1.29 Query         

   Disclosure of prior period items in profit and loss account.

1.A public sector company, follows the following accounting policy regarding prior period adjustments:

“Income/expenses on prior period are booked to natural heads and the amounts are disclosed”.

In line with this policy, in the year 1989-90, income/expenses on prior periods were booked to natural heads and the amounts were separately disclosed in the notes to the accounts contained in Schedule 19 for the year 1989-90 (Note 11) which states: -

“Profit before tax Rs. 21,319.30 lakhs (previous year Rs. 19,255.68 lakhs) for the year is after considering the following income and expenditure in excess of Rs. 1 lakh relating to prior period:

  2. On the face of the balance sheet and the profit and loss account, it is mentioned that Schedules 1 to 23 and accounting policies form an integral part thereof. The querist has submitted the relevant profit and loss account and the balance sheet for the perusal of the Committee.

3. In their supplementary audit report to C & AG of India u/s 619(3) of the Companies Act, 1956, the statutory auditors observed as follows:

“The Company is not disclosing prior period items as per Accounting Standard which is mandatory and as per which prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived.

In this connection, it is suggested that the proper way to comply with the requirement is to show the impact of prior period items in current profit or loss by disclosing individual items of prior period income and expenses in the main statement of profit and loss and not simply under the head Notes on accounts.”

4. According to the querist, the disclosure of prior period items by the company as enumerated above, is in line with Accounting Standard (AS)-5 on Prior Period and Extraordinary Items, which emphasises that:

(a) Prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount; and

(b) In a manner that their impact on current profit or loss can be perceived.

The querist is of the view that both the requirements are fulfilled by the company: -

(i) By separate disclosure of prior period items in Notes in Schedule 19 which forms an integral part of the profit and loss account, and

(ii) From the disclosure, impact on current profit/loss can be clearly perceived as shown below:

Profit before tax Rs. 21,319.30 lakhs for the year is after considering the following income and expenditure in excess of Rs. 1 lakh relating to prior period:

5. The querist has reiterated that the above approach is in line with para 4 of AS 5 which is reproduced below:

“There are two approaches to the treatment of non-recurring items. One is to include them in the reported net profit or loss with a separate disclosure of the individual amounts. The other is to show such items in the statement of profit and loss after the determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss”.

According to the querist, the company is following the first method mentioned in the above para. Similarly, para 5.2 of AS-5 states:

“Prior period items are included in the statement of profit and loss for the current period but a separate disclosure of all such items is made so that their impact on the current profit or loss can be perceived. Such disclosure complies with the requirements of statutes, wherever applicable.”

6. The querist has sought the opinion of the Expert Advisory Committee as to whether the disclosure practice regarding prior period items followed by the company is correct.

                                                                                        Opinion                             July 9, 1991

1. The Committee notes that para 9 of Accounting Standard (AS) 5 on “Prior Period and Extraordinary Items and Changes in Accounting Policies” issued by the Institute of Chartered Accountants of India, states as below:

“Prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived.”

2. The Committee notes that the following practices normally prevail as regards disclosure of prior period items:

(a) Showing the amount of prior period items distinctively under the relevant head of income or expenditure, e.g., in the parenthesis.

(b) Clubbing the amount of prior period items under the relevant heads of income or expenditure and disclosing the amounts of the prior period items in the notes to the account under the relevant heads of income and expenditure.

(c) Excluding the amount of prior period items from the relevant head of income or expenditure and exhibiting the amount of prior period items after ascertaining the profit for the year, with a separate disclosure thereof under the relevant heads of income and expenditure.

3. The Committee is of the view that in regard to the practices mentioned in para 2 above, the disclosure requirements of part II of Schedule VI to the Companies Act, 1956 also apply and, therefore, prior period items should be shown separately under the relevant heads of income and expenditure instead of showing the aggregate income and aggregate expenditure relating to prior period.

4. The Committee is of the view that although the schedule 19 to the accounts of the company for the year 1989-90 discloses the amount of prior period items in a manner that the overall impact thereof on the profit can be perceived, it does not disclose the nature of such items, i.e., it does not disclose the individual income-heads and expenditure heads to which the prior period items pertain.

5. The Committee is accordingly of the opinion that the manner of disclosure of prior period items adopted by the company is not proper.

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