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
standards.


 This accounting standard also deals

with change in accounting policy,
accounting estimates and extra
ordinary items
Components of net
profit
 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
items.


 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

investment.
 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
estimate
 Classify if ordinary activity
 Classify if extra ordinary activity


 Disclosure:
 Its effect should be disclosed in net profit or
loss.
 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
statements.
 The effect should be disclosed in the year of
change.
 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
DEPRECIATION:-


 It is a measure of wearing out,

consumption or other value an asset
arising from the use, and passing of
time.
 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
period.
Have a limited useful life
Are held for use on
production of goods and
services.
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

assets.


Depreciation
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)

2.
3.WDVM (Written Down Value Method)


Treatment Method Should Be Consistent



For Whole Life Of Assets

1.
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
method
 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.


 CHANGE IN HISTORICAL COST

 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.
 disclosure
 Total cost of each class of assets
 Total depreciation for the period of each class
of assets.
 Accumulated depreciation of each class of
assets.
 Depreciation method



 AS-7 CONSTRUCTION CONTRACT
 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
2.
3.Rendering of services which are directly
related to the construction of assets.
4.
5.Contract for destruction or restoration of
asset.

Types of construction contract
 Fixed price contracts:- fixed rate per
unit


 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

cost


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

measured.
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
output.
 Incentive payments to the contractors.

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

Methods


 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

contract
 (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
include:
 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
work.
 Claim from third parties
 Pre-contract cost
 Insurance
 Construction overheads
These cost should be reduced by incidental

income.
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
completion
 The method used to determine contract
revenue
 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
work

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