CA NITIN GOEL IND AS 8

ICAI STUDY MATERIAL

Question 1
Can an entity voluntarily change one or more of its accounting policies?

Solution
A change in an accounting policy can be made only if change is required or permitted by Ind AS 8.
As per para 14 of Ind AS 8, an entity shall change an accounting policy only if the change:
a) is required by an Ind 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 entity’s financial position, financial
performance or cash flows.
Para 15 of the standard states that the users of financial statements need to be able to compare
the financial statements of an entity 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
above criteria.
Paragraph 14(b) lays down two requirements that must be complied with in order to make a
voluntary change in an accounting policy. First, the information resulting from application of the
changed (i.e., the new) accounting policy must be reliable. Second, the changed accounting policy
must result in “more relevant” information being presented in the financial statements.
Whether a changed accounting policy results in reliable and more relevant financial information
is a matter of assessment in the particular facts and circumstances of each case. In order to
ensure that such an assessment is made judiciously (such that a voluntary change in an
accounting policy does not effectively become a matter of free choice), paragraph 29 of Ind AS 8
requires an entity making a voluntary change in an accounting policy to disclose, inter alia, “the
reasons why applying the new accounting policy provides reliable and more relevant information.”

Question 2 (PYQ Dec 2021 (5 Marks) & MTP May 2024)

Entity ABC acquired a building for its administrative purposes and presented the same as property,
plant and equipment (PPE) in the financial year 20X1-20X2. During the financial year 20X2-20X3, it
relocated the office to a new building and leased the said building to a third party. Following the
change in the usage of the building, Entity ABC reclassified it from PPE to investment property in
the financial year 20X2-20X3. Should Entity ABC account for the change as a change in accounting
policy?

Solution
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for transactions,
other events or conditions that differ in substance from those previously occurring are not
changes in accounting policies.
As per Ind AS 16, ‘property, plant and equipment’ are tangible items that:
a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
b) are expected to be used during more than one period.”

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As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or
both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business.”
As per the above definitions, whether a building is an item of property, plant and equipment (PPE)
or an investment property for an entity depends on the purpose for which it is held by the entity.
It is thus possible that due to a change in the purpose for which it is held, a building that was
previously classified as an item of property, plant and equipment may warrant reclassification as
an investment property, or vice versa. Whether a building is in the nature of PPE or investment
property is determined by applying the definitions of these terms from the perspective of that
entity. Thus, the classification of a building as an item of property, plant and equipment or as an
investment property is not a matter of an accounting policy choice.
Accordingly, a change in classification of a building from property, plant and equipment to
investment property due to change in the purpose for which it is held by the entity is not a change
in an accounting policy.

Question 3
Whether change in functional currency of an entity represents a change in accounting policy?

Solution
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for transactions,
other events or conditions that differ in substance from those previously occurring are not
changes in accounting policies.
As per Ind AS 21, ‘functional currency’ is the currency of the primary economic environment in
which the entity operates.
Paragraphs 9-12 of Ind AS 21 list factors to be considered by an entity in determining its functional
currency. It is recognised that there may be cases where the functional currency is not obvious.
In such cases, Ind AS 21 requires the management to use its judgement to determine the functional
currency that most faithfully represents the economic effects of the underlying transactions,
events and conditions.
Paragraph 13 of Ind AS 21 specifically notes that an entity’s functional currency reflects the
underlying transactions, events and conditions that are relevant to it. Accordingly, once
determined, the functional currency is not changed unless there is a change in those underlying
transactions, events and conditions. Thus, functional currency of an entity is not a matter of an
accounting policy choice.
In view of the above, a change in functional currency of an entity does not represent a change in
accounting policy and Ind AS 8, therefore, does not apply to such a change. Ind AS 21 requires that
when there is a change in an entity’s functional currency, the entity shall apply the translation
procedures applicable to the new functional currency prospectively from the date of the change.

Question 4
An entity developed one of its accounting policies by considering a pronouncement of an overseas
national standard-setting body in accordance with Ind AS 8. Would it be permissible for the entity
to change the said policy to reflect a subsequent amendment in that pronouncement

Solution
In the absence of an Ind AS that specifically applies to a transaction, other event or condition,
management may apply an accounting policy from the most recent pronouncements of
International Accounting Standards Board and in absence thereof those of the other standard-

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setting bodies that use a similar conceptual framework to develop accounting standards. If,
following an amendment of such a pronouncement, the entity chooses to change an accounting
policy, that change is accounted for and disclosed as a voluntary change in accounting policy. As
such a change is a voluntary change in accounting policy, it can be made only if it results in
information that is reliable and more relevant (and does not conflict with the sources in Ind AS 8).

Question 5
Whether an entity can change its accounting policy of subsequent measurement of property, plant
and equipment (PPE) from revaluation model to cost model?

Solution
Paragraph 29 of Ind AS 16 provides that an entity shall choose either the cost model or the
revaluation model as its accounting policy for subsequent measurement of an entire class of PPE.
A change from revaluation model to cost model for a class of PPE can be made only if it meets
the condition specified in Ind AS 8 paragraph 14(b) i.e. the change results in the financial
statements providing reliable and more relevant information to the users of financial statements.
For example, an unlisted entity planning IPO may change its accounting policy from revaluation
model to cost model for some or all classes of PPE to align the entity’s accounting policy with that
of listed markets participants within that industry so as to enhance the comparability of its
financial statements with those of other listed market participants within the industry. Such a
change – from revaluation model to cost model is not expected to be frequent.
Where the change in accounting policy from revaluation model to cost model is considered
permissible in accordance with Ind AS 8 paragraph 14(b), it shall be accounted for retrospectively,
in accordance with Ind AS 8.

Question 6
Whether an entity is required to disclose the impact of any new Ind AS which is issued but not yet
effective in its financial statements as per Ind AS 8?

Solution
Paragraph 30 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors, states
as follows:
“When an entity has not applied a new Ind AS that has been issued but is not yet effective, the
entity shall disclose:
a) this fact; and
b) known or reasonably estimable information relevant to assessing the possible impact that
application of the new Ind AS will have on the entity’s financial statements in the period of
initial application.”
Accordingly, it may be noted that an entity is required to disclose the impact of Ind AS which has
been issued but is not yet effective.

Question 7
Whether a change in inventory cost formula is a change in accounting policy or a change in
accounting estimate?

Solution
As per Ind AS 8, accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. Further, paragraph
36(a) of Ind AS 2, ‘Inventories’, specifically requires disclosure of ‘cost formula used’ as a part of
disclosure of accounting policies adopted in measurement of inventories.
Accordingly, a change in cost formula is a change in accounting policy.

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Question 8 (RTP May 2020)

An entity has presented certain material liabilities as non-current in its financial statements for
periods upto 31st March, 20X1. While preparing annual financial statements for the year ended 31st
March, 20X2, management discovers that these liabilities should have been classified as current.
The management intends to restate the comparative amounts for the prior period presented (i.e.,
as at 31st March, 20X1). Would this reclassification of liabilities from non-current to current in the
comparative amounts be considered to be correction of an error under Ind AS 8? Would the entity
need to present a third balance sheet?
Solution
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not
comply with Ind AS if they contain either material errors or immaterial errors made intentionally
to achieve a particular presentation of an entity’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, and these prior period errors are corrected in the comparative information
presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of liabilities from non-current to current would
be considered as correction of an error under Ind AS 8. Accordingly, in the financial statements
for the year ended 31st March, 20X2, the comparative amounts as at 31st March, 20X1 would be
restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding
period in addition to the minimum comparative financial statements, if, inter alia, it makes a
retrospective restatement of items in its financial statements and the restatement has a material
effect on the information in the balance sheet at the beginning of the preceding period.
Accordingly, the entity should present a third balance sheet as at the beginning of the preceding
period, i.e., as at 1st April, 20X0 in addition to the comparatives for the financial year 20X0-20X1.

Question 9
A carpet retail outlet sells and fits carpets to the general public. It recognizes revenue when the
carpet is fitted, which on an average is six weeks after the purchase of the carpet. It then decides
to sub-contract the fitting of carpets to self-employed fitters. It now recognizes revenue at the
point-of-sale of the carpet. Whether this change in recognising the revenue is a change in
accounting policy as per the provision of Ind AS 8?
Solution
This is not a change in accounting policy as the carpet retailer has changed the way that the
carpets are fitted. Therefore, there would not be any need to retrospectively change the prior
period figures for revenue already recognized.

Question 10
Under what circumstances an entity is required to present a third balance sheet at the beginning
of the preceding period?
Solution
As per paragraph 40A of Ind AS 1, Presentation of Financial Statements, an entity shall present a
third balance sheet as at the beginning of the preceding period in addition to the minimum
comparative financial statements required by paragraph 38A of the standard if:
a) it applies an accounting policy retrospectively, makes a retrospective restatement of items in
its financial statements or reclassifies items in its financial statements; and
b) the retrospective application, retrospective restatement or the reclassification has a material
effect on the information in the balance sheet at the beginning of the preceding period.
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Question 11 (MTP May 2020)

During 20X2, Delta Ltd., changed its accounting policy for depreciating property, plant and
equipment, so as to apply a component approach completely, whilst at the same time adopting the
revaluation model.
In years before 20X2, Delta Ltd.’s asset records were not sufficiently detailed to apply a component
approach fully. At the end of 20X1, management commissioned an engineering survey, which
provided information on the components held and their fair values, useful lives, estimated residual
values and depreciable amounts at the beginning of 20X2. However, the survey did not provide a
sufficient basis for reliably estimating the cost of those components that had not previously been
accounted for separately, and the existing records before the survey did not permit this
information to be reconstructed.
Delta Ltd.’s management considered how to account for each of the two aspects of the accounting
change. They determined that it was not practicable to account for the change to a fuller
component approach retrospectively, or to account for that change prospectively from any earlier
date than the start of 20X2. Also, the change from a cost model to a revaluation model is required
to be accounted for prospectively. Therefore, management concluded that it should apply Delta
Ltd.’s new policy prospectively from the start of 20X2.
Additional information:
(i) Delta Ltd.’s tax rate is 30%
(ii) Property, plant and equipment at the end of 20X1:
Cost ₹ 25,000
Depreciation ₹ 14,000
Net book value ₹ 11,000
(iii) Prospective depreciation expense for 20X2 (old basis) ₹ 1,500
(iv) Some results of the engineering survey:
Valuation ₹ 17,000
Estimated residual value ₹ 3,000
Average remaining asset life 7 years
Depreciation expense on existing property, plant and equipment for ₹ 2,000
20X2 (new basis)
You are required to prepare the relevant note for disclosure in accordance with Ind AS 8.

Solution
Extract from the notes
From the start of 20X2, Delta Ltd., changed its accounting policy for depreciating property, plant
and equipment, so as to apply much more fully a components approach, whilst at the same time
adopting the revaluation model. Management takes the view that this policy provides reliable and
more relevant information because it deals more accurately with the components of property,
plant and equipment and is based on up-to-date values. The policy has been applied prospectively
from the start of 20X2 because it was not practicable to estimate the effects of applying the policy
either retrospectively, or prospectively from any earlier date. Accordingly, the adoption of the new
policy has no effect on prior years.
The impact on the financial statements would be as under:
Particulars ₹
Increase the carrying amount of property, plant and equipment at the 6,000
start of the year (17,000-11,000)
Increase the opening deferred tax provision (6,000 x 30%) 1,800
Create a revaluation surplus at the start of the year (6,000 – 1,800) 4,200
Increase depreciation expense by (2,000 –1,500) 500
Reduce tax expense on depreciation (30%) 150

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Question 12
Is change in the depreciation method for an item of property, plant and equipment a change in
accounting policy or a change in accounting estimate?

Solution
As per paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, the depreciation method
used shall reflect the pattern in which the asset’s future economic benefits are expected to be
consumed by the entity. The depreciation method applied to an asset shall be reviewed at least at
each financial year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method shall be changed
to reflect the changed pattern. Such a change is accounted for as a change in an accounting
estimate in accordance with Ind AS 8.
As per the above, depreciation method for a depreciable asset has to reflect the expected pattern
of consumption of future economic benefits embodied in the asset. Determination of depreciation
method involves an accounting estimate and thus depreciation method is not a matter of an
accounting policy.
Accordingly, Ind AS 16 requires a change in depreciation method to be accounted for as a change
in an accounting estimate, i.e., prospectively.

Question 13 (RTP May 2020)

An entity charged off certain expenses as finance costs in its financial statements for the year
ended 31st March, 20X1. While preparing annual financial statements for the year ended 31st March,
20X2, management discovered that these expenses should have been classified as other expenses
instead of finance costs. The error occurred because the management inadvertently
misinterpreted certain facts. The entity intends to restate the comparative amounts for the prior
period presented in which the error occurred (i.e., year ended 31st March, 20X1).
Would this reclassification of expenses from finance costs to other expenses in the comparative
amounts will be considered as correction of an error under Ind AS 8? Would the entity need to
present a third balance sheet?

Solution
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not
comply with Ind AS if they contain either material errors or immaterial errors made intentionally
to achieve a particular presentation of an entity’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, and these prior period errors are corrected in the comparative information
presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of expenses from finance costs to other
expenses would be considered as correction of an error under Ind AS 8. Accordingly, in the
financial statements for the year ended 31st March, 20X2, the comparative amounts for the year
ended 31st March, 20X1 would be restated to reflect the correct classification.

Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding
period in addition to the minimum comparative financial statements if, inter alia, it makes a
retrospective restatement of items in its financial statements and the restatement has a material
effect on the information in the balance sheet at the beginning of the preceding period.
In the given case, the retrospective restatement of relevant items in statement of profit and loss
has no effect on the information in the balance sheet at the beginning of the preceding period (1st
April, 20X0). Therefore, the entity is not required to present a third balance sheet.

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Question 14 (PYQ Nov 2022 (5 Marks))

While preparing the annual financial statements for the year ended 31st March, 20X3, an entity
discovers that a provision for constructive obligation for payment of bonus to selected employees
in corporate office (material in amount) which was required to be recognised in the annual
financial statements for the year ended 31st March, 20X1 was not recognised due to oversight of
facts. The bonus was paid during the financial year ended 31st March, 20X2 and was recognised
as an expense in the annual financial statements for the said year. Would this situation require
retrospective restatement of comparatives considering that the amount was material?

Solution
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not
comply with Ind AS if they contain either material errors or immaterial errors made intentionally
to achieve a particular presentation of an entity’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, and these prior period errors are corrected in the comparative information
presented in the financial statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning
of the preceding period in addition to the minimum comparative financial statements if, inter alia,
it makes a retrospective restatement of items in its financial statements and the retrospective
restatement has a material effect on the information in the balance sheet at the beginning of the
preceding period.
In the given case, expenses for the year ended 31st March, 20X1 and liabilities as at 31st March,
20X1 were understated because of non-recognition of bonus expense and related provision.
Expenses for the year ended 31st March, 20X2, on the other hand, were overstated to the same
extent because of recognition of the aforesaid bonus as expense for the year. To correct the above
errors in the annual financial statements for the year ended 31st March, 20X3, the entity should:
a) Restate the comparative amounts (i.e., those for the year ended 31st March, 20X2) in the
statement of profit and loss; and
b) Present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April,
20X1) wherein it should recognise the provision for bonus and restate the retained earnings.

Question 15 (RTP Nov 2021 (Similar) & RTP Nov 2022)

While preparing interim financial statements for the half-year ended 30th September, 20X1, an
entity notes that there has been an under-accrual of certain expenses in the interim financial
statements for the first quarter ended 30th June, 20X1. The amount of under accrual is assessed
to be material in the context of interim financial statements. However, it is expected that the
amount would be immaterial in the context of the annual financial statements. The management
is of the view that there is no need to correct the error in the interim financial statements
considering that the amount is expected to be immaterial from the point of view of the annual
financial statements. Whether the management’s view is acceptable?

Solution
Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with Ind AS if
they contain either material errors or immaterial errors made intentionally to achieve a particular
presentation of an entity’s financial position, financial performance or cash flows.
As regards the assessment of materiality of an item in preparing interim financial statements,
paragraph 25 of Ind AS 34, Interim Financial Statements, states as follows:
“While judgement is always required in assessing materiality, this Standard bases the recognition
and disclosure decision on data for the interim period by itself for reasons of understandability of
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the interim figures. Thus, for example, unusual items, changes in accounting policies or estimates,
and errors are recognised and disclosed on the basis of materiality in relation to interim period
data to avoid misleading inferences that might result from non-disclosure. The overriding goal is
to ensure that an interim financial report includes all information that is relevant to understanding
of an entity’s financial position and performance during the interim period.”
As per the above, while materiality judgements always involve a degree of subjectivity, the
overriding goal is to ensure that an interim financial report includes all the information that is
relevant to an understanding of the financial position and performance of the entity during the
interim period. It is therefore not appropriate to base quantitative assessments of materiality on
projected annual figures when evaluating errors in interim financial statements.
Accordingly, the management is required to correct the error in the interim financial statements
since it is assessed to be material in relation to interim period data.

Question 16
ABC Ltd has an investment property with an original cost of 1,00,000 which it inadvertently omitted
to depreciate in previous financial statements. The property was acquired on 1st April, 20X1. The
property has a useful life of 10 years and is depreciated using straight line method. Estimated
residual value at the end of 10 year is Nil.
How should the error be corrected in the financial statements for the year ended 31st March, 20X4,
assuming the impact of the same is considered material? For simplicity, ignore tax effects.

Solution
The error shall be corrected by retrospectively restating the figures for financial year 20X2-20X3
and also by presenting a third balance sheet as at 1st April, 20X2 which is the beginning of the
earliest period presented in the financial statements.

Question 17 (RTP May 2019)

ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior to the
change, inventory was valued using the first in first out method (FIFO). However, it was felt that in
order to match current practice and to make the financial statements more relevant and reliable,
a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
a. 31st March, 20X1 - Increase of ₹ 10 million
b. 31st March, 20X2 - Increase of ₹ 15 million
c. 31st March, 20X3 - Increase of ₹ 20 million
Profit or loss under the FIFO valuation model are as follows:
20X2-20X3 20X1 20X2
Revenue 324 296
Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58
Retained earnings at 31st March, 20X1 were ₹ 423 million
You are required to present the impact of change in accounting policy in the profit or loss and
produce an extract of the statement of changes in equity in accordance with Ind AS 8.

Solution
Profit or loss under weighted average valuation method is as follows:

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20X2-20X3 20X1-20X2 (Restated)

Revenue 324 296
Cost of goods sold (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63
Statement of changes in Equity (extract)
Retained earnings
Retained earnings
(Original)
At 1st April, 20X1 423 423
Change in inventory valuation policy 10 -
At 1st April, 20X1 (Restated) 433 -
Profit for the year 20X1-20X2 63 58
At 31st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31st March, 20X3 569 549

Question 18 (RTP Nov 2019 & MTP May 2021/Nov 2022)

During 20X4-20X5, Cheery Limited discovered that some products that had been sold during 20X3-
20X4 were incorrectly included in inventory at 31st March, 20X4 at ₹ 6,500.
Cheery Limited’s accounting records for 20X4-20X5 show sales of ₹ 104,000, cost of goods sold
of ₹ 86,500 (including ₹ 6,500 for the error in opening inventory), and income taxes of 5,250. In
20X3-20X4, Cheery Limited reported:
₹
Sales 73,500
Cost of goods sold (53,500)
Profit before income taxes 20,000
Income taxes (6,000)
Profit 14,000
Basic and diluted EPS 2.8
The 20X3-20X4 opening retained earnings was ₹20,000 and closing retained earnings was ₹
34,000. Cheery Limited’s income tax rate was 30% for 20X4-20X5 and 20X3-20X4. It had no other
income or expenses.
Cheery Limited had ₹ 50,000 (5,000 shares of ₹ 10 each) of share capital throughout, and no other
components of equity except for retained earnings.
State how the above will be treated /accounted in Cheery Limited’s Statement of profit and loss,
statement of changes in equity and in notes wherever required for current period and earlier
period(s) as per relevant Ind AS.

Solution
Cheery Limited
Extract from the Statement of profit and loss
(Restated)
20X4-20X5
20X3-20X4
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89

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Cheery Limited
Statement of Changes in Equity
Share Retained
Total
capital earnings
Balance at 31st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31st March, 20X4 as 9,450 9,450
restated
Balance at 31st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31st March, 20X5 16,800 16,800
Balance at 31st March, 20X5 50,000 46,250 96,250
Extract from the Notes
Some products that had been sold in 20X3-20X4 were incorrectly included in inventory at 31st
March, 20X4 at ₹ 6,500. The financial statements of 20X3-20X4 have been restated to correct this
error. The effect of the restatement on those financial statements is summarized below:
Effect on 20X3-20X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950
(Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e. 1st April, 20X3.

Question 19 (RTP May 2021 & RTP May 2023)

In 20X3-20X4, after the entity’s 31st March 20X3 annual financial statements were approved for
issue, a latent defect in the composition of a new product manufactured by the entity was
discovered (that is, a defect that could not be discovered by reasonable or customary inspection).
As a result of the latent defect the entity incurred ₹ 1,00,000 of unanticipated costs for fulfilling its
warranty obligation in respect of sales made before 31st March 20X3. An additional ₹ 20,000 was
incurred to rectify the latent defect in products sold during 20X3-20X4 before the defect was
detected and the production process rectified, ₹ 5,000 of which relates to items of inventory at
31st March 20X3. The defective inventory was reported at cost ₹ 15,000 in the 20X2-20X3 financial
statements when its selling price less costs to complete and sell was estimated at ₹ 18,000. The
accounting estimates made in preparing the 31st March 20X3 financial statements were
appropriately made using all reliable information that the entity could reasonably be expected to
have been obtained and taken into account in the preparation and presentation of those financial
statements.
Analyse the above situation in accordance with relevant Ind AS.

Solution
Ind AS 8 is applied in selecting and applying accounting policies, and accounting for changes in
accounting policies, changes in accounting estimates and corrections of prior period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability,
or the amount of the periodic consumption of an asset. This change in accounting estimate is an
outcome of 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.
Further, the effect of change in an accounting estimate, shall be recognised prospectively by
including it in profit or 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.
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Prior period errors are omissions from, and misstatements in, the entity’s financial statements
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.
On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31st March 20X3 or before the
financial statements were approved for issue, so understatement of the warranty provision ₹
1,00,000 and overstatement of inventory ₹ 2,000 (Note 1) in the 31st March 20X3 financial
statements are not prior period errors.
The effects of the latent defect that relate to the entity’s financial position at 31st March 20X3 are
changes in accounting estimates.
In preparing its financial statements for 31st March 20X3, the entity made the warranty provision
and inventory valuation appropriately using all reliable information that the entity could
reasonably be expected to have obtained and had taken into account the same in the preparation
and presentation of those financial statements.
Consequently, the additional costs are expensed in calculating profit or loss for 20X3-20X4.
Working Note:
Inventory is measured at the lower of cost (i.e. ₹ 15,000) and fair value less costs to complete and
sell (i.e. ₹ 18,000 originally estimated minus ₹ 5,000 costs to rectify latent defect) = ₹ 13,000.

Question 20 (RTP Nov 2023)

In its financial statements for the year ended 31st March, 20X2, Y Ltd. reported ₹ 73,500 revenue
(sales), ₹ 53,500 cost of sales, ₹ 6,000 income tax expense, ₹ 20,000 retained earnings at 1st April,
20X1 and ₹ 34,000 retained earnings at 31st March, 20X2.
In 20X2-20X3, after the 20X1-20X2 financial statements were approved for issue, Y Ltd. discovered
that some products sold in 20X1-20X2 were incorrectly included in inventories at 31st March, 20X2
at their cost of ₹ 6,500.
In 20X2-20X3, Y Ltd. changed its accounting policy for the measurement of investments in
associates after initial recognition from cost model to the fair value model as per Ind AS 109. It
acquired its only investment in an associate for ₹ 3,000 many years ago. The associate’s equity is
not traded on a securities exchange (that is, a published price quotation is not available). The fair
value of the investment was determined reliably using an appropriate equity valuation model on
31st March, 20X3 at ₹ 25,000 (20X1-20X2: ₹ 20,000 and 20X0-20X1: ₹ 18,000).
At 31st March, 20X3, as a result of usage of improved lubricants, Y Ltd. reassessed the useful life
of Machine A from four years to seven years. Machine A is depreciated on the straight-line method
to a Nil residual value. It was acquired for ₹ 6,000 on 1st April, 20X0.
Inventories of the type manufactured by Machine A were immaterial at the end of each reporting
period. Y Ltd.’s accounting records for the year ended 31st March, 20X3, before accounting for
change in accounting policy and change in accounting estimate, record ₹ 1,04,000 revenue (sales),
₹ 86,500 cost of sales (including ₹ 6,500 for the error in opening inventory and ₹ 1,500 depreciation
for Machine A) and ₹ 5,250 income tax expense.
Y Ltd. presents financial statements with one year of comparative information.
For simplicity, the tax effect of all items of income and expenses should be assumed to be 30% of
the gross amount.
Draft an extract showing how the correction of the prior period error, change in accounting policy
and change in accounting estimate could be presented in the Statement of Profit and Loss and
Statement of Changes in Equity (Retained Earnings) and disclosed in the Notes of Y Ltd. for the
year ended 31st March, 20X3.
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 CA NITIN GOEL IND AS 8

Solution
Extract of Y Ltd.’s Statement of Profit and Loss for the year ended 31st March, 20X3
20X2-20X3 Reference 20X1- 20X2 Reference
to W.N. Restated to W.N.
₹ ₹
Revenue 1,04,000 73,500
Cost of sales (20X1-20X2
previously ₹ 53,500) (79,100) 1 (60,000) 4
Gross profit 24,900 13,500
Other income — change in
the measurement policy i.e.
the value of investment in 5,000 2 2,000 5
associate at FVTPL
Profit before tax 29,900 15,500
Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

Extract of Y Ltd.’s Statement of Changes in Equity (Retained Earnings) for the year
ended 31st March, 20X3
20X2-20X3 Reference 20X1- 20X2 Reference
to W.N. Restated to W.N.
₹ ₹
Retained earnings, as restated,
at the beginning of the year
- as previously stated 34,000 20,000
- effect of the correction of a -
prior period error (4,550) 7
- effect of a change in 11,900 13 10,500 12
accounting policy
41,350 30,500
Profit for the year 20,930 10,850
Retained earnings at the end of 62,280 41,350
the year
Y Ltd.
Extract of Notes to the Financial Statements for the year ended 31st March, 20X3
Note X : Change in Accounting Estimates
Due to usage of improved lubricants the estimated useful life of the machine used for production
was increased from four years to seven years. The effect of the change in the useful life of the
machine is to reduce the depreciation allocation by ₹ 900 in 20X2-20X3 and 20X3-20X4. The after-
tax effect is an increase in profit for the year of ₹ 630 for each of the two years.
Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ₹ 600 because of revision in the
useful life of machinery, as under the initial estimate, the asset would have been fully depreciated
at the end of 20X3-20X4. The after-tax effect for these three years is a decrease in profit for the
year by ₹ 420 per year.
Note Y : Correction of Prior Period Error
In 20X2-20X3 the entity identified that ₹ 6,500 products that had been sold in 20X1-20X2 were
included erroneously in inventory at 31st March, 20X2. The financial statements of 20X1-20X2 have
been restated to correct this error. The effect of the restatement is ₹ 6,500 increase in the cost of
sales and ₹ 4,550 decrease in profit for the year ended 31st March, 20X2 after decreasing income
tax expense by ₹ 1,950. This resulted in ₹ 4,550 (decrease) restatement of retained earnings at 31st
March, 20X2.
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 CA NITIN GOEL IND AS 8

Note Z : Change in Accounting Policy

In 20X2-20X3 the entity changed its accounting policy for the measurement of investments in
associates from cost model to fair value model as per Ind AS 109. Management judged that this
policy provides reliable and more relevant information because dividend income and changes in
fair value are inextricably linked as integral components of the financial performance of an
investment in an associate and measurement at fair value is necessary if that financial performance
is to be reported in a more meaningful way. This change in accounting policy has been accounted
for retrospectively. The comparative information has been restated. A new line item, ‘Other income
— change in the fair value of investment in associate’, has been added in the Statement of Profit
and Loss and Retained Earnings. The effect of the restatement has been to add income of ₹ 2,000
as a result of the increase in value of the associate during the year ended 31st March, 20X2 which
resulted in ₹ 1,400 increase in profit for the year (after including a resulting increase in income tax
expense of ₹ 600). This, together with ₹ 10,500 (increase) restatement of retained earnings at 31st
March, 20X1, resulted in a ₹ 11,900 increase in retained earnings at 31st March, 20X2. Furthermore,
profit for the year ended 31st March, 20X3 was ₹ 3,500 higher (after deducting ₹ 1,500 tax effect) as
a result of recording a further ₹ 5,000 (W.N.2) increase in the fair value of the investment in an
associate.

Working Notes:
1.) ₹ 86,500 (given) minus ₹ 6,500 correction of error (now recognised as an expense in 20X1-20X2)
minus ₹ 900 (W.N.9) effect of the change in accounting estimate.
2.) ₹ 25,000 fair value (20X2-20X3) minus ₹ 20,000 fair value (20X1-20X2) = ₹ 5,000 (the effect of
applying the new accounting policy (fair value model) in 20X2-20X3).
3.) ₹ 5,250 + ₹ 1,950 (W.N.8) + 30% (₹ 900 (W.N.9) reduction in depreciation resulting from the change
in accounting estimate) + 30% (₹ 5,000 increase in the fair value of investment property — change
in accounting policy) = ₹ 8,970.
4.) ₹ 53,500 as previously stated + ₹ 6,500 (products sold and incorrectly included in closing inventory
in 20X1-20X2) = ₹ 60,000 (that is, the prior period error is corrected retrospectively by restating
the comparative amounts).
5.) ₹ 20,000 fair value (20X1-20X2) minus ₹ 18,000 fair value (20X0-20X1) = ₹ 2,000 (the effect in 20X1-
20X2 of the change in accounting policy for investments in associates from the cost model to the
fair value model).
6.) ₹ 6,000 as previously stated minus ₹ 1,950 (W.N.8) correction of prior period error + 30% (₹ 2,000
change in accounting policy) = ₹ 4,650.
7.) ₹ 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) – ₹ 1,950 (W.N.8) (tax
overstated in 20X1-20X2) = ₹ 4,550.
8.) ₹ 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) x 30% (income tax rate)
= ₹ 1,950.
9.) ₹ 1,500 depreciation (using old estimate, that is, ₹ 6,000 cost ÷ 4 years) minus ₹ 600 (W.N.10) (using
new estimate of useful life) = ₹ 900.
10.) ₹ 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ₹ 600 depreciation per year.
11.)[₹ 6,000 cost minus (₹ 1,500 depreciation x 2 years)] = ₹ 3,000 carrying amount at 31st March, 20X2.
12.) (₹ 18,000 fair value of investment in associates at 31st March, 20X1 minus ₹ 3,000 carrying amount
based on the cost model at the same date) x 0.7 (to reflect 30% income tax rate) = ₹ 10,500 (effect
of a change in accounting policy (from cost model to fair value model)).
13.) ₹ 10,500 (W.N.12) + [₹ 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] = ₹ 11,900.

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ADDITIONAL QUESTIONS

Question 21 (MTP Dec 2021)

Given the decreased revenue in financial year 20X1-20X2, management of PQR Ltd is keen to
identify ways to reduce the overall impact on profit and loss. A consultant has suggested that they
could explore changing the basis of depreciation from SLM to hours-in-use but not entirely sure
if this is permitted. Annual depreciation charge for financial year 20X1-20X2 would be ₹ 25 lacs
using SLM and ₹ 7 lacs using new method. This difference is significant for PQR Ltd.’s financial
statements.
What are the considerations in determining whether a change in depreciation methodology is
appropriate, and how should this change be accounted for? Given the risk of charging lower
depreciation per annum and the possibility that the asset will be depreciated over a period longer
than it would otherwise be (under SLM basis), what other safeguards do you suggest, in order to
ensure compliance with relevant standards in Ind AS and its framework?

Solution
As illustrated in per para 32 of Ind AS 8, Change in method of depreciation is a change in
accounting estimates.
Considerations in determining whether the change in depreciation methodology is appropriate:
Paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, state that the depreciation
method used shall reflect the pattern in which the asset’s future economic benefits are expected
to be consumed by the entity.
The depreciation method applied to an asset shall be reviewed at least at each financial year-end
and, if there has been a significant change in the expected pattern of consumption of the future
economic benefits embodied in the asset, the method shall be changed to reflect the changed
pattern.
Accounting procedure:
Such a change is accounted for as a change in an accounting estimate in accordance with Ind AS
8. Depreciation is a function of several factors, with extent of usage and efflux of time being its
primary determinants. The hours-in-use method relates the amount of periodic depreciation
charge only to one of the above two factors, namely, the extent of usage as reflected by the number
of hours. This method may therefore be said to be appropriate as per para 62 of Ind AS 16.
Determination of depreciation method involves an accounting estimate; depreciation method is
not a matter of an accounting policy. Accordingly, as per Ind AS 8 and Ind AS 16, a change in
depreciation method shall be accounted for as a change in accounting estimate, i.e; prospectively.
However, given the possibility that the asset will be depreciated over a period longer than it would
be under SLM basis, the company will need to assess if there are any impairment triggers and
carry out impairment testing as required under Ind AS 36.

Question 22 (PYQ Nov 2023 (5 Marks))

HG Incredibles Limited had in the recent past made a right issue. In its offer document to its
members, it had projected a surplus of ₹ 50 crores during the year ending 31.03.2023. The draft
result for the year ended 31.03.2023, prepared on the hitherto followed accounting policies and
presented for perusal of the Board of Directors showed a surplus of ₹ 5 Crores. The Board in
consultation with the Managing Director, decided on the following:
a. Value year-end Inventory at Works Cost (₹ 40 Crores) instead of hitherto method of valuation
of inventory at Prime Cost (₹ 20 Crores);
b. Not to provide for "After Sales Expenses" during the warranty period. Till the last year, provision
for 1% of Sales used to be made under the concept of "matching of costs against revenue" and
actual expenses used to be charged against provision. The Board now decided to account for
expenses as and when actually they are incurred. Sales during the year was ₹ 800 Crores;
c. Provide depreciation for the year on Straight Line Method on account of substantial additions
in Gross Block during the year, instead of on Reducing Balance Method, which was hitherto
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CA NITIN GOEL IND AS 8

adopted. As a consequence, ₹ 21 Crores depreciation is now less charged than it would have
been provided under the old method. (₹ 67 Crores on Reducing Balance method and ₹ 46 Crores
in Straight Line Method).
d. Provide for other than temporary fall in the value of investments, which fall took place in last
6 years, amounting to ₹ 12 Crores.
Discuss the above situations as per applicable Ind AS, particularly Ind AS 8. Whether the above
are changes in accounting policies or changes in estimates?

Solution
a. Paragraph 36(a) of Ind AS 2, ‘Inventories’, specifically requires disclosure of ‘cost formula used’
as a part of disclosure of accounting policies adopted in measurement of inventories.
Accordingly, a change in cost formula is a change in accounting policy. The entity should
apply the change in the accounting policy retrospectively. For retrospective application of a
change in accounting policy, adjust the opening balance of each affected component for the
earliest prior period presented and the other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied. Usually, the
adjustment is made to retained earnings.
Income tax effect due to change in accounting policy will be accounted for in accordance with
Ind AS 12.
b. Here, since the question talks about making of provision, it is assumed that assurance
warranty has been provided by the entity. Further, providing for 1% against after sales expenses
is an accounting policy decision. Now since, the company has decided not to make provision
for such expenses but to account for the same as and when expenses are incurred, there is a
change in accounting policy decision.
The change in accounting policy is accounted for retrospectively. For retrospective application
of a change in accounting policy, adjust the opening balance of each affected component for
the earliest prior period presented and the other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied. Usually, the
adjustment is made to retained earnings.
Income tax effect due to change in accounting policy will be accounted for in accordance with
Ind AS 12.
c. Determination of depreciation method involves an accounting estimate and thus depreciation
method is not a matter of an accounting policy. Accordingly, as per Ind AS 16, a change in
depreciation method should be accounted for as a change in accounting estimate in accordance
with Ind AS 8. Change in accounting estimate is accounted for prospectively. However, the
effect of the change is recognised as income or expense of the year in which the change is
made. The effect, if any, on future periods is recognised as income or expense in those future
periods.
d. Accounting for investment made by the entity falls under the purview of Ind AS 109 ‘Financial
Instruments’. As per Ind AS 109, subsequent measurement of financial instruments is done on
following basis:
• Measured at Amortised cost
• Measured at Fair value through Other Comprehensive Income (FVTOCI)
• Measured at Fair value through Profit or Loss (FVTPL)
In case the entity has subsequently measured its financial asset i.e. investment on the basis of
FVTOCI or FVTPL, then change in fair value would have been recorded earlier in previous
reporting period too. In such a case, there is no change in accounting policy or accounting
estimate. However, if the entity had not accounted for previous changes in its books, then it is
an error. If the material error occurred before the earliest prior period presented, an entity
shall, unless impracticable, correct the same retrospectively in the first set of financial
statements approved for issue after their discovery by restating the opening balances of
assets, liabilities and equity for the earliest prior period presented. Further, fair value change
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CA NITIN GOEL IND AS 8

is to be accounted for at every reporting date. Hence, restatement of the comparative amounts
for the prior period(s) presented in which the error occurred is also required to be done.
Further, if an entity reclassifies any financial asset, it must do so prospectively from
reclassification date. The entity shall not restate any previously recognised gains, losses
(including impairment gains or losses) or interest. Reclassification of financial asset will be
accounted for in accordance with the guidance given in Ind AS 109.

Question 23 (PYQ Nov 2024 (4 Marks))

You are required to analyse the following cases and advise whether they are related with prior
period errors or change in accounting estimate:
a) As per the judgement of court an arrear of salaries and wages relating to previous year
amounting to ₹ 15,00,000 will be paid in the current year. At the end of previous year, the
management of the company was of the opinion that arrears of salaries and wages would not
be required to be paid and accordingly no provision was made at the end of previous year.
b) Expenses of ₹ 1,50,000 of the previous year which were omitted from books of accounts of the
previous year due to an oversight.
c) The amount of provision for doubtful debts as at the end of the previous year was ₹ 10,00,000
of which debts of ₹ 6,00,000 were realized during the current year.
d) Company had taken a Group Insurance policy. During the previous year due to mistake of
Insurance Company the company paid less premium, which insurance company is demanding
to pay now.

Solution
a) In case, it is assumed that the judgement of court has been received after the approval of
previous year’s financial statements of the reporting entity and the probability for payment of
arrears of salaries and wages was remote in the previous year because of which the entity
had neither made any provision or disclosure, then the liability for arrears of salary and wages
would be considered as a change in accounting estimate in the current year.
Alternatively, if it is assumed that in case the judgement of court has been received before the
approval of financial statements of the previous year, then the entity should have adjusted the
liability in that year itself. In the absence of said accounting treatment in the previous year, it
will be considered a mistake and would be accounted for as a prior period error.

b) In the given case, since the information regarding expenses of ₹ 1,50,000 in the previous year
was available with the entity, and was omitted due to an oversight, it will be considered as a
prior period error.

c) As per para 32 of Ind AS 8, a loss allowance for expected credit losses (i.e. provision for
doubtful debts) applying Ind AS 109, Financial Instruments, is an example of accounting
estimate. Hence, any change in the previous year’s estimate on account of recovery of such
loss allowance in the current year would be a change in the accounting estimate in the current
year because of the uncertainties inherent in business activities and it is not possible to
measure the provision for doubtful debts with precise accuracy.

d) This is neither a case of prior period error nor a change in accounting estimates. In the given
case, the company did not have any information as on the balance sheet date and it is the
mistake committed by the Group Insurance company and not the reporting entity. Hence, the
demand for an additional premium amount by the Group Insurance Company will not be
considered as a prior period error for the reporting entity. Further, the entity had paid the
premium amount in the previous year, so no accounting estimate was involved thereupon.
Therefore, the additional demand cannot be considered as a change in accounting estimate for
the reporting entity.

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