Short notes (any three of four)

Three notes are written: (i), (ii) and (iv).

(i) Fair value accounting. AS-10 defines fair value as the price at which an asset could change hands between informed and willing parties in an arm's length deal. Fair value accounting measures assets at that current exchange amount instead of at historical cost.

• Where AS-10 uses it. After recognition, an enterprise chooses either the cost model (cost less accumulated depreciation and impairment) or the revaluation model for a whole class of property, plant and equipment. Under the revaluation model, an item whose fair value can be measured reliably is carried at its fair value on the date of revaluation, less later depreciation and impairment (AS-10, paras 32–34).
• Illustration. A building with a carrying amount of ₹8,00,000 is revalued to its fair value of ₹12,00,000. It is shown at ₹12,00,000, and the surplus of ₹4,00,000 goes to revaluation reserve.
• Merits and limits. It shows assets at current values, which helps users judge the position of the business. But fair value often needs estimates, so it is less objective than cost and can make reported figures move from year to year.

(ii) The prudence (conservatism) concept. Accountants choose the cautious figure where judgment is involved: anticipated profits are not recorded, but all foreseeable losses are provided for.

• Example. Stock is valued at cost or market price, whichever is less, under conservatism. Stock costing ₹50,000 with a market price of ₹46,000 is shown at ₹46,000, so the ₹4,000 loss is recognised now. A provision for doubtful debts is another example.
• Why. Overstating assets and income does more harm to users than understating them.
• Limit. Prudence must not be pushed too far. Excessive provisions or charging capital items to expense misstate profit and create secret reserves, which conflicts with full disclosure.

(iv) A prior period item. AS-5 defines prior period items as income or expenses that come up in the current year because mistakes or omissions were made when the accounts of one or more earlier years were prepared.

• Examples. Depreciation omitted from last year's accounts, an expense of an earlier year left unrecorded, or a calculation mistake found this year.
• Treatment (AS-5). They are included in this year's profit or loss, but their nature and amount are shown separately in the statement of profit and loss, so that their effect on the current profit can be seen (AS-5, para 15).
• What they are not. A revision of an accounting estimate (for example, a change in useful life) is not a prior period item, and neither is an extraordinary item, which AS-5 defines separately as arising from events clearly distinct from the ordinary activities.