Negation of effect of change in the method of depreciation on the profit and loss is not allowed

Query

A company (company A) is engaged in the retail trading. The company was following Straight Line Method (SLM) for charging depreciation. But from the current financial year it has changed the method to Written Down Value (WDV) Method. For the purpose of accounting treatment of the

change, company A has computed depreciation as per new method retrospectively. The depreciation as per old method was more than depreciation as per new method, so differential amount has been credited to the statement of profit and loss. To negate the effect of the change on profit and loss, company A has transferred an amount equal to the differential depreciation from general reserve to the debit of the statement of profit and loss.

Whether transfer of amount from general reserve to the debit of statement of profit and loss is correct?

Answer

No.

As per Para 21 of Accounting Standard 6, "Depreciation Accounting",in case of change in the method of charging depreciation, the deficiency or surplus arising from retrospective recomputation of depreciation with new method should be adjusted in the statement of profit and loss in the year of change. In case of surplus (i.e. excess of depreciation as per new method over depreciation as per old method), the surplus amount should be credited to the statement of profit and loss and any deficiency should be treated vice-versa to the treatment of surplus.

Therefore, an entity has to increase or decrease its profit and loss, for the period in which method is changed, by the amount of surplus or deficiency arising on change in the method of depreciation. In the instant case, company A has negated the effect of surplus on the profit and loss by transferring equivalent amount form general reserve to debit of statement of profit and loss. Hence, transfer of amount from general reserve is not correct.