# AS 5: Classifying Items Correctly
AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) requires you to correctly classify every unusual item into one of these categories. Misclassification distorts the P&L and misleads users.
## The Four Key Categories
### 1. Prior Period Items
Definition: Income or expenses that arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods.
Key test: Was there an error/omission in past financial statements?
- YES → Prior Period Item
- NO → Not a prior period item (even if it relates to past events)
Example: A legislative change with long-term retrospective application creating expenses/income for past years is treated as an error correction (prior period item).
### 2. Extraordinary Items
Definition: Income or expenses that arise from events or transactions that are clearly distinct from ordinary activities and are not expected to recur frequently or regularly.
Example: Attachment of property of the enterprise — distinct from ordinary business operations and unlikely to recur.
Disclosure: Nature and amount must be separately disclosed in the Statement of P&L so its impact on current profit/loss can be perceived.
### 3. Change in Accounting Policy
Definition: A change in the specific accounting principles, bases, conventions, rules and practices adopted by an enterprise in preparing financial statements.
Examples:
- Capitalisation of working capital loan interest (change from expensing to capitalising)
- Change from Cost Model to Revaluation Model for measurement of carrying amount of PPE
Note: Introduction of a new pension scheme for employees is NOT a change in accounting policy — it is an ordinary activity (a new transaction, not a change in how existing transactions are accounted for).
### 4. Change in Accounting Estimate
Definition: A revision of an estimate due to changes in circumstances or new information. Estimates are inherent in accounting because of uncertainties.
Examples:
- Change in Reserve/Provision for obsolete inventory
- Change in provision for obsolete inventory — revising the estimated obsolescence amount
### 5. Ordinary Activities (Requiring Separate Disclosure)
Some items arise from ordinary activities but are of such size, nature or incidence that disclosure is relevant.
Examples:
- Settlement of litigation case — part of ordinary business but requires separate disclosure
- Actual bad debts exceed the provision — ordinary activity (already provided for, just adjustment); separate disclosure if material
- Government-sanctioned grant in current year for expenses incurred in a previous accounting year — ordinary activity (or extraordinary depending on nature) requiring separate disclosure
## Decision Flowchart
```
Is the item due to an ERROR/OMISSION in past financial statements?
YES → Prior Period Item
NO ↓
Is it clearly DISTINCT from ordinary activities & NOT recurring?
YES → Extraordinary Item
NO ↓
Is it a change in PRINCIPLE/RULE applied?
YES → Change in Accounting Policy
NO ↓
Is it a revision of an ESTIMATE due to new information?
YES → Change in Accounting Estimate
NO ↓
It is an ORDINARY activity (disclose separately if material)
```