AS 5 - Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Purpose: 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.

Definitions

• 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.
• 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.

Explanations

The net profit or loss for the period comprises

1. Profit or loss from ordinary activities and
2. Extraordinary items

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.

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 nature and amount of prior period items should be separately disclosed in the profit and loss statement in such a way that their impact on the current profit or loss can be perceived. Prior period item does not include other adjustments necessitated by circumstances, even if they relate to prior periods. e.g. arrears payable to workers as a result of revision of wages with retrospective effect during the current period.

Accounting Estimates are made for many items of the financial statement, which cannot be measured with precision and are also revised if the circumstances on which the estimates were based changes. 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:

1. if the change affect the period only, or
2. the period of the change and future periods, if the change affects both. If it is impracticable to quantify the amount, this fact should be disclosed.

Change in Accounting Policy: should be done 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.

Disclosures

The effect of any change in an accounting policy if it has a material effect should be disclosed in the financial statements of the period in which such change is made. If the effect of such change is not ascertainable, wholly or in part, the fact should be disclosed or if the change is expected to have a material effect in later periods, still the fact of such change should be disclosed in the period of change.