Accounting Policy Change: AS Vs Ind AS Treatment

Facts

Radiant Limited (hereinafter referred to as “the Company”) is engaged in the manufacturing of industrial components.The company prepares its financial statements in accordance with the applicable financial reporting framework. During the financial year 2024–25, the company undertook a review of certain accounting policies to enhance the reliability, relevance, and comparability of its financial information. Until the end of FY 2023–24, inventories were valued using the First-In-First-Out (FIFO) method, and provisions for doubtful trade receivables were recognised only upon the occurrence of an identifiable default event.

In FY 2024–25, management concluded that the weighted average cost method more appropriately reflected the pattern of inventory consumption and fluctuations in purchase prices, thereby providing a more faithful representation of inventory costs. In addition, the company adopted an expected credit loss model for impairment of trade receivables, recognising that credit risk exists even in the absence of an actual default and that earlier recognition of such losses would better reflect the economic reality of recoverability risks.

Consequent to the change in the inventory valuation method, the closing inventory as at 31stMarch 2024 increased from ₹40 crore to ₹44 crore, resulting in an incremental impact of ₹4 crore on reported profits. At the same time, the adoption of the expected credit loss model necessitated recognition of an additional provision of ₹3 crore in respect of trade receivables, leading to a corresponding reduction in profits. While these changes were undertaken with the stated objective of improving the quality of financial reporting, they resulted in a measurable impact on the company’s reported profitability and equity.

In this background, an important issue arises as to how the profit or loss arising from such changes in accounting policies should be recognised under the Accounting Standards framework and the Indian Accounting Standards.

Relevant Provision

AS 1 – Disclosure of Accounting Policies

• Para 11 of AS 1

The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements.

• Para 22 of AS 1

Any change in an accounting policy thathas a material effect should be disclosed. The amount by which any item in the financial statements is affected by such a change should also be disclosed to the extent ascertainable. Wheresuch an amount is not ascertainable, wholly or in part, the fact should be indicated.If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

• Para 19(b) of Ind AS 8

Subject to para 23, when an entity changes an accounting policy upon initial application of an Ind AS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively.

• Para 22 of Ind AS 8

Subject to para 23, when a change in accounting policy is applied retrospectively in accordance with para 19, the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policies had always been applied.

• Para 23 of Ind AS 8

When a retrospective application is required by para 19, a change in accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change.