The accountant of Moon Limited provides you the following information: (i) Provision for doubtful debts was created @ 3% till 31st March, 2025. From…

As per para 21 of AS 5 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies', the preparation of financial statements involves making estimates which are based on the circumstances existing at the time when the financial statements are prepared. It may be necessary to revise an estimate in a subsequent period if there is a change in the circumstances on which the estimate was based. Revision of an estimate, by its nature, does not bring the adjustment within the definitions of a prior period item or an extraordinary item [para 21 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies]. (i) In the given case, Provision for doubtful debts was created @ 3% till 31 March, 2025. From the Financial Year 2025-26, the rate of provision has been changed to 5%. As per AS-5 (Revised), this change in estimate is neither a prior period item nor an extraordinary item. Change in Accounting estimate is not a change in accounting policy. However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has material effect in the current period, should be disclosed and quantified. Any change in the accounting estimate which is expected to have a material effect in later periods should also be disclosed and quantified. (ii) As per AS 5, adopting an accounting policy for event or transactions that differ in substance from previously occurring events or transactions will not be considered as change in accounting policy. Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement is not a change in an accounting policy. (iii) As per AS-2 (Valuation of Inventories) and AS-5 (Net Profit or Loss, Prior Period Items and Changes in Accounting Policies): The method of determining cost (FIFO / Weighted Average) is an accounting policy choice. Any change in such method affects the measurement of inventory and profit. Hence a Change in cost formula in measuring the cost of inventories is a change in Accounting Policy (iv) The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial will not be treated as a change in an accounting policy.