 We will do one more standard let us complete try and complete AS5 also, okay AS5, net profit or loss for the period prior period items and changes in accounting policies. See basically AS5 is there to give you disclosures, AS5 does not actually talk about accounting it talks about how to disclose those items in your income and expenditure or profit or loss account, okay. So basically it says that items of income and expenditure differ in their financial implications. Some items are very irregular, some items are regular like sale of fixed assets is not a regular item you do not do it every year, okay. Loss due to fire is a rare item it might not happen in 10 years, 15 years also. So basis the regularity of item basis its nature of item you should categorize those items and disclose in your financial statements or in your income and expenditure account. Now why is that required? See suppose in the current year I have loss, the loss is because of fire occurred. Now this is not a regular loss normally I would make a profit but because of this fire I am making a loss. Hence you should disclose that loss due to fire separately from all other incomes and expenses you should show that there is a profit in the current year then you should show that there is a loss due to fire and the net there is a loss. So that disclosure will help all others to understand your profit and loss account or your working or your operations that is you are a profit making entity but because of this particular loss which is a rare instance or which is a irregular instance you are making a loss. So this is what AS5 says how to disclose the events it does not talk about how to account the events. Some can be adjustments due to prior period items so that also needs to be disclosed separately. Some reflect changes in accounting policies or estimates so because you have changed the accounting policy it is affecting your income statement. So you should show that okay you should disclose somewhere in your financial statements whether in notes or somewhere that this is the impact of change in accounting policy or estimate and hence my profit or loss or income and expenditure account is adjusted. Financial implications are different for each like increase in profit due to reduction in expenditure is not same as increase in profit due to change in depreciation method. Hence it is important to disclose financial implications of these separately or differently. The objective of AS5 is you should maintain uniformity year on year prescribe the classification and disclosure how to classify items how to disclose each item. AS5 puts items in 6 broad categories ordinary but exceptional extraordinary prior period changes in policies and changes in estimates. The standard is mandatory and applies to all enterprises okay what are ordinary activities any activity which is undertaken by enterprise as part of its regular business and such related activities in which the enterprise engages in furtherance of or incidental to arising from these activities. So any ordinary activity which is your business any items any expenditure income related to your ordinary activities are all your ordinary items and should be normally reflected in your income and expenditure account it should not be highlighted or disclosed separately it should be kept as normal okay. What is exceptional item and what is extraordinary item? Now exceptional item it says is ordinary item see exceptional and extraordinary something which is not ordinary is extraordinary. So exceptional has to be ordinary exceptional items are normal items ordinary items part of your business but because of its amount or nature it becomes exceptional for example okay. An item of income or expense arising out of ordinary activities but because of its size nature or incidence their disclosure is relevant to explain performance of your enterprise then nature and amount of such items should be disclosed separately. Now what are the examples of exceptional items write down of inventories to NRV as well as reversal of such write down so if you have inventories those inventories the value has gone down because of obsolescence or because of some damage to them. Now this is a normal course of business but the amount may be so material hence you should disclose them separately if the amount is material disposal of items of fixed assets so you have disposed many fixed assets in the current year okay. So that becomes exceptional item normally disposal of fixed assets is ordinary item I do it every year I might do it every second year third year. But if I disposed many fixed assets in one year the amount might become material so I should disclose it separately as an exceptional item disposal of long term investments so I have kept long term investments I keep on investing I keep on selling them so purchase and sale happens it is a normal thing for me but in a particular year I have disposed all of my long term investments or majority of my long term investments that item I should disclose separately as exceptional item any changes in legislature which has retrospective application so any law change any regulatory change retrospective application and because of that there is a impact in my current income and expenditure account and that impact is material then I should disclose it separately any litigation settlements so there is a case court case going on against or I have filed a suit against a party and that case has settled so that is a exceptional item I should disclose it separately any reversal of provision which is material I spoke about ordinary items I spoke about ordinary items which are exceptional in nature now we will talk about extraordinary items items which are not ordinary now income or expenses which are clearly distinct from your ordinary activities and therefore are not expected to occur frequently or regularly those items should be classified as extraordinary item and should be disclosed separately it is determined by nature of the event or transaction as compared to ordinary activities frequency is not important most important is nature of the activity example earthquake now earthquake any loss which has happened due to earthquake is a extraordinary item it is not my ordinary activity any loss because of that should be separately disclosed in my income and expenditure account how do I prepare my income and expenditure account in this case so basically I list down my incomes and expenditures I have a surplus then I classify extraordinary items then I again leaves down those items and I write all the expenses and then I again create surplus or deficit so basically I have to highlight extraordinary items and I have to list down those this is what I have to do so that I get a proper details of I get proper idea of the functioning of the institute or the company whether it is a profit-making or whether it is a loss-making or whether it is converted into a loss-making because of this extraordinary item so such things I will come to know in this fashion the nature and amount of each extraordinary item should be separately disclosed in a manner that its impact on current profit or loss can be perceived okay now these were certain disclosures which I had to make separately extraordinary items or ordinary items but exceptional in nature then there is something called as prior period items okay how do you currently classify prior period items where do you show it do show it separately or do you mix in the normal expenses separate column for prior period items so that's what you have to do in future also that's how this standard says that you have to do income or expense which arise in the current period as a result of errors or omissions in preparation of financial statements of one or more prior periods okay prior period items relates to income and expenditure account or balance sheet or both prior period items only relate to income and expenditure account so if there is a error in my depreciation it is a income and expenditure account I will go and change it if it is a error in any calculation of income or expenditure I will go and change it suppose there is a error in calculation of advance received I received 110 rupees but I accounted as advance only as 100 it does not go into my PNL will I will I next year show 110 and 10 rupees as prior period item no prior period item is only highlighted in my income and expenditure account it is never highlighted in my balance sheet because it is highlighted only in my income and expenditure account it relates to only those items which will appear in my income and expenditure account clear that has not been written off that goes to the balance sheet to sorry that is the prior period expenses so prior period expenses expense that amount which has not been written off that goes to the balance sheet for example what suppose suppose you are reaching the share and other things whatever the prior period expenses that amount is a percent for a number of years so what amount that is written off in a particular financially prior period expense prior period expense I think you are mistaken prior period expenses not that prior period expenses whatever expenses that should be that is pre-incorporation expense no no no no okay what is prior period expense prior period error or prior period expenses expense which was incurred in previous year I should have recorded in previous year but I by mistake by error I could not record in previous year in the current year I come to know that I made a error in previous year so I record in the current year and when I record in the current year I highlight it as it was related to prior period hence it is a prior period error what you are talking about is pre-incorporation expense before I started my company I incurred certain expenses so I will write it off over five years or x number of years so that is completely different prior period error is a error which was conducted by not recording in the previous year any expense or any income so prior period items are items of income or expense which arise as a result of error or omission so any error I made any omission I made in the previous year I will record in the current year it does not include other adjustments necessitated by circumstances which though related to prior period are determined in the current period okay now what this means is suppose I increase the salary of one of the employees retrospectively or suppose I bring a new plan retrospectively so anything which is determined in the current year retrospectively is not a prior period error or omission I did not know then how will it be error or omission like estimate I estimated that seven the seven employees will leave my organization I have to pay them gradually I make an estimate okay now when I do that I provide for expenses based on estimate but say seven did not leave six left or eight left it is a change in estimate it is not prior period error I did not know how many will leave so something which I did not know cannot be a error yes very relevant question I am asking about this when the pay commission announces its reports and recommendation are accepted accepted in subsequent years areas are paid to the employees right so when the areas are paid to the employees it pertains to previous years also right prior period it is not prior period because it was not a error in the first place see prior period error or prior period items are either error or omission now I made a provision of expenses only for what I am paying now at that time the pay commission had not increased the pay hence I did not know that I will have to pay extra it is only later that they did retrospectively so it is not a error or omission it is a current period item current period it is not a prior period item though it pertains to previous year it is not a error or omission because it is not a error or omission it will not be disclosed as prior period item any other questions on prior period errors or items I would like to quote one instance for example we have come here to attend this workshop then our TA will be paid so when it will be booked when we submit our bills right or when they actually pay after one month two months whatever time when you submit your bill you should create expenditure because you know that it has to be paid so expenditure has to be created so you do not have to go by cash basis or payment basis you have to go by accrual basis so you will account for it that means yes we have come here with a right you should account for it immediately okay okay when it is a prior period item when you know that it was an error or omission in the previous year you should disclose the nature and amount in profit and loss account and the impact that will have that will that is in the current profit or loss account sometimes you can also you know disclose it within the items itself suppose my opening stock is incorrect okay opening stock is a valuation which you do right opening stock closing stock now closing stock is taken forward as opening stock say suppose my closing stock was incorrect hence my opening stock is incorrect now there are two options which you can do it is a prior period error first of all because you incorrectly valued it so you know it is a error or omission and it relates to prior period so one option is you can go and adjust the opening opening stock other option is you show it separately as prior period error so these are the two alternatives available with you income tax prior period expenses are disallowed so any item which you show as prior period expense income tax will disallow any item which you show as prior period income they will come and tax you it is always on the point of your revenue for them it should bring in revenue so expenses disallowed income is taxed that is what happens in income tax yes sir we were preparing our annual accounts on cash basis prior to 2004 5 or 5 6 we started converting to approval system in 2005 6 and then we started to be here providing depreciation on the assets from the date of its installation now this depreciation pertains to previous years also now this is not an error because only in 2005 6 we started because it was directed and we started it was not an error now the depreciation for the previous years whether they are the prior period though they are not the omissions neither they are the errors okay see there are two more things left in this chapter which is change in accounting estimates and change in accounting policy okay now something which is change in accounting policy and because of that change in policy there is a expense or income which is appearing in your accounts because of change in policy if it is change in policy then it is not a error if it is not because of change in policy then it is a error so you You changed your accounting policy to start depreciating your fixed assets and hence it will not be constituted as error. It was a basically but it was a wrong accounting policy if you if you have to prepare accounts accounting standards do not permit cash basis accounting. So you will not following accounting standards at all if you were following accounting standard it would be classified as error. You have to account for it in the same financial year but because it must be very material you should show it as ordinary but exceptional item which will appear only in this year next year onwards it will become normal. So you should highlight it as exceptional item okay as I said as I said we have we have to discuss two more things changes in accounting estimates and changes in accounting policy okay. Many items of financial statements are estimates like any provision which you make is an estimate depreciation is also an estimate okay. An estimate may have to be revised if changes occur. Changes can be regarding circumstances on which estimate is based it can be result of any further information which you have received okay. The revision of estimate does not bring in adjustment within the definition of extraordinary item or prior paid item that means changes in estimates is not a prior paid item it is not a extraordinary item changes in estimate is an ordinary item which may happen year on year every year it might become a regular item for you okay it has to be accounted for as changes in accounting estimate only. Changes in accounting estimate is not highlighted separately it is not given under separate header it is included in your normal expenditure it is not to be shown separately it is to be accounted in the period in which the changes occurred and the period of change in future period if it affects both then you have to account for it there. Example a change in estimate of bad debts so we were creating 2% bad debts now we start creating 3% bad debts provision for bad debts so that 3% change you have to directly account as provision for bad debts 3% then finish it off you do not have to highlight that we have changed the estimate okay a change in useful life of depreciable assets affect depreciation in current year and future periods both if you change okay depreciation can change because of change in method it can change because of change in rate of depreciation which amongst this is change in policy and which amongst this is change in estimate there are 2 things okay which is a change in policy and which is a change in estimate method is policy rate is estimate okay what is method first what is method SLM this is method so if you change from SLM to WDV WDV to SLM it is a change in accounting policy okay what is rate rate is basically you calculate what is the useful life what is your salvage value when you estimate useful life and salvage value that is how you get rate so rate is a function of useful life and salvage value and both are estimates hence change in rate is an estimate so when you change rate of depreciation you do not highlight it separately you just change the depreciation amount and you pass a normal accounting entry you do not disclose it separately classified using the same classification if the item previously classified as extraordinary if the item itself is extraordinary then change in estimate is also extraordinary if the item is ordinary change in estimate is also ordinary okay accounting policies accounting policies are specific accounting principles and the methods of applying those principles in preparation of your financial statements okay now why SLM and WDV is method or why it is a policy we discussed SLM and WDV is a policy what is difference between policy and estimate how do you know it is a policy and not estimate sorry policy relates to some rules yes policy is a decision which an organization takes estimate is a result of that rules is a result of that decision then I have to estimate basis that decision how to estimate or how to calculate the amount so I have decided that I will use SLM so it is a decision whenever it is a decision it is a policy of the organization and then when I know it is SLM I will use my estimates and I will find out the rate so that is difference between a policy and an estimate accounting policies it says that you have to follow uniform accounting policies so that it is comparable over a period of time to identify trends in financial position performances and cash flows as a change in accounting policies retrospective or prospective perspective as a change in method from SLM to WDV has anyone done that has any institute change from SLM to WDV till now yes it is retrospective change in accounting policy per se is prospective but change in SLM to WDV is given by accounting standard 6 that you have to do it retrospective income tax is not connected with depreciation because income tax depreciation will go on its own income tax depreciation will not be dependent upon your books depreciation income tax follows only WDV approach you do not have SLM approach in income tax so you cannot change from SLM to WDV there is only one approach so in income tax you can never change your accounting policy policy in income tax is defined by income tax authority and not by your organization so you cannot change that okay in books of accounts you can change policies change in policies prospective only depreciation is given by AS6 accounting standard 6 that change in depreciation method from SLM to WDV is retrospective otherwise any other change in policy is also prospective like change in estimates a change in accounting policies allowed only if it is required by any law to change it or if you want to start complying with accounting standard now and hence you have changed it or if it is considered that a change will result in appropriate presentation then and then only you are allowed to change the policy whenever you change your policy you have to give reasons why you have changed your accounting policy you cannot just keep on changing every year or you cannot change when when you want it you have to give reasons why I have changed it okay adoption of a accounting policy for transactions that differ in substance so there are two basic different transactions one transaction I have another policy another transaction I have another policy this is not changing accounting policy that is what it says if you adopt a new policy for a new transaction a transaction which was not there in your books you have entered into a new transaction and there is a new policy for that that is also not a change in accounting policy disclosure any change in accounting policy which has a material impact you have to give a disclosure in your notes to accounts you have to give the impact and the adjustments which are resulting from the change in accounting policy where the effect is not ascertainable you have to disclose that I cannot ascertain the financial impact of change in accounting policy where it is not material in the current period but it it is reasonably expected to affect the future periods then you should give details that this change in accounting policy will affect my future periods so that disclosure you have to give see it says because policy and estimates are so close okay it is sometimes very difficult to find or to decide whether this change is change in accounting estimate or whether this change is change in accounting policy when it is difficult in such case you have to assume that it is change in accounting estimate and go ahead okay a few questions a company finds that stocks of 31st March 2010 did not include inventory of 20 lakhs that means closing stock is wrong by 20 lakhs how will you deal with this matter in the next year you will change the opening stock of the current year or you will write it as prior period item 20 lakhs is expense both are allowed so you can either add 20 lakhs in the opening stock or alternatively you can show it in PNL as separately as prior period item of 20 lakhs so we discussed there are 5 important items one is exceptional items which are ordinary but exceptional in the current year there are extraordinary items which are not ordinary and hence you should disclose it separately there are prior period items prior period items are result of error or omission in the previous year so you did some error in the previous year you came to know about it in the current year and hence you should adjust it and show it as prior period item then there are changes in accounting estimates any change in estimates has to be adjusted in your income and expenditure account then there is changes in accounting policies accounting policies any change you have to disclose it that there is a change and then you have to apply it in your profit and loss income and expenditure account it might even affect your balance sheet and you have to disclose that you have changed and what is the impact of that change in your income and expenditure account and in your balance sheet any questions on AS4 or AS5 sir normally prior period income we are showing income side right prior period expenses we are showing expense side instead of that one net of the adjustments whether it is possible either income is if it is a accident income we are showing see if prior paid income is from some other item and prior paid expense is of some other item then you should not net it off ideally why why normally some editors are asking since you show the net of adjustments whether it is income or whether it is expenses side what is wrong in it see wrong in it is I will not come to know that there are two items of adjustment I will think it is only net item of it as a reader see understand financial statements are prepared for the reader whether the reader is government all the reader is any other authority all the reader is the investor financial statements are prepared for them now if there is a error and error is in expense also an income also and suppose these are compensating errors but of saw rupee expense may have saw rupee income may so the reader will never come to know that there is a compensating error of 100 rupees each they will never come to know there is a error in the first case hence schedule shortly schedules must be there but they you will then in schedules you will show that there is expense in income both then it is allowed you have to show somewhere that there is a prior paid expense of 100 rupees and prior paid income of 100 rupees that is the requirement and then on the header on the P and L face you have to show that net prior paid expenses this much so then it is allowed but you have to disclose it that is important any other question you were explaining that profit or loss on sale of assets suppose I follow the net approach and it is shown with 1 rupee on the asset side and 1 rupee on the liability side where I have got capital grant okay I have got grant for fixed asset I have shown it at nominal value 1 rupee right now the disposal of that asset is there suppose the asset is costing 1 lakh and I dispose it at 60 rupees 60 because the value in the balance it is 1 rupee and liability was 1 rupee now the 60,000 which is coming to me how to account for that because 60,000 will become income of the business or what yes it becomes income so my accounting entry will be bank account debit 60,000 bank account or receivable account account receivable account debit 60,000 rupees to fix asset 1 rupee or may be 0 rupee because it is nominal asset and liability goes away to profit on sale 59,000 rupees this is your accounting entry so this will be shown in your income side but is it a revenue income because item is capital in nature and the income will go to the income and expenditure account as revenue yes is it not an error of principle or not it is it is my income of the current year I have only income and expenditure account I cannot directly adjust in my capital reserve but on the reverse side if I follow the gross approach then 59,000 will not go then some other amount will go as an income book value minus the real estate no if I follow gross approach suppose in the same scenario I am following gross approach okay what is the gross approach my asset in the gross approach in my balance sheet I will have a fixed asset of say 40,000 suppose example and on the liability side I have a grant outstanding or the deferred revenue of 40,000 now when I sell this asset I have to reverse this also so when I write here 40,000 it will wipe out this deferred revenue I will also write here deferred revenue so my profit will still be 59,000 or 60,000 in 99 am I right if I have a deferred revenue expenditure of 40,000 I have a fixed asset of 40,000 my accounting entity will be what suppose it is disposed at 60 my example is 60 let us take 60,000 so when I dispose it is bank or accounts receivable 60,000 rupees I reverse this 40,000 rupees I reverse this 40,000 rupees so here it is 1 lakh here it is 40 so balance 60 will come here right so my profit has remained same as 60 see the logic is asset to me free me mila chai me usko 60,000 pe dikhaun chai 40,000 pe dikhaun chai 1 rupe pe dikhaun free me mila jo jis free me mila asset liability dono side dikhega jab me usko bechunga to jitna bhi mila poora profit hai because asset to ideally free me to agar me ne usko 60,000 pe becha to poora mera profiti hai so even if I show 40, 40 I will reverse both 40 even if I show it at 1 rupee I will reverse only 1 rupee it will not impact my profit I shown the accounting entity you write it and see answer will be same jo jis free me mila usko ap kitne me bhi becho poora profiti hone wala it is capital in nature also the amount which is received see I have just income and expenditure account income and expenditure account you will include all my income of the current year all my expense of the current year including capital item any item even if I sell my long term investments my long term investment is a capital item jab me wo bech naun me income ka leke jato profit and loss income and expenditure account so I do not have income and expenditure account capital income and expenditure revenue income and expenditure I have income and expenditure it is just that capital expenditure I spread over 5 years 10 years 20 years 30 years hence it does not come in the first year itself capital income I record immediately because income yes whatever is the relation value that is the total income yes income yes if it is grant if I have purchased it then I have to then calculate the difference of the carrying value and the sale value it is from the project point then the method yes then I will have some value of exact net value yes so I am considering a case where it is grant you said it is a grant in the first case any other question yes sir during previous year I have shown my income as excess okay this year I want to report it back so for that I have to show it as a prior period expenditure or no but why you want to reverse the income first of all you have to give me complete case last year I had an income of 100 rupees suppose I presume that from 100 students I will get fees but afterwards I came to know that out of that 100 10 students have already left but for which I had given extra provision that I am supposed to receive that I want to reverse it back so how I will adjust whether it will I will show it as a first of all for income I don't create provision that means I don't estimate that I will have 100 students and I create income for 100 students I book income only when I get the money or I know that okay 100 students are there when it is confirmed I book income we are following a conservative approach in conservative approach income is booked only when we know that it is going to realize okay in any case suppose it is not students it is conference fees I have built them or any other fees I have built them build them book income okay next year I come to know that I will they will not pay me then there is a bad debt it is not a prior paid item they have not paid me so I you have to present a good case mother I don't know explain me what is there in your mind with entire example then I can tell whether it is prior paid or not suppose I made a wrong entry mother only 59 came only 59 paid me but I booked 60 income now that is a error I should have booked for 59 I booked for 60 next year I come to know that I have made that error then I should show it as prior paid error and show it in expenditure account prior period expenditure prior paid expenditure any other questions any other doubts break for lunch thank you so much