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Contemporary Accounting

Notes Contingencies are of two types – contingent loss and contingent gain. The amount of a
contingent loss should be provided for by way of a change in the statement of profit and
loss if:
(a) it is probable that future events will confirm that, after taking into account any
related probable recovery, an asset has been impaired or a liability has been incurred
as at the balance sheet date, and
(b) a reasonable estimate of the amount of the resulting loss can be made. [Para 10 of AS-4.]
5. AS-5 – Net profit or loss for the periods, prior period items and changes in accounting
policies: The net profit or loss for a given accounting period comprises essentially of two
items – (a) profit or loss from Ordinary activities and (b) extraordinary items. Ordinary
activities are undertaken by a business entity as part of its business and include such
related activities in which the entity engages. Extraordinary items are income or expenses
that arise from events or transactions that are clearly distinct from the ordinary activities
of the enterprise and, therefore, are not expected to recur frequently or regularly.

Both profit or loss from ordinary activities and extraordinary items are to be disclosed on
the face of profit and loss statement. It may be noted here that virtually all items of income
and expenses included in the determination of net profit or loss arise in the course of
ordinary activities of the enterprise. Therefore, occurrence of extraordinary items is a
rarity. In most of the cases, only losses arising out of natural calamity can be considered as
an extraordinary item.
Prior Period Items
(a) The nature and amount of prior period items should be separately disclosed in the
statement of profit and loss in a manner that their impact on the current profit or
loss can be perceived.
(b) The term ‘prior period items’, as defined in this Statement, refers only to income or
expenses which arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods.

Changes in Accounting Policies
On the other hand, a change in an accounting policy should be made only if the adoption
of the new policy is required by statute or for compliance with an accounting standard or
if it is considered that the change would result in a more appropriate presentation of
financial statements of the enterprise.
6. AS-6 – Statements of accounting standards revised – depreciation accounting: The
following is the text of the revised Accounting Standard (AS) 6, ‘Depreciation Accounting’,
issued by the Council of the Institute of Chartered Accountants of India.

(a) This statement deals with depreciation accounting and applies to all depreciable
assets, except the following items to which special considerations apply:
(i) forests, plantations and similar regenerative natural resources;
(ii) wasting assets including expenditure on the exploration for and extraction of
minerals, oils, natural gas and similar non-regenerative resources;
(iii) expenditure on research and development;
(iv) goodwill;
(v) live stock.

This statement also does not apply to land unless it has a limited useful life for the
enterprise.

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