CHANGE IN METHOD OF

DEPRECIATION AND
INVENTORY VALUATION

Submitted Submitted by:

to: Surbhi Kulshrestha
Dr. Jk PGDM 1-B
Batra Roll no-120
CHANGE IN METHOD OF
DEPRECIATION
• As per the Accounting Standard 1- Disclosure of Accounting
Policies, the change in the method of depreciation is a
change in the accounting estimate. Thus, it requires
quantification and full disclosure in the footnotes. Also, the
justification and financial effects of the change needs to be
disclosed.
WITH AND WITHOUT
RETROSPECTIVE EFFECT
• Method of depreciation can be changed without retrospective
effect or with retrospective effect. Without retrospective
effect means no adjustment will be made for past entries and
only in the future depreciation shall be charged by the new
method. While with retrospective effect implies that the
amount of depreciation to be charged is adjusted from the
date of purchase of the asset.
EXAMPLE
A COMPANY BOUGHT AN ASSET FOR 100,000 WITH AN EXPECTED USEFUL LIFE
OF FIVE YEARS. AFTER TWO YEARS OF USE COMPANY DECIDED TO CHANGE THE
DEPRECIATION METHOD FROM STRAIGHT-LINE BASIS TO REDUCING BALANCE
METHOD AT THE RATE OF 15%. REQUIRED: CALCULATE THE DEPRECIATION FOR
THE THIRD AND FOURTH YEAR.
(Without Retrospective Method).
Step 1: Find the carrying amount at the date of change
Change in depreciation is made after two years so we will depreciate the asset for two
years and it was on straight line basis.
100,000 / 5 = 20,000 per year
For two years it will be 20,000 x 2 = 40,000
Thus, carrying amount of the asset at the end of second year was 100,000 – 40,000 =
60,000
Step 2: Depreciate the carrying amount on the new basis from the date of
change
Carrying amount at the date of change = 60,000
New basis of depreciate = Reducing balance method @ 15%
Depreciation for the third year will be calculated as follows:
60,000 x 0.15 = 9,000
WITH RETROSPECTIVE EFFECT

• Depreciation will be charged on WDV basis from first year.

First year Dep = 100000 x .15= 15000
Second year Dep = (100000-15000) x .15 =12750.
Third Year Dep = 100000-15000-12750 = 72250
Difference between SLM & WDV Dep= 40000-27750=12250
So Machine Value for third year Depreciation will be
60000+12250 = 72250
Dep for third year = 72250 x .15 =10837.5
CHANGE IN INVENTORY VALUATION

• Financial statements are required to disclose all significant

changes in accounting policies. This is done to comply with
accounting’s full-disclosure principle. As a result, the
business’s financial statements would need to inform
prospective investors that there was a shift from LIFO to FIFO
as well as detail what the effect of that shift could be.
• Inventory change is the difference between the amount of
last period's ending inventory and the amount of the current
period's ending inventory.
• Under the periodic inventory system, there may also be an
income statement account with the title Inventory Change or
with the title (Increase) Decrease in Inventory. This account is
presented as an adjustment to purchases in determining the
company's cost of goods sold.
THANK YOU