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AS-5 Net

profit and loss for

the period items
and change in
accounting policies
Objectives- to prescribe the
criterion for certain items in the
profit and loss accounts. Profit
and loss being a period
statement covers the items of
income and expenditure of
particular period while there may
be a situation where income or
expenditure appears in the profit
and loss account is not related to
that period, what should be done
is prescribed by this accounting

 This accounting standard also deals

with change in accounting policy,
accounting estimates and extra
ordinary items
Components of net
 Profit or loss from ordinary activities
 Extra ordinary items

These components should be disclosed on the

statement of profit and loss account.

Profit or loss from ordinary activities
Normally all items of income and expanses

which are recognized in a period are included

in the determination of net profit or loss for
the period. It also includes extra ordinary

 The write down of inventories to net realizable

value or reversal of such write down.
 Restructuring cost or reversal of provision of
restructuring cost.
 Profit or loss on disposal of fixed assets.

 Profit or loss on disposal of long term

 Reversal of provision.
Extra ordinary items

 Distinct from ordinary items.

 Do not occur frequently.

Example: Attachment of property of the

enterprises or an earthquake

Prior period items

Arise in current periods as a result of error of

omission in the preparation of financial

statement of one or more prior periods.

 Disclosure:
The nature and amount of prior period should

be disclosed and its impact on current profit or

loss can be perceived.

Change in accounting estimates
 Estimation of provision of sundry debtors.

 Estimation of provision for any liabilities.

 Computing income tax provision.

 Estimating useful life of fixed assets.

Effect of change in accounting
 Classify if ordinary activity
 Classify if extra ordinary activity

 Disclosure:
 Its effect should be disclosed in net profit or
 The period of change, if the change effects the
period only.
 The period of change and future period, if the
change effects both.

Change in accounting policies

In the following circumstances changes in

accounting policies are made:

 For compliance of accounting standards

 For compliance of statute or law.

 For better and appropriate presentation of

financial statements.

Disclosure of change in
accounting policies
 Material effect should be shown in financial
 The effect should be disclosed in the year of
 If the effect of change is not ascertainable, the
fact should be disclosed.
 If the effect of change is not material for
current period, but it is material effect for
the later period, then fact should be
disclosed in the period of change.
As-6 Depreciation accounting

 It is a measure of wearing out,

consumption or other value an asset
arising from the use, and passing of
 It is nothing but distribution of total cost
of assets over its useful life
Depreciable assets
Are expected to be used for
more than one accounting
Have a limited useful life
Are held for use on
production of goods and
Calculation of depreciation

 Historical cost or other amount in place of

historical cost like revalued amount.
 Estimated useful life of depreciable assets.

 Estimated residual/ scrap value of depreciable


Cost of depreciable assets
 Increase / decrease in long term liability on
account of exchange fluctuation.

 Price adjustments
 Change in duties

 Revaluation of depreciable assets

Methods of depreciation
There are two methods of depreciation

1.SLM (Straight Line Method)

3.WDVM (Written Down Value Method)

Treatment Method Should Be Consistent

For Whole Life Of Assets

Change in depreciation method
 For compliance of accounting standards

 For compliance of statute or law.

 For better and appropriate presentation of

financial statements.

Procedure in case of change in
 Depreciation should be recomputed applying
the new method from the date of its
acquisition/ installation.
 Difference between the two methods may be
surplus / deficiency.
 Such resultant surplus is credited to profit and
loss account under the head of depreciation
written back.

Change in method is under accounting policy.

Change in estimated useful life
 Change should be allocated over the revised
remaining useful life of assets.


 Increase/decrease is added/deducted from the
outstanding written down value on the date
of change.
 Depreciation on the revised WDV will be
provided prospectively over the remaining
useful life.
Depreciation should be charged on the

basis of revalued amount and remaining

useful life.
Depreciation charge on addition/
extension to an existing asset
 Additional/extension is an integral part of
existing assets.
 It is depreciated over the remaining useful
life of the existing assets.
 Additional/extension is not an integral part of
existing assets.
 It is depreciated over the estimated useful
life of the additional assets.
 Total cost of each class of assets
 Total depreciation for the period of each class
of assets.
 Accumulated depreciation of each class of
 Depreciation method

 Objective
The objective of this Statement is to prescribe

the accounting treatment of revenue and

costs associated with construction contracts
 A construction contract is a contract
specifically negotiated for the construction
of an asset or a combination of assets that
are closely interrelated or interdependent in
terms of their design, technology and
function or their ultimate purpose or use.
As-7 construction contract
 Accounting standard is applicable in
accounting for construction contracts in
contractor’s financial statements.
It includes

1.Construction of asset
3.Rendering of services which are directly
related to the construction of assets.
5.Contract for destruction or restoration of

Types of construction contract
 Fixed price contracts:- fixed rate per

 Cost plus contracts:- contractor is

reimbursed the cost as defined plus fixed
percentage of fee/profit.
Combining  and se g me nting  contracts

    Co ntrac t o ptio ns :­ construction of    

additional asset should be treated as a separate construction 
contract if
qAsset differs significantly as compared to 
original contract
qPrice of additional asset is independent of 
original contract
Calculating the profit or loss of a
construction contract
 Contract revenue

 Contract cost

Øprofit/ loss= Contract revenue-Contract


If positive profit

If negative loss
Contract revenue
Contract revenue should comprise:
(a) the initial amount of revenue agreed in the

contract; and
(b) variations in contract work, claims and

incentive payments:
 (i) to the extent that it is probable that they
will result in revenue; and
 (ii) they are capable of being reliably

Contract revenue
 Revenue/price agreed as per contract
 Revenue arising due to escalation clause

 Claims- it is the amount that contractors seek

to collect from customer as reimbursement
of cost not included in contract price.
 Increase in revenue due to increase in units of
 Incentive payments to the contractors.

 penalties
Measurement of contract revenue
 Till the stage of completion


 Cost to cost method

 By survey of work performed

 exclusion from contract cost
Contract cost
Contract costs should comprise:-

 (a) costs that relate directly to the specific

 (b) costs that are attributable to contract
activity in general and can be allocated to the
contract; and
 (c) such other costs as are specifically
chargeable to the customer under the terms of
the contract.
Contract cost
Costs that relate directly to a specific contract
 Site labor cost including supervision.
 Cost of material used
 Depreciation of plant and equipment used.
 Cost of hiring plant
 Cost of design and technical assistance
 Estimated cost of rectification and guarantee
 Claim from third parties
 Pre-contract cost
 Insurance
 Construction overheads
These cost should be reduced by incidental

Cost specifically chargeable
 Some general administration cost
 Development cost

 Reimbursement cost

 Cost excluded
 General administration cost
 Selling cost

 Research and development

 Depreciation cost

 Cost of idle plant and equipment

 Cost incurred in securing contract

Provision for expected loss
 Whether or not work has commenced

 Stage of completion of contract

 The amount of profit on other contracts which

are not treated as single contract

Disclosure by contractor
 Method used to determine the stage of
 The method used to determine contract
 The mount of contract revenue recognized in
the period
 Contract cost incurred and profit

 Advanced received

 Gross amount due from customers for

contractors work
 Gross amount due to customers for contract

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