Query-ABC Limited (company) has written off Rs 5,00,000 as provision for inventory obsolescence in the year ended 31 March 2009. During the year ended 31 March 2010, XYZ determines that 50% of such stock has become usable due to the availability of an updated technology. Thus, inventory to the extent of Rs. 2,50,000 needs to be brought back in the financial statements.
Is it mandatory for the company to treat reversal as a prior period item in the financial statements for the year ended 31 March 2010? Will the answer to this issue be different if it was clear at 31 March 2009 that the updated technology is available and only 50% write-off is needed?
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies defines a prior period item” as income or expenses 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.” It appears from the given facts that the company was justified in writing off inventory fully at 31 March 2009. The inventory has become usable only due to the availability of new technology in the year ended 31 March 2010. Since there was no error or omission in the preparation of the financial statement for the year ended 31 March 2009, the company cannot treat the write back of inventory as a prior-period item in the current year.
However, if the updated technology was available as of 31 March 2009 itself, the company has in that case made an error by writing off the entire inventory in the year ended 31 March 2009. In this scenario, it should treat the write back of inventory as a prior-period item in the current year.