1.28     Query

Disclosure of prior period items

1.A public sector corporation does not disclose prior adjustments relating to either income or expenditure in the accounts under different heads even though the amounts involved are material. Further, even for ascertaining the exact quantum the various units of the corporation follow different policies; some absorb directly, under the relevant head of account, while others through one prior period adjustment account.

2.The relevant note appended to the accounts reads as under:

“Income of Rs. 84.6 lacs and expenditure of Rs. 83.42 lacs under various heads of accounts absorbed in respective accounts relate to earlier years on the basis of available information”. The figures indicated in the note are only based on available information, i.e., the correctness of the quantum remains only provisional.

            3. Almost all heads of income and expenditure are affected by prior period adjustments.

            4.The querist has offered his following views in this regard for the consideration of the Expert Advisory Committee:

i)The non-disclosure of prior period debits and credits, on the one hand, does not reflect exact income and expenditure under various heads and, on the other, does not fairly present the results of operations of the corporation for the relevant period appropriately.

ii)  As the corporation reviews performance of expenditure and income under various heads, vis-à-vis performance budget, non-disclosure of such items under relevant heads will be misleading for the purposes of review.

iii)In the Compendium of Opinions, Volume I, query No. 1.18 and 1.49 as also the relevant International Accounting Standard, the opinions/recommendations are not exact and specific as to the disclosure of prior period expenditure except where the amounts involved are material. No mention is also made as to how to disclose the same even if the amounts are material, i.e., whether by netting or grossing of income and expenditure under one account head “prior period adjustments” or effect on all account heads should be disclosed.

iv)The querist is of the view that to depict the result of the operations for a particular year, if the amount involved is material, prior period adjustments should be shown under all functional heads, either by way of a note giving full details of debits and credits under all or important functional heads or to show the expenditure and income by adding the words including Rs. ………/ for the prior period”. This will not only ensure giving the true results of operations for the period in the view of the querist, but would also enable the shareholders, to whom the accounts are presented for adoption, to compare the various debits and credits with the previous year figures. The relevance of such disclosure or determining the exact quantum becomes all the more necessary in view of requirements under the Income-tax Act for such disclosure in Section 44 AB report.

5.The querist has raised the following issues for the opinion of the Expert Advisory Committee:

i)In case a test check reveals materiality of prior period adjustments, is it not obligatory for the client to determine the exact quantum of such items under different heads?

ii)In view of materiality, is it not obligatory to disclose the amount under various heads of account, enabling a reader of the accounts to know the exact operating results for the year as also facilitating comparison of the heads of accounts.

 Opinion                                                                                                                    October 15,1986

1.  The Committee notes that Accounting Standard 5 (AS-5) issued by the Council of the Institute of Chartered Accountants of India on “Prior Period and Extraordinary Items and Changes in Accounting Polices”, has defined prior period items as “material charges or credits 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” (para 3.1),

  2.  The Committee further notes that AS-5 recommends in para 9 that “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 current profit or loss can be perceived”.

3.  On the basis of the above, the opinion of the Committee on the issues raised by the querist para 5 of the query is as below:

i)          It is necessary for the corporation to determine the exact quantum of prior period adjustments under different heads, if material. If it is not done, the auditor should qualify his report.

ii)         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 current profit or loss can be perceived. One of the effective ways to show the impact of prior period items on current profit or loss is to disclose individual items of prior period income and expenditure, in respect of which the amounts involved are material, under the head entitled e.g., “Prior Period Adjustments Account”, either in the main statement of profit and loss- the net figure being shown in the outer column- or in a schedule attached thereto, in which case the net amount of prior period adjustments should be shown in the main statement of profit or loss.

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