accounting Estimates

  • Use of estimates is essential for preparation of financial statements. Estimates may have to be revised if changes occur regarding the circumstances on which the estimates were made or as a result of new information, more experience or subsequent developments.
  • The effect of a change in an accounting estimate should be included in the determination of net profit or loss in:
    • the period of the change, if the change affects the period only; or
    • the period of the change and future periods, if the change affects both.
  • 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 material effect in subsequent periods, should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.

Whenever it is difficult to distinguish between change in an accounting policy and change in an accounting estimate, the change is treated as change in an accounting estimate.

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