NET PROFIT OR LOSS FOR THE PERIOD,PRIOR PERIOD ITEMS AND
CHANGESIN ACCOUNTING POLICIES
ACCOUNTING STANDARD 05 The purpose of this accounting standard is to prescribe the criteria for certain items in the statement of profit&loss so that comparability of the financial statements can be enhanced.statement of profit&loss covers the items of income and expenditure of that particular year/period. For eg if we are preparing the statement of profit or loss for the year ended31-03-2010 it means that the statement of profit or loss is covering all the incomes/expenses related to1-04-2009 to31-03-2010. However there may be a situation where a particular income or expense appearing in the statement of profit or loss for theyearended31-03-2010 may not relate to the period01-04-2009to 31-03-2010.In that situation what should be the accounting treatment& presentation of such items in profit&loss is prescribed or explained in this accounting standard. It also deals with change in accounting policies,accounting estimates and extraordinary items. Objectives of Accounting standard05 1. To prescribe the classification and disclosure of certain items. 2. To facilitate the comparability of the financial statements of different firms. 3. To provide for classification and disclosure of ordinary/Extraordinary items& prior period items. 4. To specify the accounting treatment for changes in accounting estimates. 5. To disclose the changes regarding the accounting policies in the financial statements. Components of Net profit: Net profit or loss for the period consists of two components. 1. profit or loss from ordinary activities. 2. Extraordinary items. 3. Ordinary activities are defined as any activities which are undertaken by any enterprise as part of its business and incidental to main business.Normally all items of incomes and expenses which are recognized in a period are included in the determination of the net profit Or loss for the period.This includes Extraordinary items and changes in accounting estimates. The Extraordinary items are incomes or expenses that arise from events or transactions that is not likely to recur frequently or regularly and is different from ordinary activities. Examples of Extraordinary items are:1.Loss due to Earthquakes. 2. Attachment of property. 3. Govt grants becoming refundable. 4. Govt grants for giving immediate financial support with no further cost 5. Govt grants receivable as compensation for expenses or losses incurred in previous accounting period. Prior period items are income or expenses which arise in current period as a result of errors or omissions in the preparation of financial statements of one more prior periods.Either they are included in the determination of net profit or loss for the current period or shown as items in the statement of profit or loss after determination of current net profit or loss.The examples of prior period items are: 1Errors in calculation in providing income or expenses 2Omission to account for income or expenditure. 4. Non provision for salary due in earlier years. 5. Applying incorrect rate of depreciation etc Accounting Estimates: As a result of uncertainties inherent in business activities many items in financial statements cannot be measured with precision but can only be estimated which needs latest information.The use of reasonable estimates is an essential part of the preparation of financial statements. Change in accounting estimate: It means that estimate is to be revised due to changes in the circumstances/conditions on which the estimates were based.Examples: 1. Estimating the useful life of the asset. 2. Estimation of provision of any liability. 3. Computing income tax provision.etc The effect of changes in accounting estimates should be classified into A) change in ordinary activities B) Change in Extraordinary activities should be shown separately,should be included in the determination of net profit or loss in the current period if it effects that period or in future period if it effects future period or both. Change in accounting policies:The accounting policies may be changed by the companies: 1. For the compliance of accounting standard. 2. For the compliance of statue or law. 3. For better &appropriate presentation of financial statements. DISCLOSURES OF AS05: 1. The items of income and expense within profit or loss from ordinary activities if their disclosure is relevant they should be disclosed. 2. The nature and amount of each Extraordinary item is to be disclosed and their impact on profit or loss should be perceived. 3. Separate disclosure of items such as Profit or loss on sale of fixed assets,long term investments,litigation settlements etc 4. The nature and amount of prior period items and their impact on profits should be disclosed. 5. Changes in accounting estimate sand their impact on profit should also be disclosed. 6. Changes in accounting policies and their impact on profit should be disclosed. 7. If the effect of change is not ascertainable a statement to that effect is to be submitted.