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Exposure Draft of Accounting Standard (AS) 5 (Revised) Accounting Policies, Changes in Accounting Estimates and Errors (Comments to be received by September 02, 2013).
August, 01st 2013
                   posure Draft
                 Exp      D

    A      ing Stan
    Accounti             AS) 5 (Re
                  ndard (A       evised)
    ounting Policies
 Acco                     ges in Accountin
                   s, Chang             ing
             E      es and Errors
             Estimate      E




     ast date fo
   (La               ments: Sep
               or Comm                        )
                              ptember 02, 2013)




                      ssued by
                     Is
            counting Standar
          Acc                      d
                           rds Board

     nstitute of
The In              tered Ac
              o Chart                     ndia
                           ccountants of In
            Accounting Standard (AS) 5 (revised)1

Accounting Policies, Changes in Accounting
Estimates and Errors
 
Following is the Exposure Draft of the revised Accounting Standard (AS) 5, Accounting
Policies, Changes in Accounting Estimates and Errors, issued by the Accounting
Standards Board of the Institute of Chartered Accountants of India, for comments. The
Board invites comments on any aspect of this Exposure Draft. 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, Accounting Standards Board,
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
September02, 2013. Comments can also be sent by e-mail at asb@icai.in.

(This Accounting Standard includes paragraphs set in bold type and plain type, which
have equal authority. Paragraphs in bold type indicate the main principles. This
Standard should be read in the context of the Preface to the Statements of Accounting
Standards issued by the Institute of Chartered Accountants of India).







Objective

1       The objective of this Standard 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. The Standard is intended to enhance the relevance
        and reliability of an enterprise's financial statements, and the comparability of
        those financial statements over time and with the financial statements of other
        enterprises.

2       Disclosure requirements for accounting policies, except those for changes in
        accounting policies, are set out in AS 1 (Revised) Presentation of Financial
        Statements.




1
 Appendix I to this revised AS 5 contains the objective of the revision of and comparison with the
existing AS 5.
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   The tax effects of corrections of prior period errors and of retrospective
    adjustments made to apply changes in accounting policies are accounted for and
    disclosed in accordance with AS 22. .

Definitions
5   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 enterprise in preparing and presenting financial
    statements.

    A change in accounting estimate is an adjustment of the carrying amount of
    an asset or a liability, 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 corrections of
    errors.

    Accounting Standards (ASs) are Standards prescribed under the Companies
    Act, or the Accounting Standards issued by the Institute of Chartered
    Accountants of India, whichever are applicable to the enterprise.

    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.

    Prior period errors are omissions from, and misstatements in, the financial
    statements of an enterprise for one or more prior periods arising from a
    failure to use, or misuse of, reliable information that:

    (a)    was available when financial statements for those periods were
           approved for issue; and

    (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.
    Retrospective application is applying a new accounting policy to
    transactions, other events and conditions as if that policy had always been
    applied.


    Impracticable Applying a requirement is impracticable when the enterprise
    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 are 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)    provides 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 approved for issue from other
                  information.

    Prospective application of a change in accounting policy and of recognising
    the effect of a change in an 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; and

    (b)    recognising the effect of the change in the accounting estimate in
           the current and future periods affected by the change.

6   Assessing whether an omission or misstatement could influence economic
    decisions of users, and so be material, requires consideration of the
    characteristics of those users. The Framework for the Preparation and
    Presentation of Financial Statements issued by the Institute of Chartered
    Accountants of India states in paragraph 26 that `It is assumed that users have a
    reasonable knowledge of business and economic activities and accounting and
    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 economic decisions.
    Accounting policies
       Selection and application of accounting policies
7      When an AS specifically applies to a transaction, other event or condition,
       the accounting policy or policies applied to that item should be determined
       by applying the AS.

8      ASs 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 ASs to achieve a particular
       presentation of an enterprise's financial position, financial performance or cash
       flows.

9      Some ASs may be accompanied by guidance to assist enterprises in applying
       their requirements. Where such guidance states that it is an integral part of the
       ASs, that guidance is mandatory. Guidance that is not an integral part of the ASs
       does not contain requirements for financial statements.

10     In the absence of an AS that specifically applies to a transaction, other
       event or condition, management should use its judgement in developing
       and applying an accounting policy that results in information that
       disreliable, in that the financial statements:

              (i)     are prudent, i.e., in view of the uncertainty attached to future
                      events, profits are not anticipated but recognised only when
                      realised though not necessarily in cash. Provision is made for
                      all known liabilities and losses even though the amount cannot
                      be determined with certainty and represents only a best
                      estimate in the light of available information;

              (ii)    reflect the economic substance of transactions, other events
                      and conditions, and not merely the legal form;

              (iii)   are complete in all material respects;

              (iv)     represent faithfully the financial position,           financial
                       performance and cash flows of the enterprise;

              (v)      are neutral, i.e., free from bias;


       While reliability is a factor for using judgement in developing and applying
       an accounting policy, the management should also consider that the
       resulting information should be relevant to the economic decision-making
       needs of users.
11   In making the judgement described in paragraph 10, management should
     refer to, and consider the applicability of, the following sources in
     descending order:

     (a)    the requirements in ASs dealing with similar and related issues; and

     (b)    the definitions, recognition criteria and measurement concepts for
            assets, liabilities, income and expenses in the Framework.

12   In making the judgement described in paragraph 10, management may also
     first consider the other pronouncements of the Institute of Chartered
     Accountants of India, and then the most recent pronouncements of
     International Accounting Standards Board and in absence thereof those of
     the other standard-setting bodies that use a similar conceptual framework
     to develop accounting standards, other accounting literature and accepted
     industry practices, to the extent that these do not conflict with the sources
     in paragraph 11.

     Consistency of accounting policies
13   An enterprise should select and apply its accounting policies consistently
     for similar transactions, other events and conditions, unless an AS
     specifically requires or permits categorisation of items for which different
     policies may be appropriate. If an AS requires or permits such
     categorisation, an appropriate accounting policy should be selected and
     applied consistently to each category.

     Changes in accounting policies
14   An enterprise should change an accounting policy only if the change:

     (a)    is required by an AS; or

     (b)    results in the financial statements providing reliable and more
            relevant information about the effects of transactions, other events
            or conditions on the enterprises's financial position, financial
            performance or cash flows.

     (c)   if the adoption of the different accounting policy is required by a
             statute

15   Users of financial statements need to be able to compare the financial
     statements of an enterprise over time to identify trends in its financial position,
     financial 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 14.
16      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 were immaterial.


      Applying changes in accounting policies

17    Subject to paragraph 21:

     (a) an enterprise should account for a change in accounting policy resulting
         from the initial application of an AS in accordance with the specific
         transitional provisions, if any, in that AS; and

     (b) when an enterprise changes an accounting policy upon initial application
         of an AS that does not include specific transitional provisions applying to
         that change, or changes an accounting policy voluntarily, it should apply
         the change retrospectively.

18    For the purpose of this Standard, early application of an AS, where permitted, is
      not a voluntary change in accounting policy.

19    In the absence of an AS that specifically applies to a transaction, other event or
      condition, management may, in accordance with paragraph 12, apply an
      accounting policy from the other pronouncements of the Institute of Chartered
      Accountants of India and then most recent pronouncements of International
      Accounting Standards Board and in absence thereof those of the other standard-
      setting bodies that use a similar conceptual framework to develop accounting
      standards. If, following an amendment of such a pronouncement, the enterprise
      chooses to change an accounting policy, that change is accounted for and
      disclosed as a voluntary change in accounting policy.

      Retrospective application

20    Subject to paragraph 21, when a change in accounting policy is applied
      retrospectively in accordance with paragraph 17(a) or (b), the enterprise
      should adjust the opening balance of each affected component of equity for
      the current period. Usually, the adjustment is made to reserves. However, the
      adjustment may be made to another component of equity (for example, to
      comply with an AS).as if the new accounting policy had always been applied.

      Limitations on retrospective application

21 When retrospective application is required by paragraph 17(a) or (b), a change
   in accounting policy should be applied retrospectively except to the extent
   that it is impracticable to determine either the period-specific effects or the
   cumulative effect of the change.
22 When it is impracticable to determine the period-specific effects of changing
   an accounting policy, the enterprise 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 the current period.

23 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 enterprise should apply the new accounting policy prospectively
   from the earliest date practicable.

24 When it is impracticable for an enterprise to apply a new accounting policy
   retrospectively, because it cannot determine the cumulative effect of applying the
   policy to all prior periods, the enterprise, in accordance with paragraph 23, applies
   the new policy prospectively from the start of the earliest period practicable.
   It therefore disregards the portion of the cumulative adjustment to assets, liabilities
   and equity arising before that date. Changing an accounting policy is permitted
   even if it is impracticable to apply the policy prospectively for any prior period.
   Paragraphs 50­53 provide guidance on when it is impracticable to apply a new
   accounting policy to one or more prior periods.

     Disclosure

25   When initial application of an AS or initial application of a new accounting
     policy required by a statute has an effect on the current period or any prior
     period, would have such an effect except that it is impracticable to determine
     the amount of the adjustment, or might have an effect on future periods, an
     enterprise should disclose:

     (a)   the title of the AS or the relevant requirement of the statute;

     (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, to the extent practicable, the amount of the
           adjustment:

           (i) for each financial statement line item affected; and

           (ii)     if AS 20 Earnings per Share applies to the enterprise, for basic
                  and diluted earnings per share;
      (g)     the amount of the adjustment relating to prior periods, to the extent
              practicable; and

      (h)      if retrospective application required by paragraph 17(a) or (b) is
              impracticable for a particular prior period, or periods, 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.

26    When a voluntary change in accounting policy has an effect on the current
      period or any prior period, would have an effect on that period except that it
      is impracticable to determine the amount of the adjustment, or might have an
      effect on future periods, an enterprise should disclose:

     (a) the nature of the change in accounting policy;

     (b) the reasons why applying the new accounting policy provides reliable and
         more relevant information;

     (c) for the current period, to the extent practicable, the amount of the
         adjustment:

       (i)    for each financial statement line item affected; and

      ( ii)   if AS 20 applies to the enterprise, for basic and diluted earnings per
              share as well as for each prior period presented;

     (d) the amount of the adjustment relating to prior periods, to the             extent
         practicable; and

     (e) if retrospective application is impracticable for a particular prior period, or
         for periods before those presented, 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.


.Changes          in accounting estimates

27    As a result of the uncertainties inherent in business activities, many items in
      financial statements cannot be measured with precision but can only be estimated.
      Estimation involves judgements based on the latest available, reliable information.
      For example, estimates may be required of:

      (a)     bad debts;
       (b)   inventory obsolescence;

       (c)   the useful lives of, depreciable assets; and

       (d)   warranty obligations.

 28    The use of reasonable estimates is an essential part of the preparation of financial
       statements and does not undermine their reliability.

29     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.

30    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.

31     The effect of change in an accounting estimate, other than a change to which
       paragraph 32 applies, should be recognised prospectively by including it in
       the statement of profit and loss in:

      (a)    the period of the change, if the change affects that period only; or

      (b)    the period of the change and future periods, if the change affects both.

 32    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 the change.

 33    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 profit or loss, or the profit or loss 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 profit or loss and therefore is recognised in the
       current period. However, a change in the estimated useful life of, , a depreciable
       asset affects 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 income or expense in the current
       period. The effect, if any, on future periods is recognised as income or expense in
       those future periods

       Disclosure




 34    An enterprise 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 in future periods, except for the disclosure of the effect on
      future periods when it is impracticable to estimate that effect.

35    If the amount of the effect in future periods is not disclosed because
      estimating it is impracticable, an enterprise should disclose that fact.

Errors

36    Errors can arise in respect of the recognition, measurement, presentation or
      disclosure of elements of financial statements. Financial statements do not comply
      with ASs if they contain either material errors or immaterial errors made
      intentionally to achieve a particular presentation of an enterprise's financial
      position, financial performance or cash flows. Potential current period errors
      discovered in that period are corrected before the financial statements are
      approved for issue. However, material errors are sometimes not discovered until a
      subsequent period.

37    An enterprise should correct material prior period errors retrospectively in
      the first set of financial statements approved for issue after their discovery
      by adjusting the opening balances of assets, liabilities and equity for the
      current period.

     Limitations on correcting errors retrospectively

38 When it is impracticable to determine the cumulative effect, at the beginning
   of the current period, of an error on all prior periods, the enterprise should
   correct the error prospectively from the earliest date practicable.

39    The correction of a prior period error is excluded from profit or loss for the period in
      which the error is discovered.

40    When it is impracticable to determine the amount of an error (eg a mistake in
      applying an accounting policy) for all prior periods, the enterprise disregards the
      portion of the cumulative restatement of assets, liabilities and equity arising before
      that date. Paragraphs 43-46 provide guidance on when it is impracticable to correct
      an error for one or more prior periods.

41    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

42    In applying paragraph 37, an enterprise 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:
            (i) for each financial statement line item affected; and

           (ii)   if AS 20 applies to the enterprise, for basic and diluted earnings per
                  share ;

     (c)    the amount of the correction at the beginning of the current period; and

     (d)     a description of how and from when the error has been corrected.

     Financial statements       of   subsequent      periods    need    not   repeat    these
     disclosures.


Impracticability in respect of retrospective application
43    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 44-
      46, its prospective application to prior periods) or to correct a prior period error, and
      it may be impracticable to recreate the information.

44    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 period. Developing estimates is potentially more
      difficult when retrospectively applying an accounting policy or to correct a prior
      period error, 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.

45    Therefore, retrospectively applying a new accounting policy or correcting a prior
      period error 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 approved for issue from other information. For some types of estimates (eg
         an estimate of fair value not based on an observable price), it is impracticable to
         distinguish these types of information. When retrospective application would
         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.

46 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
enterprise corrects a prior period error in calculating its liability for employees'
accumulated sick leave in accordance with AS 15 Employee Benefits, it disregards
information about an unusually severe influenza season during the next period that
became 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.
       Appendix I




       The objective of revision of and comparison with the existing AS
       5 (Revised 1997) Net Profit or Loss for the Period, Prior Period
       Items and Changes in Accounting Policies

       The objective of revision of the existing AS 5


       The Institute of Chartered Accountants of India had revised Accounting Standard (AS)
       5, Net Profit or Loss for the Period, Prior Items and Changes in Accounting Policies, in
       1997. Since then significant developments in accounting have taken place including the
       revisions in the International Accounting Standard (IAS) 8, Accounting Policies, Changes
       in Accounting Estimates and Errors. Recognising the aforesaid developments, the
       objective of the revision of the existing AS 5 is to bring about changes in the Standard
       commensurate with the requirements of the existing law and the existing notified
       Accounting Standards. Thus, while the Indian Accounting Standard (Ind AS) 8,
       Accounting Policies, Changes in Accounting Estimates and Errors, on the lines of IAS 8,
       which was placed by the Ministry of Corporate Affairs on its website in 2011, is based on
       the framework of the Indian Accounting Standards and the expected changes in the
       relevant provisions of law, revisions to the existing AS 5 do not contain various
       requirements included in Ind AS 8 such as the restatement of comparative information in
       respect of changes in accounting policies and correction of errors.


       Comparison with the existing AS 5

 (i)      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 AS 5 (Revised) 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.

(ii)      Keeping in view that AS 1, Presentation of Financial Statements (Revised), 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.

(iii)     The existing AS 5 restricts the definition of accounting policies to specific accounting
          principles and the methods of applying those principles while AS 5 (Revised)
          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.



 (iv)    AS 5 (revised) specifically states that an entity shall select and apply its accounting
         policies consistently for similar transactions, other events and conditions, unless an
         AS specifically requires or permits categorisation of items for which different policies
         may be appropriate. Neither existing AS 5 nor any other existing Standard
         specifically requires accounting policies to be consistent for similar transactions,
         other events and conditions.

  (v)    AS 5 (Revised) 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.

 (vi)    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. AS 5 (Revised) 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. AS 5 (Revised) specifically states that errors include frauds,
         which is not covered in existing AS 5.

(vii)    AS 5(Revised) requires rectification of material prior period errors 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, existing AS 5 requires the rectification of prior period items with
         prospective effect.

(viii)    Disclosure requirements given in AS 5 (Revised) are more detailed as compared to
         the disclosure requirements given in the existing AS 5.
 
 
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