Accounting Standard (AS) 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies
OBJECTIVES
The objective of this Standard is to prescribe the classification and disclosure of certain items in the statement of profit and loss so that all enterprises
prepare and present such a statement on a uniform
basis. This enhances the comparability of the financial statements of an enterprise over time and with the financial statements of other enterprises.
DEFINITIONS
The following terms are used in this Standard with the
meanings specified:
(a)Ordinary activities are any activities which are undertaken by an enterprise as par: of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or arising from, these activities.
Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to reoccur frequently or regularly.
Prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
Net Profit or Loss for the Period
All items of income and expense which are recognized in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise. (1)Normally, all items of income and expense which are
recognized in a period are included in the determination
of the net profit or loss for the
period this includes extraordinary items and the effects of
changes in accounting estimates.
(2)The net profit or loss for the period comprises the following components, each of which should be disclosed on the face
of the statement of profit and loss:
(a)extra ordinary items; (b)profit and loss from ordinary activities; (c) prior period items
Extraordinary Items
(a) Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of
each extraordinary item should be separately
disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
(b) Virtually all items of income and expense included
in the determination of net profit or loss for the
period arise in the course of the ordinary activities of the enterprise. Therefore, only on rare occasions does an-event or transaction give rise to an extraordinary item.
(d) However, claims from policy holders arising from an
earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against it such risks. Examples of events or transactions that generally give rise
to extraordinary items for most enterprises are:
(a)attachment of property of the enterprise; or
(b)an earthquake.
Profit or Loss from Ordinary Activities
When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
Although the items of income and expense described in last paragraph are not extraordinary items, the nature and amount of such items may be relevant to users of financial statements in understanding the financial position and
performance of an enterprise and in making projections
about financial position and performance. Disclosure of
such information is sometimes made in the notes to the
financial statements.
Prior Period Items
(a) The nature and amount of prior period items should be
separately disclosed in the statement of profit and loss in a
manner that their impart on the current profit or loss can he perceived. (b) The term 'prior period items', as defined in this Standard, refers only to income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.
e.g.. arrears payable to workers as a result of revision of wages with retrospective effect during the current period.
(c) Errors in the preparation of the financial statements of one or more prior periods may be discovered in the
current period. Errors may occur as a result of
mathematical mistakes, mistakes in applying accounting
policies, misinterpretation of facts, or oversight.
(d) Prior period items are generally infrequent in nature
and can be distinguished from changes in accounting estimates.
(e) Prior period items are normally included in the determination of net profit or loss for the current period.
DISCLOSURE
When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed seprately. Circumstances which may give rise to
separate disclosure of items of income and expenses
include:-
(a) the write-down of inventories to net realisable
value as well as the reversal of such write-
downs;
(b) a restructuring of the activities of an enterprise
and the reversal of any provisions for the costs of
restructuring;
(c)
disposals of items of fixed assets
(d) disposals of long-term investments;
(e) legislative changes having retrospective application;
(f) litigation settlements; and
(g) other reversals of provisions
Changes in Accounting Policies
(a) Users need to be able to compare the financial statements of an enterprise over a period of time in order to identify trends in its financial position, performance and cash flows. Therefore, the same accounting policies are normally adopted for similar
events or transactions in each period.
(b) Any change in an accounting policy which has a material effect
should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change.
(c) A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with
the specific transitional provisions, if any, contained in that
Accounting Standard.
