EXPOSURE DRAFT
Accounting Standard for Local Bodies (ASLB) 3
Accounting Policies, Changes in Accounting
Estimates and Errors
(Based on corresponding IPSAS 3)
(Last date of comments: June 10, 2014)
Issued by
The Committee on Accounting Standards for Local Bodies
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
Exposure Draft
Accounting Standard for Local Bodies (ASLB)
Accounting Policies, Changes in Accounting Estimates
and Errors
Contents
Paragraphs
Objective ..................................................................................................... 12
Scope .......................................................................................................... 36
Definitions .................................................................................................. 78
Materiality ......................................................................................... 8
Accounting Policies .................................................................................... 936
Selection and Application of Accounting Policies ............................. 915
Consistency of Accounting Policies .................................................. 16
Changes in Accounting Policies ....................................................... 1736
Applying Changes in Accounting Policies .......................... 2432
Retrospective Application .................................... 27
Limitations on Retrospective Application ...... 2832
Disclosure ............................................................................... 3336
Changes in Accounting Estimates .............................................................. 3745
Disclosure .......................................................................................... 4445
Errors .......................................................................................................... 4654
Disclosure of Prior Period Errors ....................................................... 54
Impracticability in Respect of Retrospective Application ............................ 5558
Effective Date ..................................................................................... 5960
Appendices:
Annexure 1: Difference with corresponding IPSAS 3, `Accounting Policies, Changes in
Accounting Estimates and Errors'
Annexure 2: Difference with corresponding existing AS 5, `Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies'
Exposure Draft
Accounting Standard for Local Bodies (ASLB) 3
Accounting Policies, Changes in Accounting Estimates and Errors
INVITATION TO COMMENTS
The Committee on Accounting Standards for Local Bodies of the Institute of Chartered
Accountants of India invites comments on any aspect of this Exposure Draft of the
Accounting Standard for Local Bodies (ASLB) 3, `Accounting Policies, Changes in
Accounting Estimates and Errors'. Comments are most helpful if they indicate the
specific paragraph or group of paragraphs to which they relate, contain a clear rationale
and, where applicable, provide a suggestion for alternative wording.
Comments should be submitted in writing to the Secretary, Committee on Accounting
Standards for Local Bodies, The Institute of Chartered Accountants of India, ICAI
Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002, so as to be
received not later than June 10, 2014. Comments can also be sent by e-mail at
caslb@icai.in.
Exposure Draft
Accounting Standard for Local Bodies (ASLB) 3
Accounting Policies, Changes in Accounting Estimates and Errors
(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 Preface to
the Accounting Standards for Local Bodies1)
The Accounting Standard for Local Bodies (ASLB) 3, `Accounting Policies, Changes in
Accounting Estimates and Errors', issued by the Council of the Institute of Chartered
Accountants of India, will be recommendatory in nature in the initial years for use by the
local bodies. This Standard will be mandatory for Local Bodies in a State from the date
specified in this regard by the State Government concerned2.
The following is the text of the Accounting Standard for Local Bodies
Objective
1. The objective of this Standard is to prescribe the criteria for selecting and changing
accounting policies, together with the (a) accounting treatment and disclosure of
changes in accounting policies, (b) changes in accounting estimates, and (c) the
corrections of errors. This Standard is intended to enhance the relevance and
reliability of an entity's financial statements, and the comparability of those
financial statements over time and with the financial statements of other entities.
1
Attention is specifically drawn to paragraph 4.2 of the `Preface to the Accounting Standards for Local Bodies',
according to which Accounting Standards are intended to apply only to items which are material.
2
Reference may be made to the paragraph 7.1 of the `Preface to the Accounting Standards for Local Bodies'
providing the discussion on the compliance with the Accounting Standards for Local Bodies.
2. Disclosure requirements for accounting policies, except those for changes in
accounting policies, are set out in ASLB 1, 'Presentation of Financial Statements'.
Scope
3. This Standard should be applied in selecting and applying accounting
policies, and accounting for changes in accounting policies, changes in
accounting estimates, and corrections of prior period errors.
4. [Refer to Appendix 1]
5. This Standard applies to entities described as local bodies in the Preface to
the Accounting Standards for Local Bodies3.
6. [Refer to Appendix 1]
Definitions
7. The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules,
and practices applied by an entity in preparing and presenting financial
statements.
A change in accounting estimate is an adjustment of the carrying amount of
an asset or a liability, or the amount of the periodic consumption of an asset,
that results from the assessment of the present status of, and expected
future benefits and obligations associated with, assets and liabilities.
Changes in accounting estimates result from new information or new
developments and, accordingly, are not correction of errors.
Impracticable Applying a requirement is impracticable when the entity
cannot apply it after making every reasonable effort to do so. For a particular
prior period, it is impracticable to apply a change in an accounting policy
retrospectively if:
(a) The effects of the retrospective application is not determinable
(b) The retrospective application requires assumptions about what
management's intent would have been in that period; or
(c) The retrospective application requires significant estimates of
amounts and it is impossible to distinguish objectively information
about those estimates that:
(i) Provide evidence of circumstances that existed on the date(s)
as at which those amounts are to be recognised, measured, or
disclosed; and
(ii) Would have been available when the financial statements for
that prior period were authorised for issue from other
information.
Prior period errors are omissions from, and misstatements in, the entity's
financial statements for one or more prior periods arising from a failure to
use, or a misuse of, reliable information that:
(a) was available when financial statements for those periods were
authorised for issue; and
3
Refer paragraph 1.3 of the `Preface to the Accounting Standards for Local Bodies'.
(b) could reasonably be expected to have been obtained and taken
into account in the preparation and presentation of those financial
statements.
Such errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts, and
fraud.
Prospective application of a change in accounting policy, and of recognising
the effect of the change in the accounting estimate, respectively, are:
a. applying the new accounting policy to transactions, other events,
and conditions occurring after the date as at which the policy is
changed;
b. recognising the effect of the change in the accounting estimate in
the current and future periods affected by the change.
Retrospective application is applying a new accounting policy to
transactions, other events, and conditions as if that policy had always been
applied.
Material Omissions or misstatements of items are material if they could, individually
or collectively, influence the economic decisions that users make on the basis of
the financial statements. Materiality depends on the size and nature of the omission
or misstatement judged in the surrounding circumstances. The size or nature of the
item, or a combination of both, could be the determining factor.
Materiality
8. Assessing whether an omission or misstatement could influence decisions of users,
and so be material, requires consideration of the characteristics of those users. Users
are assumed to have a reasonable knowledge of the local bodies and economic
activities and accounting and a willingness to study the information with reasonable
diligence. Therefore, the assessment needs to take into account how users with such
attributes could reasonably be expected to be influenced in making and evaluating
decisions.
Accounting Policies
Selection and Application of Accounting Policies
9. When an ASLB specifically applies to a transaction, other event or condition,
the accounting policy or policies applied to that item should be determined by
applying the Standard.
10. ASLBs set out accounting policies that result in financial statements containing
relevant and reliable information about the transactions, other events, and conditions
to which they apply. Those policies need not be applied when the effect of applying
them is immaterial. However, it is inappropriate to make, or leave uncorrected,
immaterial departures from ASLBs to achieve a particular presentation of an entity's
financial position, financial performance, or cash flows.
11. ASLBs are accompanied by guidance to assist entities in applying their requirements.
All such guidance states whether it is an integral part of ASLBs. Guidance that is an
integral part of ASLBs is mandatory. Guidance that is not an integral part of ASLBs
does not contain requirements for financial statements.
12. In the absence of an ASLB that specifically applies to a transaction, other
event, or condition, management shall use its judgment in developing and
applying an accounting policy that results in information that is:
(a) Relevant to the decision-making needs of users; and
(b) Reliable, in that the financial statements:
i) Represent faithfully the financial position, financial
performance, and cash flows of the entity;
ii) Reflect the economic substance of transactions, other events,
and conditions and not merely the legal form;
iii) Are neutral, i.e., free from bias;
iv) Are prudent; and
v) Are complete in all material respects.
13. Paragraph 12 requires the development of accounting policies to ensure that the
financial statements provide information that meets a number of qualitative
characteristics.
14. In making the judgment, described in paragraph 12, management should refer
to, and consider the applicability of, the following sources in descending
order:
(a) The requirements in ASLBs dealing with similar and related issues;
and
(b) The definitions, recognition and measurement criteria for assets,
liabilities, revenue and expenses described in other ASLBs.
15. In making the judgment described in paragraph 12, management may also
consider the following in descending order (a) the most recent
pronouncements of the Institute of Chartered Accountants of India e.g.,
Accounting Standards and Guidance Notes on Accounting. Such
pronouncements also include `Framework for the Preparation and Presentation
of Financial Statements' (b) International Public Sector Accounting Standards
issued by International Public Sector Accounting Standards Board, and (c)
accepted accounting practices in Local Bodies or in private sector, but only to
the extent that these do not conflict with the sources in paragraph 14.
Consistency of Accounting Policies
16. An entity should select and apply its accounting policies consistently for
similar transactions, other events, and conditions, unless an ASLB
specifically requires or permits categorisation of items for which different
policies may be appropriate. If an ASLB requires or permits such
categorisation, an appropriate accounting policy should be selected and
applied consistently to each category.
Changes in Accounting Policies
17. An entity should change an accounting policy only if the change:
(a) is required by an ASLB; or
(b) results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events,
and conditions on the entity's financial position, financial
performance, or cash flows; or.
(c) if the adoption of the different accounting policy is required by a
statute.
18. Users of financial statements need to be able to compare the financial statements
of an entity over time to identify trends in its financial position, performance, and
cash flows. Therefore, the same accounting policies are applied within each period
and from one period to the next, unless a change in accounting policy meets one
of the criteria in paragraph 17.
19. A change from one basis of accounting to another basis of accounting is a
change in accounting policy.
20. A change in the accounting treatment, recognition, or measurement of a
transaction, event, or condition within a basis of accounting is regarded as a
change in accounting policy.
21. The following are not changes in accounting policies:
(a) The application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring; and
(b) The application of a new accounting policy for transactions, other events,
or conditions that did not occur previously or that were immaterial.
22. The initial application of a policy to revalue assets in accordance with ASLB
5, `Property, Plant and Equipment', is a change in accounting policy to be
dealt with as a revaluation in accordance with ASLB 5, `Property, Plant and
Equipment', rather than in accordance with this Standard.
23. Paragraphs 24-36 do not apply to the change in accounting policy described in
paragraph 22.
Applying Changes in Accounting Policies
24. Subject to paragraph 28:
(a) An entity should account for a change in accounting policy resulting from
the initial application of an ASLB in accordance with the specific
transitional provisions, if any, in that Standard; and
(b) When an entity changes an accounting policy upon initial application of an
ASLB that does not include specific transitional provisions applying to that
change, or change an accounting policy voluntarily, it should apply the
change retrospectively.
25. For the purpose of this Standard, early application of an ASLB, where permitted,
is not a voluntary change in accounting policy.
26. In the absence of an ASLB that specifically applies to a transaction, other event,
or condition, management may, in accordance with paragraphs 14 and 15 apply
an accounting policy from (a) the most recent pronouncements of the Institute of
Chartered Accountants of India e.g., Accounting Standards and Guidance Notes
on Accounting. Such pronouncements also include `Framework for the
Preparation and Presentation of Financial Statements' and (b) International Public
Sector Accounting Standards issued by International Public Sector Accounting
Standards Board. and (c) accepted accounting practices in Local Bodies or in
private sector, but only to the extent that these do not conflict with the sources in
paragraph 14.
Retrospective Application
27. Subject to paragraph 28, when a change in accounting policy is applied
retrospectively in accordance with paragraph 24(a) or (b), the entity should
adjust the opening balance of each affected component of equity for the
current period. Usually, the adjustment is made in the opening balance of
accumulated surplus or deficit. However, the adjustment may be made to
the another component of equity (for example, to comply with an ASLB) as
if the new accounting policy had always been applied.
Limitations on Retrospective Application
28. When retrospective application is required by paragraph 24(a) or (b), a
change in accounting policy should be applied retrospectively, except to
the extent that it is impracticable to determine the period-specific effect or
cumulative effect of the change.
29. When it is impracticable to determine the period-specific effects of
changing an accounting policy, the entity should apply the new accounting
policy to the carrying amounts of assets and liabilities as at the beginning
of the earliest period for which retrospective application is practicable,
which may be the current period, and should make a corresponding
adjustment to the opening balance of each affected component of equity for
current period.
30. When it is impracticable to determine the cumulative effect, at the
beginning of the current period, of applying a new accounting policy to all
prior periods, the entity should apply the new accounting policy
prospectively from the earliest date practicable .
31. [Refer to Appendix-1]
32. When it is impracticable for an entity to apply a new accounting policy
retrospectively, because it cannot determine the cumulative effect of applying the
policy to all prior periods , the entity, in accordance with paragraph 30, applies the
new accounting policy prospectively from the start of earliest period practicable. It
therefore disregards the portion of cumulative adjustment to assets, liabilities, and
equity arising from before that date. Changing an accounting policy is permitted
even if it is impracticable to apply the policy prospectively for any prior period.
Paragraphs 56-58 provide guidance when it is impracticable to apply a new
accounting policy to one or more prior periods.
Disclosure
33. When initial application of an ASLB (a) has an effect on the current
period or any prior period, (b) would have such an effect, except that it
is impracticable to determine the amount of the adjustment, or (c)
might have an effect on future periods, an entity should disclose:
(a) The title of the Standard;
(b) When applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
(c) The nature of the change in accounting policy;
(d) When applicable, a description of the transitional provisions;
(e) When applicable, the transitional provisions that might have an effect
on future periods;
(f) For the current period the amount of the adjustment for each financial
statement line item affected;
(g) The amount of the adjustment relating to periods before those
presented, to the extent practicable;
(h) If retrospective application required by paragraph 24(a) or (b) is
impracticable for a particular prior period, , the circumstances that led
to the existence of that condition and a description of how and from
when the change in accounting policy has been applied; and
Financial statements of subsequent periods need not repeat these disclosures.
34. When a voluntary change in accounting policy (a) has an effect on the
current period or any prior period, (b) would have an effect on that
period, except that it is impracticable to determine the amount of the
adjustment or (c) might have an effect on future periods, an entity
should disclose:
(i) The nature of the change in accounting policy;
(ii) The reasons why applying the new accounting policy provides
reliable and more relevant information;
(iii)For the current period, to the extent practicable, the amount of
the adjustment for each financial statement line item affected;
(iv)The amount of the adjustment relating to periods before those
presented, to the extent practicable; and
(v) If retrospective application is impracticable for a particular prior
period, , the circumstances that led to the existence of that
condition and a description of how and from when the change
in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these disclosures.
35. [ Refer to appendix 1]
36. [Refer to Appendix 1]
Changes in Accounting Estimates
37. As a result of the uncertainties inherent in delivering services, conducting
trading, or other activities, many items in financial statements cannot be
measured with precision but can only be estimated. Estimation involves
judgments based on the latest available, reliable information. For example,
estimates may be required of:
(a) Tax revenue due to government;
(b) Bad debts arising from uncollected taxes;
(c) Inventory obsolescence;
(d) The fair value of financial assets or financial liabilities, where applicable;
and
(e) The useful lives of, or expected pattern of consumption of future
economic benefits or service potential embodied in depreciable assets,
or the percentage completion of road construction.
38. The use of reasonable estimates is an essential part of the preparation of
financial statements and does not undermine their reliability.
39. An estimate may need revision if changes occur in the circumstances on
which the estimate was based or as a result of new information or more
experience. By its nature, the revision of an estimate does not relate to prior
periods and is not the correction of an error.
40. A change in the measurement basis applied is a change in an accounting
policy, and is not a change in an accounting estimate. When it is difficult to
distinguish a change in an accounting policy from a change in an
accounting estimate, the change is treated as a change in an accounting
estimate.
41. The effect of a change in an accounting estimate, other than a change
to which paragraph 42 applies, should be recognised prospectively by
including it in surplus or deficit 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.
42. To the extent that a change in an accounting estimate gives rise to
changes in assets and liabilities, or relates to an item of equity, it
should be recognised by adjusting the carrying amount of the related
asset, liability, or /equity item in the period of change.
43. Prospective recognition of the effect of a change in an accounting estimate
means that the change is applied to transactions, other events, and
conditions from the date of the change in estimate. A change in an
accounting estimate may affect only the current period's surplus or deficit,
or the surplus or deficit of both the current period and future periods. For
example, a change in the estimate of the amount of bad debts affects only
the current period's surplus or deficit, and therefore is recognised in the
current period. However, a change in the estimated useful life of, or the
expected pattern of consumption of economic benefits or service potential
embodied in, a depreciable asset affects the depreciation expense for the
current period and for each future period during the asset's remaining useful
life. In both cases, the effect of the change relating to the current period is
recognised as revenue or expense in the current period. The effect, if any,
on future periods is recognised in future periods.
Disclosure
44. An entity should disclose the nature and amount of a change in an
accounting estimate that has an effect in the current period or is
expected to have an effect on future periods, except for the disclosure
of the effect on future periods when it is impracticable to estimate that
effect.
45. If the amount of the effect in future periods is not disclosed because
estimating it is impracticable, the entity should disclose that fact.
Errors
46. Errors can arise in respect of the recognition, measurement, presentation,
or disclosure of elements of financial statements. Financial statements do
not comply with ASLB if they contain either material errors, or immaterial
errors made intentionally to achieve a particular presentation of an entity's
financial position, financial performance, or cash flows. Potential current
period errors discovered in that period are corrected before the financial
statements are authorised for issue. However, material errors are
sometimes not discovered until a subsequent period.
47. An entity should correct material prior period errors retrospectively in
the first set of financial statements authorised for issue after their
discovery by adjusting the opening balance of the assets, liabilities
and the equity for the current period.
Limitations on correcting errors retrospectively
48. [Refer to Appendix-1]
49. [Refer to Appendix-1]
50. When it is impracticable to determine the cumulative effect, at the
beginning of the current period, of an error on all prior periods, the
entity should correct prospectively from the earliest date practicable.
51. The correction of a prior period error is excluded from surplus or deficit for
the period in which the error is discovered.
52. When it is impracticable to determine the amount of an error (eg. mistake in
applying an accounting policy) for all prior period, the entity in accordance
with paragraph 50 corrects the error prospectively from the earliest date
practicable. It, therefore, disregards the portion of the cumulative
adjustment in respect of assets, liabilities and equity arising before that
date. Paragraphs 55-58 provide guidance on when it is impracticable to
correct an error for one or more prior periods.
53. Corrections of errors are distinguished from changes in accounting
estimates. Accounting estimates by their nature are approximations that
may need revision as additional information becomes known. For example,
the gain or loss recognised on the outcome of a contingency is not the
correction of an error.
Disclosure of Prior Period Errors
54. In applying paragraph 47, an entity should disclose the following:
(a) The nature of the prior period error;
(b) For the current period, to the extent practicable, the amount of the
correction for each financial statement line item affected ;
(c) The amount of the correction at the beginning of the current period.
Financial statements of subsequent periods need not repeat these
disclosures beyond.
Impracticability in Respect of Retrospective Application
55. In some circumstances, it is impracticable to apply retrospectively a change
in accounting policy or correct a prior period error. For example, data may
not have been collected in the prior period(s) in a way that allows either
retrospective application of a new accounting policy (including, for the
purpose of paragraphs 56-58, its prospective application to prior periods) or
to correct a prior period error, and it may be impracticable to re-create the
information.
56. It is frequently necessary to make estimates in applying an accounting
policy to elements of financial statements recognised or disclosed in respect
of transactions, other events, or conditions. Estimation is inherently
subjective, and estimates may be developed after the reporting date.
Developing estimates is potentially more difficult when retrospectively
applying an accounting policy because of the longer period of time that
might have passed since the affected transaction, other event, or condition
occurred. However, the objective of estimates related to prior periods
remains the same as for estimates made in the current period, namely, for
the estimate to reflect the circumstances that existed when the transaction,
other event, or condition occurred.
57. Therefore, retrospectively applying a new accounting policy requires
distinguishing information that:
(a) Provides evidence of circumstances that existed on the date(s) as at
which the transaction, other event, or condition occurred; and
(b) Would have been available when the financial statements for that prior
period were authorised for issue; from other information. For some types
of estimates (e.g., an estimate of fair value not based on an observable
price or observable inputs), it is impracticable to distinguish these types
of information. When retrospective application require making a
significant estimate for which it is impossible to distinguish these two
types of information, it is impracticable to apply the new accounting
policy or correct the prior period error retrospectively.
58. Hindsight should not be used when applying a new accounting policy to, or
correcting amounts for, a prior period either in making assumptions about what
management's intentions would have been in a prior period or estimating the
amounts recognised, measured, or disclosed in a prior period. For example,
when an entity corrects a prior period error in calculating its liability for
employees' accumulated sick leave in accordance with ASLB on, `Employee
Benefits'4, it disregards information about an unusually severe influenza
season during the next period that becomes available after the financial
statements for the prior period were approved for issue. The fact that significant
estimates are frequently required does not prevent reliable adjustment or
correction of the error in the current period.
Effective Date
59. [Refer to Appendix-1]
59 A. [Refer to Appendix-1]
60. [Refer to Appendix-1]
4
The Accounting Standard for Local Bodies is under formulation.
Appendix 1
Note: This Appendix is not a part of the Accounting Standard for Local Bodies. The
purpose of this Appendix is only to bring out the major differences, if any, between
Accounting Standard for Local Bodies (ASLB) 3 and the corresponding International
Accounting Standard (IPSAS) 3, `Accounting Policies, Changes in Accounting Estimates
and Errors'.
COMPARISON WITH IPSAS 3, ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS'
1. Paragraph pertaining to exclusion of the tax effects of correction of prior period
errors have been deleted from the exposure draft ASLB 3 as the same is not
relevant for Local Bodies in India. However, paragraph number 4 has been
retained in order to maintain consistency with IPSAS 3.
2. Paragraph 6 of IPSAS 3 which provides that Government Business Enterprises
should use IFRSs, has been deleted, as it is not relevant for the exposure draft
ASLB 3, which is applicable to Local Bodies in India. However, paragraph number
has been retained in exposure draft ASLB 3 in order to maintain consistency with
ASLB 3.
3. The concept of retrospective restatement has been removed in the exposure draft
ASLB 3, as it would be difficult for the Local Bodies to apply since Local Bodies in
India are at very initial stage of implementing accrual accounting. Consequential
changes due to this change have also been made in the exposure draft.
4. Exposure draft ASLB 3 provides for an additional condition for change in
accounting policy by an entity ,i.e., an entity can change its accounting policy if it is
required by a statute, which is not there in IPSAS 3.
5. As per IPSAS 3, an entity shall correct the error by restating the comparative
amounts for prior period(s) presented in which the error occurred and if the error
occurred before the earliest prior period presented, restating the opening balance
of assets /equity for the earliest prior period presented whereas according to
exposure draft ASLB 3, an error is corrected in the current year by adjusting the
opening balance of assets, liabilities and the equity for the current period.
Consequential changes have been made. However, paragraph numbers have
been retained in order to maintain consistency with IPSAS 3.
6. Paragraphs relating to effective date have been removed as the exposure draft
ASLB 3 would become mandatory for Local Bodies in a state from the date
specified by the State Government concerned. Paragraph numbers have been
retained in order to maintain consistency with IPSAS 3.
Appendix 2
Note: This Appendix is not a part of the Accounting Standard for Local Bodies. The
purpose of this Appendix is only to bring out the major differences, if any, between
Accounting Standard for Local Bodies (ASLB) 3 and the existing Accounting Standard
(AS) 5, `Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies' issued by the Institute of Chartered Accountants o India.
COMPARISON WITH EXISTING AS 5, `NET PROFIT OR LOSS FOR THE
PERIOD, PRIOR PERIOD ITEMS AND CHANGES IN ACCOUNTING
POLICIES'
1. The objective of the existing AS 5 is to prescribe the classification and disclosure
of certain items in the statement of profit and loss for uniform preparation and
presentation of financial statements. The objective of exposure draft ASLB 3 is to
prescribe the criteria for selecting and changing accounting policies, together with
the accounting treatment and disclosure of changes in accounting policies,
changes in accounting estimates and corrections of errors.
2. The existing AS 5 restricts the definition of accounting policies to specific
accounting principles and the methods of applying those principles while
exposure draft ASLB 3 broadens the definition to include bases, conventions,
rules and practices (in addition to principles) applied by an entity in the
preparation and presentation of financial statements.
3. Exposure draft ASLB 3 specifically states that an entity shall select and apply its
accounting policies consistently for similar transactions, other events and
conditions, unless an ASLB specifically requires or permits categorisation of
items for which different policies may be appropriate. Existing AS 5 does not
specifically requires accounting policies to be consistent for similar transactions,
other events and conditions.
4. Certain additional definitions such as `change in accounting estimate',
`impracticable', `prospective application and `retrospective application' etc. have
been provided in exposure draft ASLB 3, whereas the same are not provided in
the existing AS 5.
5. Exposure draft ASLB 3 requires that changes in accounting policies should be
accounted for with retrospective effect subject to limited exceptions, viz., where it
is impracticable to determine the period specific effects or the cumulative effect of
applying a new accounting policy. On the other hand, the existing AS 5 does not
specify how change in accounting policy should be accounted for.
6. The existing AS 5 defines prior period items as incomes or expenses which arise
in the current period as a result of errors or omissions in the preparation of
financial statements of one or more prior periods. Exposure draft ASLB 3 uses
the term prior period errors and relates it to errors or omissions arising from a
failure to use or misuse of reliable information (in addition to mathematical
mistakes, mistakes in application of accounting policies etc.) that was available
when the financial statements of the prior periods were approved for issuance
and could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements. Exposure draft
ASLB 3 specifically states that errors include frauds, which is not covered in
existing AS 5.
7. Exposure draft ASLB 3 requires rectification of material prior period errors with
retrospective effect subject to limited exceptions viz., where it is impracticable to
determine the cumulative effect of an error on all prior periods. On the other hand,
existing AS 5 requires the rectification of prior period items with prospective
effect.
8. Keeping in view that ASLB 1, Presentation of Financial Statements, is silent about
the presentation of any items of income or expense as extraordinary items, this
standard does not deal with the same, which at present is dealt with by the
existing AS 5.
9. Disclosure requirements given in Exposure draft ASLB 3 are more detailed as
compared to the disclosure requirements given in the existing AS 5.
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