SS Ltd had made a Rights Issue of Shares 3 years back. In the Offer Document to its Members, it had projected a surplus of ₹ 40 Crores during the…

CA Intermediate · Advanced Accounting · RTP · September 2026
SS Ltd had made a Rights Issue of Shares 3 years back. In the Offer Document to its Members, it had projected a surplus of ₹ 40 Crores during the current Accounting Year. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the Board of Directors showed a deficit of ₹ 10 Crores. The Board in consultation with the Managing Director, decided on the following: (a) Value year-end inventory at Works Cost (₹50 Crores) instead of the hitherto method of valuation of inventory at Prime Cost (₹30 Crores). (b) Provide depreciation for the year on straight line basis on account of substantial additions in Gross Block during the year instead of on reducing balance method, which was hitherto adopted. As a consequence, the charge for depreciation at ₹ 27 Crores is lower than the amount of ₹ 45 Crores, which would have been provided had the old method been followed by ₹ 18 Crores. (c) Not to provide for "After Sales Expenses" during the warranty period. Till the last year, provision at 2% of Sales used to be made under the concept of "matching of costs against revenue" and actual expenses used to be charged against the provision. The Board now decided to account for expenses as and when actually incurred. Sales during the year total to ₹ 600 Crores. (d) Provide for permanent fail in the value of Investments - which fall had taken place over the past five years the provision being ₹ 10 Crores. As Chief Accountant of the Company, you are asked by the Directors to draft the Notes on Accounts for inclusion in the Annual Report for the year.

Suggested Answer and Working Notes:

As per AS 1, any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect. Notes on Accounts: (1) Change in Method of Valuation of Inventory: During the year, inventory has been valued at Works Cost, instead of valuing them at Prime Cost which was the practice till last year. This has been done to take cognizance of the more capital-intensive method of production on account of heavy capital expenditure during the year. Due to this change, the year-end inventory has been valued at ₹50 Crores (instead of ₹30 Crores at Prime Cost) and the profit for the year is greater by ₹20 Crores. (2) Change in Method of Providing Depreciation: Due to heavy capital-intensive method of production introduced during the year, the Company has decided to change the method of providing depreciation from Reducing Balance Method to Straight Line Method. Due to this change, depreciation has been provided at ₹27 Crores, which is lower by ₹18 Crores than the old method (WDV Method). Consequently, the profit is higher by ₹18 Crores. (3) Provision for After Sales Expenses during Warranty Period: The Company has been providing 2% of Sales, for meeting "After Sales Expenses" during the warranty period. With the improved method of production, the probability of defects occurring in the products has reduced considerably. Due to this change, the profit for the year is greater by ₹12 Crores than would have been the case, if the old provisioning policy were to continue. (4) Fall in Investments: The Company has decided to provide ₹10 Crores for the permanent fall in the value of investments which has taken place over the period of last 5 years. The provision so made has reduced the profit disclosed in the accounts by ₹10 Crores.

Topics: AS 1, Applicability of AS

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