India's Accounting Policy Changes
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Which of the following best describes accounting policies?

  • Vague accounting standards that change based on industry practice.
  • Specific principles, conventions, rules, and practices applied in preparing financial statements. (correct)
  • Broad, general guidelines for financial reporting, adaptable to any situation.
  • A mix of guidelines selected by local regulators, to ensure all businesses in the region comply.

    • Which of the following is an example of an accounting policy?

  • The setting of sales targets for the next quarter.
  • The decision to hire a new CFO.
  • The method used to depreciate property, plant, and equipment (PPE). (correct)
  • The selection of a company's external auditor.

    • According to Indian Accounting Standards, what is the primary source to consult when choosing an accounting method for a specific transaction?

  • Industry specific standards.
  • International Financial Reporting Standards (IFRS).
  • The judgement of the company's CFO.
  • Specific Indian Accounting Standards (Ind AS). (correct)

    • If no specific Indian Accounting Standard (Ind AS) covers a transaction, what should be consulted next?

    <p>The principles within the Ind AS framework itself. (C)</p> Signup and view all the answers

    When there is no Ind AS, Ind AS framework or IFRS guidance available, what should be used to select an accounting policy?

    <p>Accepted industry practice. (D)</p> Signup and view all the answers

    A change in accounting policy is mandated when:

    <p>A new Ind AS standard requires a change to a particular accounting practice. (D)</p> Signup and view all the answers

    When a company decides to voluntarily change an accounting policy, what is a key requirement?

    <p>Provide a detailed explanation of the reasons for the change in the financial statements. (D)</p> Signup and view all the answers

    Which situation would necessitate a mandatory change in accounting policy?

    <p>The introduction of a new standard which requires a change from one valuation method to another. (B)</p> Signup and view all the answers

    What is the correct accounting treatment if a company changes its inventory valuation method from FIFO to weighted average?

    <p>Apply the change retrospectively, adjusting prior period financial statements. (A)</p> Signup and view all the answers

    Which of the following best describes the treatment of a change in accounting estimate?

    <p>It is applied prospectively, affecting the current and future periods. (D)</p> Signup and view all the answers

    A company discovers that a machine purchase was incorrectly recorded as ₹10,000,000 instead of the correct amount of ₹1,000,000. How should this error be corrected?

    <p>The error should be corrected retrospectively by adjusting the financial statements of the period in which the error occurred. (B)</p> Signup and view all the answers

    When is it acceptable to apply a change in accounting policy prospectively?

    <p>When it is impracticable to apply it retrospectively. (D)</p> Signup and view all the answers

    What type of accounting error is made when an organization incorrectly classifies a loan as current, when it is a non-current loan?

    <p>Classification error. (A)</p> Signup and view all the answers

    Which of the following is NOT considered to be a change in accounting policy?

    <p>Applying a new accounting policy on a transaction that did not previously occur. (A)</p> Signup and view all the answers

    What is required to be disclosed for a change in accounting estimate?

    <p>The nature of the change, the effect on current and future periods, and the reasons for the change. (A)</p> Signup and view all the answers

    A company's management intentionally altered the accounting records to embezzle cash. What type of error is this?

    <p>Fraud. (C)</p> Signup and view all the answers

    What is the correct accounting treatment for an error of omission discovered in a prior period?

    <p>Correct retrospectively by adjusting the financial statements of previous years. (A)</p> Signup and view all the answers

    Which of the following is NOT an example of an accounting estimate?

    <p>Recording a purchase at the incorrect cost. (A)</p> Signup and view all the answers

    What does it mean to apply a change in accounting policy retrospectively?

    <p>Adjust past financial periods as if the new policy was always in place. (C)</p> Signup and view all the answers

    How should a company treat a change from the revaluation model to the cost model for a building that was previously classified as property, plant and equipment but has now been reclassified as investment property?

    <p>This would not be considered a change in accounting policy. (A)</p> Signup and view all the answers

    What is the primary reason for applying changes in accounting policies retrospectively?

    <p>To ensure consistency and comparability of financial statements over time. (B)</p> Signup and view all the answers

    What happens in the case where the effect on future periods of a change in accounting estimate cannot be reasonably estimated?

    <p>A statement to that effect is required to be made (D)</p> Signup and view all the answers

    Which of the following best describes an error of principle?

    <p>An error in the accounting treatment of a transaction. (D)</p> Signup and view all the answers

    If a company chooses not to restate prior period financial statements, what action must it take?

    <p>Disclose the reasons for not restating the statements. (C)</p> Signup and view all the answers

    Which event occurring after the balance sheet date would be classified as an adjusting event?

    <p>A debtor's bankruptcy, where financial troubles existed prior to the balance sheet date. (B)</p> Signup and view all the answers

    A company receives a refund after the balance sheet date related to a liability that existed at the balance sheet. How should this be treated?

    <p>It should be adjusted within the current period's financial statements. (B)</p> Signup and view all the answers

    Which of the following best defines a non-adjusting event after the reporting period?

    <p>Events that provide evidence of conditions that arose after the balance sheet date. (D)</p> Signup and view all the answers

    If a company's warehouse is affected by significant flooding after the balance sheet date, what action should be taken regarding the financial statements?

    <p>A disclosure regarding the event and its financial impact should be made. (C)</p> Signup and view all the answers

    When is a change in the net realizable value(NRV) of inventory considered an adjusting event?

    <p>When the change is due to a change in selling price after the balance sheet date. (B)</p> Signup and view all the answers

    Which of the following is true regarding dividends declared after the balance sheet date but before the financial statements are approved?

    <p>The dividend liability should be recognised in the year it is declared. (B)</p> Signup and view all the answers

    An entity is anticipating the going concern assumption will cease after the balance sheet date and before the approval of the financials due to a significant event after the balance sheet date. What affect does this have?

    <p>Assets and liabilities are adjusted according to their realizable amounts. (D)</p> Signup and view all the answers

    What is the core characteristic of a liability?

    <p>A present obligation arising from past events requiring an outflow of resources. (C)</p> Signup and view all the answers

    When are liabilities generally recorded in the financial statements?

    <p>When they are probable and the amount can be reliably measured. (D)</p> Signup and view all the answers

    What is a provision in accounting?

    <p>A present obligation where the amount or timing of outflow is uncertain, but probable. (A)</p> Signup and view all the answers

    How should the amount of a provision best be estimated?

    <p>It should be the best estimate of the cost needed to settle the obligation. (D)</p> Signup and view all the answers

    A lawsuit pending at the balance sheet date is settled after the balance sheet date. How is this treated?

    <p>The settlement will be recorded in the current period's financials. (C)</p> Signup and view all the answers

    What is the primary purpose of the 'events after the reporting period' standard?

    <p>To ensure users obtain the most relevant information, even if that information becomes available after the balance sheet date. (D)</p> Signup and view all the answers

    An asset was purchased just prior to the balance sheet and the cost is finalized after the balance sheet date. How is this treated?

    <p>The cost adjustment should be made in the current period's financial statements. (C)</p> Signup and view all the answers

    Study Notes

    India's Accounting Policy Changes

    • This chapter discusses the accounting policy framework in India and key concepts typically covered in introductory accounting courses.
    • It focuses on accounting policies, implementation, and the process of changing accounting policies.
    • This chapter covers the basics of accounting policies and emphasizes their limited relevance for exams.

    Accounting Policies

    • Definition: Specific principles, conventions, rules, or practices applied when creating financial statements.
    • Examples:
      • Inventory valuation methods (FIFO, weighted average)
      • Measurement basis for intangible assets (cost model or revaluation model)
      • Investment accounting (cost model or fair value)

    Selection and Application of Accounting Policies

    • General Rule: Follow specific Ind AS standards if available for a particular transaction.
    • Example: To record PPE, use Ind AS 16.
    • Ind AS Framework: If no specific Ind AS is available, refer to the framework's principles, which guide the development of Ind AS.
    • Ind AS Framework components:
      • Ind AS objective
      • Qualitative characteristics of financial statements
      • Assumptions and recognition criteria
    • International Accounting Standards (IFRS): Can be used if no specific Ind AS or framework guidance is available.
    • Fallback options: If no Ind AS, framework, or IFRS guidance exists, use:
      • Accepted industry practice: Standardized accounting practices in a particular industry.
      • Other relevant pronouncements: Guidelines from other standard-setting bodies.

    Changes in Accounting Policies

    • Mandatory Changes: Required when an Ind AS standard mandates a policy change.
      • Example: Changing from initial recognition of a financial asset at cost to fair value due to a change in intent, such as from holding to maturity to selling in the near future.
    • Voluntary Changes: Permitted if changing the policy leads to more relevant and reliable financial statement information for users.
      • Example: Presenting PPE at fair value when it's a more relevant value indicator than historical cost.
      • Disclosure Requirement: Voluntary changes require explanation in the financial statements.

    Exceptions to Changes in Accounting Policies

    • Applying a policy to a transaction different in substance from previous transactions is NOT a change in accounting policy.
      • Example: Switching from a revaluation to the cost model for a building reclassified as investment property from PPE.
    • Applying a new accounting policy to a transaction that didn't previously occur is NOT a change in accounting policy.
      • Example: First-time recording of a newly acquired PPE using the cost model.

    Consistency in Applying Accounting Policies

    • Selected accounting policies should be consistently applied unless a meaningful change warrants a different approach.
    • Changes in accounting policies should be documented.

    Accounting Policy Change

    • Policy changes arise from Ind AS pronouncements or other regulatory bodies' instructions.
    • Ind AS 109 provides guidance on changes in policies.
    • Use Ind AS 8 for lacking specific Ind AS guidance.
    • Ind AS 8 necessitates retrospective application of accounting policies.
    • Retrospective application adjusts past periods as if the new policy was always in use to ensure consistency and comparability.
    • Ind AS 8 allows prospective application if retrospective application is impossible or impractical.

    Accounting Policy Change - Example

    • Switching from FIFO to weighted-average cost for inventory accounting necessitates retrospective adjustments.
    • Adjustments are reflected in comparative financial statements.
    • Opening balances for previous years impacted by the switch are updated to reflect the new method.

    Accounting Estimates

    • Accounting estimates measure items in financial statements with inherent uncertainty.
    • Examples:
      • Provision for bad debts
      • Warranty obligations
      • Useful life and residual value of assets
      • Depreciation methods
    • Changes in estimates are accounted for prospectively from the date of the estimate change.
    • Changes in estimates are not regarded as prior period error corrections.

    Errors in Financial Statements

    • Errors in financial statements stem from mistakes in applying accounting policies or estimates.
    • Corrections are made retrospectively.
    • Affected prior periods are restated.
    • Opening balances for the current year are adjusted if the error impacts the statement of financial position.

    Distinguishing Accounting Policy Changes from Accounting Estimates

    • A policy change affecting a period is a policy change; multiple periods require estimate change treatment.

    Disclosures for Changes in Accounting Policies and Estimates

    • Changes in Accounting Policies:
      • Change nature
      • Current and prior period effects
      • Reasons for changes in retrospectively applied policies
    • Changes in Accounting Estimates:
      • Change nature
      • Current and future period effects
      • Reasons for changes
      • If future effects aren't reasonably estimable, a statement to that effect is needed.

    Errors in Financial Statements

    • Error of omission: A transaction's non-recording.
    • Error of misstatement: Incorrectly recording a transaction.
      • Error of commission: Amount misstatement.
      • Error of principle: Incorrect accounting treatment.
    • Fraud: Deliberate misstatement/omission for gain.
    • Classification error: Wrong category assignment of a transaction.

    Treatment of Errors in Financial Statements

    • Current year errors: Corrected in the current year's financial statements.
    • Prior period errors: Corrected retrospectively.
      • Restate comparative amounts and opening balances accordingly.
    • Prospective correction: Applicable if restating prior periods is impractical.
    • Disclosures: Nature of error, effect on financial statements, and avoidance of prior period restating reasons.

    Events After the Reporting Period

    • Definition: Events between the balance sheet date and financial statement authorization.
    • Purpose: To ensure users have the most relevant information available.
    • Event types:
      • Adjusting: Evidence of balance sheet-date conditions.
      • Non-adjusting: Evidence of events after the balance sheet date.
    • Adjusting events: Recognizing bankruptcy loss, recording refund adjustments, and incorporating asset cost determinations occurring after the balance sheet date.
    • Non-adjusting events: Recording subsequent asset sales, fire losses, or investment fair value changes in future periods not affecting the current period.
    • Disclosures: Adjusting events require disclosure of nature and amount, with only significant non-adjusting events warranting disclosure.

    Non-Adjusting Events

    • Non-adjusting events do not require adjustments in financial statements.
    • Significant non-adjusting events require disclosure. This includes the event's nature and estimated financial impact, for example, a company's warehouse fire loss to inventory.

    Special Cases for Non-Adjusting Events

    • Changes in Net Realizable Value (NRV) of Inventory:
      • Changes in selling price after the balance sheet date requiring adjustment.
      • Damage after the balance sheet date is a non-adjusting event.
      • Damage before but NRV confirmation occurred after the balance sheet date is an adjusting event.
    • Dividend Declaration:
      • Dividends declared after the balance sheet date but before financial statement approval are considered non-adjusting events.
    • Going Concern:
      • If liquidation is evident post-balance sheet date, non-adjusting but needing adjustment for the liquidation basis. Assets and liabilities are valued at realizable amounts.

    Liabilities

    • A liability is a present obligation arising from past events requiring resource transfer.
    • Characteristics: Legal (contract/legislation) or constructive (company practices/commitments).
    • Recording criteria: Probable, reliable measurement.

    Provisions

    • A provision is a liability with uncertain amount or timing.
    • Examples: Warranties, taxes, environmental remediation.

    Recording Provisions

    • Amount: Best estimate of settlement cost; expected value if multiple outcomes.
    • Discounting: Discounted to present value using a pre-tax rate for multi-year obligations.

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    Description

    This quiz focuses on the accounting policy changes in India, discussing the framework and key concepts essential for introductory accounting courses. It emphasizes the definition, selection, and application of accounting policies, as well as their relevance in exams. Understand the nuances of Indian Accounting Standards (Ind AS) as they pertain to financial statements.

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