BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
The objective of BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is to
enhance relevance, reliability and comparability by presenting criteria for selecting and changing
accounting policies, together with accounting for and disclosing changes in accounting estimates and
corrections of errors.
1.0 Accounting policies
1.1 Selection and consistency of accounting policies
--Where an IFRS applies to an item, compliance is mandatory except that accounting policies set out
in IFRSs need not be applied when the effect of applying them is immaterial.
--Where that there is no BAS applies to an item, management should use judgement and consider the
BAS Conceptual Framework.
There should be consistent application of policies for similar transactions; the entity cannot pick and
choose by applying an accounting policy to some items but not to others.
Following are Examples of accounting policies:
Valuation of inventory using FIFO, Average Cost or other suitable basis as per IAS 2
Classification, presentation and measurement of financial assets and liabilities under
categories specified under IAS 32 and IAS 39 such as held to maturity, available for sale or
fair value through profit and loss
Timing of recognition of assets, liabilities, expenses and income
Basis of measurement of non-current assets such as historical cost and revaluation basis
Accruals basis of preparation of financial statements
A change in accounting for construction contracts from the percentage-of-completion to the
completed-contract method.
1.2 Changes in accounting policies
An existing accounting policy may only be changed:
--When a new IFRS requires it or
--If the result will be reliable information which is more relevant than under the previous policy (a
voluntary change of policy).
1.3 Retrospective application of new accounting policies
Retrospective application: Applying the new policy as if it had always been in use, by adjustments
in both the current accounting period and the previous one. The reasons for and effects of the changes
must also be disclosed. IAS 8 sets out the circumstances in which the entity may avoid
retrospective application because of impracticability.
1.4 The steps needed to make the retrospective application are as follows.
Step 1
Restate the opening balances for the current year, by applying the new policy to the opening balance
sheet (i.e. the previous period's closing balance sheet).
Step 2
Calculate the difference between the figure for equity and reserves in the revised opening balance
sheet and the figure as originally published.
Step 3
Apply the new policy in the current period's income statement and to the closing balance sheet.
Step 4
Restate the comparatives for the prior period by applying Steps 1 to 3 to the prior period values.
1.5 The following are not changes in accounting policy according to IAS 8:
--Applying an accounting policy to new transactions that have not previously occurred or were
previously immaterial.
--Applying an accounting policy to transactions that differ in substance from those previously
occurring.
A new IAS may specify how the transition to a new accounting policy is to be treated, in which case
IAS 8 does not apply. But if no such specific requirement is laid down, or if the change of policy is
voluntary, then retrospective application under IAS 8 is required.
Exemption from Retrospective Application of Accounting Policies
Retrospective application of a change in accounting policy may be exempted in the following
circumstances:
Where the effect of a change in accounting policy is not determinable for any prior period due
to impracticability, the change in accounting policy must be accounted for prospectively from
the start of the period in which the effect of change is determinable. In other words, the
change is accounted for retrospectively to the extent that it is practicable.
If it is not clear whether a change represents a change in accounting policy or estimate, the
change must be accounted for as a revision of accounting estimate.
Where the effect of a change in accounting policy is not material, the change may be
accounted for prospectively.
Change in accounting policy may be accounted for prospectively where the nature of
transactions and events differ substantially from those recognized previously.
Where non-current assets are subject to the application of revaluation models under IAS 16
and IAS 38 for the first time, the change in policy is accounted for prospectively according to
those standards rather than IAS 8.
Where impracticability impairs an entity's ability to apply a change in accounting policy
retrospectively from the earliest prior period presented, the new accounting policy must be
applied prospectively from the beginning of the earliest period feasible which may be the
current period.
Disclosures
Following must be disclosed in the financial statements of the accounting period in which a change in
accounting policy is implemented:
Title of IFRS
Nature of change in accounting policy
Reasons for change in accounting policy
Amount of adjustments in current and prior period presented
Where retrospective application is impracticable, the conditions that caused the
impracticality.
Example: ABC LTD until now has valued inventory using LIFO method. However, following
changes to IAS 2 Inventories, the use of LIFO method has been disallowed. Therefore, management
of the company intends to use FIFO method for the valuation of the company's stock.
Accounting Treatment
The switch from LIFO method to FIFO method represents a change in accounting policy which must
be accounted for retrospectively in the financial statements. Therefore, the change must be applied as
if the new accounting policy was always in place.
Consequently, entity shall adjust all comparative amounts presented in the financial statements
affected by the change in accounting policy for each prior period presented.
Management estimates that the value of its inventory using FIFO method would be as follows:
Management further believes that the valuation of inventory using FIFO method for periods prior to
20X0 would produce materially similar results.
The financial statement extracts of ABC LTD would appear as follows after the retrospective
application of the change in accounting policy.
Statement of Financial Position as at 31st December 20X2
Actual Restated
20X2 20X1 20X2 20X1
Current Assets
Cash and Bank 6 4 6 4
Short Term Investments 5 8 5 8
Inventory 10 12 12 13
21 24 23 25
The amount of inventory is adjusted for current period as well as the prior period.
Income Statement for the year ended 31st December 20X2
Actual Restated
20X2 20X1 20X2 20X1
Cost of Sales
Opening Inventory 12 8 13 10
Purchases 48 44 48 44
Closing Inventory (10) (12) (12) (13)
50 40 49 41
Statement of Changes in Equity for the year ended 31st December 20X2
Actual Restated
20X2 20X1 20X2 20X1
Retained Earnings
Opening reserves 40 30 41 32
Net Profit 30 20 31 19
Dividend (10) (10) (10) (10)
Closing Reserve 60 40 62 41
Note that the change is applied to both current period and prior period comparative amounts presented
(i.e. retrospectively). The estimated effect of the change in accounting policy relating to the prior
periods that are not presented (i.e. before 20X1) is adjusted in the opening reserves of 20X1.
The nature of the change in accounting policy must be disclosed in the financial statements of ABC
LTD.
2.0 Changes in accounting estimates
Changes in accounting estimates means an adjustment of the carrying amount of an asset or a
liability that results from assessment of the present status of, and expected future benefits and
obligations associated with, assets and liabilities.
Changes in accounting estimates result from new information or new developments and, accordingly,
are not corrections of errors.
The preparation of financial statements requires many estimates to be made on the basis of the latest
information which is both available and reliable. For example: Key areas in which estimates have to
be made include the recoverability of receivables, the useful lives of non-current assets and the
amount of a warranty provision.
These estimates nearly always have to be re-estimated on a later occasion, in the light of more up-to-
date information. This will give rise to changes, but they are changes in estimates, not in accounting
policies. Provided estimates are reasonable they do not undermine the reliability of financial
statements.
Examples of accounting estimates include the following:
Valuation of land where it is accounted for at revalued cost
Impairment of non-current assets
Useful lives of non-current assets
Pattern of economic benefits expected to be received from non-current assets for calculating
depreciation
Impairment of receivables (bad debts)
Pension Benefit obligations
Provision for slow moving and obsolete inventory
Worked example: Accounting estimates
A company applies an accounting policy of making an allowance for irrecoverable debts. It decides
that as the economy is entering a period of recession, it should raise its allowance so that it covers all
receivables which are unpaid after four months. This is not a change in accounting policy, since the
policy is to make the best estimate of the irrecoverable amount. What has changed is the view as to
what that irrecoverable amount is, which is clearly a change in estimate.
It can sometimes be difficult to distinguish between changes in accounting policies and changes in
accounting estimates. When there is doubt as to which type of change it is, it is to be treated as a
change in accounting estimate, based upon new information.
2.2 Accounting for changes in accounting estimates
The effect of a change in an accounting estimate is to be applied prospectively by inclusion in the
current accounting period and, if relevant, in future accounting periods. The carrying amount of
assets, liabilities or equity may be changed following a change in accounting estimates in the period
of the change.
Prospective application: Recognising the effect of a change in accounting estimate in the current and
future periods affected by the change.
Worked example: Change in accounting estimates
ABC LTD has depreciated a machine over its expected useful life of 5 years. The cost of machine was
$100,000 and annual depreciation charge was therefore $20,000. No residual value is expected at the
end of the machine's useful life.
Three years later, the remaining useful life of the machine was estimated to be only 1 years.
ABC LTD should account for the change in estimate prospectively by allocating the net carrying
amount of the asset over its remaining useful life. No adjustment is required to restate the depreciation
charge in previous accounting periods.
Depreciation expense for the machine would therefore be as follows:
Although expected useful life of the machine has reduced at the end of third year, depreciation
expense recorded in previous years is not affected. Instead, the depreciation expense is increased
accordingly in years 3 and 4.
Exceptions
Where an accounting estimate has to be revised based on information that was already available at the
time of preparation of prior period financial statements, the effect of revision must be recognized
retrospectively as it constitutes a correction of prior period error.
3.0 BAS 8 and prior period errors
Financial statements do not comply with IASs if they contain material errors, or immaterial errors
made intentionally.
3.1 Prior period errors: Omissions from and misstatements in financial statements for prior periods
in
relation to information which was available when those statements were prepared and could
reasonably be expected to have been taken into account at that time.
The correction of prior period errors should be spread over the accounting periods to which they
relate, so that the current period's result will remain undistorted. IAS 8 requires retrospective
restatement of prior period errors to correct the financial statements as if the errors had never
occurred. Prior period errors are therefore accounted for in the same way as voluntary changes in
accounting policies.
Example
Misapplication of accounting policies: e.g. not recognizing sale upon transfer of goods to a
customer.
Fraud: e.g. overstating sales revenue by issuing fake invoices before the reporting date
Misunderstanding of, or failure to notice, information at the time of preparation of financial
statements:
e.g. not writing off a receivable who had been announced as insolvent before the
authorization of financial statements
Arithmetical Errors
Omission of transactions and events from the financial statements.
3.2 Distinguish between prior period errors and changes in accounting estimates
Be careful to distinguish between prior period errors which are corrected retrospectively and
changes
in accounting estimates which are applied prospectively. The way to think about it is as follows:
Accounting estimates are approximations, being the result of considering what is likely to happen
in the future (e.g. how many customers will pay off their outstanding invoices, over how long a period
can non-current assets be used productively within the business). Many of these approximations will
need adjustment in the future, in the light of additional information becoming available, so changes in
accounting estimates are very common.
Prior period errors result from discoveries which undermine the reliability of the previously
published financial statements (e.g. unrecorded income and expenditure, fictitious inventory quantities
or incorrect application of accounting policies such as classifying maintenance expenses as
expenditure
on non-current assets). Prior period errors are (and should be) very rare, and their effect needs to be
eradicated from the financial statements. As with retrospective application of new accounting policies,
impracticability may mean that retrospective restatement can be avoided.
3.3 Exceptions
Where a prior period error is not material, it may be corrected prospectively.
Where the effect of an accounting error is not determinable for any prior period due to the
reason of impracticability, the prior period error may be corrected prospectively from the start
of the period in which the effect of the error is determinable. In other words, the prior period
error is corrected retrospectively to the extent that it is practicable.
3.4 Correction of Prior Period Accounting Errors
Prior Period Errors must be corrected retrospectively in the financial statements. Retrospective
application means that the correction affects only prior period comparative figures. Current period
amounts are unaffected.
Therefore, comparative amounts of each prior period presented which contain errors are restated. If
however, an error relates to a reporting period that is before the earliest prior period presented, then
the opening balances of assets, liabilities and equity of the earliest prior period presented must be
restated.
3.5 Errors discovered after reporting date
Accounting Errors discovered after the reporting date but before the authorization of financial
statements are adjusting events after the reporting date as per IAS 10 and must therefore be corrected
in the current period prior to the issuance of financial statements.
3.6 Disclosure
The nature of prior period errors corrected during the period
The amount of restatement made at the start of the earliest prior period presented
The circumstances that resulted in impracticability to correct an accounting error
retrospectively and how and from when the error has been corrected
Example
Management of ABC LTD, while preparing financial statements of the company for the period ended
31st December 20X2, noticed that they had failed to account for depreciation in last year's accounts in
respect of an office building acquired in the preceding year.
Following are extracts of ABC LTD's most recent financial statements before the application of FIFO
method.
Accounting Treatment
The omission of depreciation of office building in the previous year's financial statements represents a
prior period accounting error which must be accounted for retrospectively in the financial statements.
Consequently, ABC LTD shall adjust all comparative amounts presented in the current period's
financial statements affected by the accounting error.
Management estimates that depreciation charge for the year 20X1 was under booked by $1 million.
Financial statement extracts of ABC LTD would appear as follows after the retrospective correction
of the prior period accounting error.
Note that the correction of the error is applied to all prior period comparative amounts affected by the
omission (i.e. retrospectively). Current year's profit is therefore unaffected by the correction of prior
period error.
The nature of the correction of prior period error must be disclosed in the financial statements of ABC
LTD.
Summary:
1. Accounting policies should be applied consistently to the relevant transactions
– Relevant IASs are mandatory unless the effect is immaterial
– Judgement should be applied in line with the Framework where there is no applicable IAS
2. Change in accounting policy
– When a new IAS requires it
– When the result is more reliable and relevant
– Retrospective application
3. Change in accounting estimate
– Change can be made to reflect new information e.g. on recoverability of receivables and useful lives
of non-current assets
– Accounting estimates nearly always change
– Prospective recognition
4. Prior period errors
– Omissions and misstatements that should not have occurred
– Retrospective restatement
Illustrative Example
Example-1: Retrospective Restatement of Errors
During 2015, a Public Sector Entity discovered that revenue from income taxes was incorrect.
Income taxes of Tk. 65,000 that should have been recognized in 2014 were incorrectly omitted and
recognised as revenue in 2015. The entity’s accounting records for 2015 show revenue from taxation
of Tk. 600,000 (including taxation that should have been recognised in the opening balances), and
expenses of Tk. 865,000. In 2014, the entity reported;
Tk.
Revenue from taxation 340,000
User charges 30,000
Other operating revenue 300,000
Total Revenue 670,000
Expenses (600,000)
Surplus 70,000
The 2014 opening accumulated surplus was Tk. 200,000, and closing accumulated surplus was Tk.
270,000. The entity had no other revenue or expenses. The entity had Tk. 50,000 of contributed
capital throughout, and no other components of net assets/equity except for accumulated surplus.
Solution:
Public Sector Entity Statement of Financial Performance:
2015 2014 (restated)
Tk. Tk.
Revenue from taxation 535,000 405,000
User charges 40,000 30,000
Other operating revenue 400,000 300,000
Total Revenue 975,000 735,000
Expenses (865,000) (600,000)
Surplus 110,000 135,000
Statement of Changes in Equity:
Accumulated
Contributed Capital Total
Surpluses
Tk. Tk. Tk.
Balance as at 31 December 2013 50,000 200,000 250,000
Surplus for the year ended December 31
- 135,000 135,000
2014 as restated
Balance as at 31 December 2014 50,000 335,000 385,000
Surplus for the year ended December 31
- 110,000 110,000
2015
Balance as at 31 December 2015 50,000 445,000 495,000
Extracts from Notes to the Financial Statements:
Revenue from taxation of Tk. 65,000 was incorrectly omitted from the financial statements of 2014.
The financial statements of 2014 have been restated to correct this error. The effect of the restatement
on those financial statements is summarised below. There is no effect in 2015.
Tabulated effect on the financial statements on 2014
Tk.
Increase revenue 65,000
Increase in surplus 65,000
Increase in debtors 65,000
Increase in net assets/equity 65,000
Example 2. Change in Accounting Policy
During 2015, a Public Sector Entity changed its accounting policy for the treatment of borrowing
costs that are directly attributable to the acquisition of a hydro-electric power station that is under
construction. In previous periods, the entity had capitalized such costs. The entity has now decided to
expense, rather than capitalize them. Management judges that the new policy is preferable, because it
results in a more transparent treatment of finance costs and is consistent with local industry practice,
making the entity’s financial statement more comparable.
The entity capitalized borrowing costs incurred of Tk. 26,000 during 2014 and Tk. 52,000 in periods
prior to 2014. All borrowing costs incurred in previous years with respect to the acquisition of the
power station were capitalized.
The accounting records for 2015 show surplus before interest of Tk. 300,000 and interest expense of
Tk. 30,000 (which relates to 2015).
The entity has not recognized any depreciation on the power station because it is not yet in use. In
2014, the entity reported;
Tk.
Surplus before interest 180,000
Interest expense -
Surplus 180,000
2014 opening accumulated surpluses was Tk. 200,000 and closing accumulated surpluses was Tk.
380,000. The entity had Tk. 100,000 of Contributed capital throughout, and no other components of
net assets/equity except for accumulated surplus.
Solution:
Statement of Financial Performance:
2015 2014 (restated)
Tk. Tk.
Surplus before interest 300,000 180,000
Interest Expense 30,000 26,000
Surplus 270,000 154,000
Statement of Changes in Equity
Contributed Accumulated
Capital Surpluses Total
Tk. Tk. Tk.
Balance as at 31 December 2013 as
previously reported 100,000 200,000 300,000
Change in accounting policy with respect to
the capitalisation of interest - (52,000) (52,000)
Balance as at 31 December 2013 100,000 148,000 248,000
Surplus for the year ended 31 December
2014 (restated) - 154,000 154,000
Balance as at 31 December 2014 100,000 302,000 402,000
Surplus for the year ended December 31
2015 - 270,000 270,000
Balance as at 31 December 2015 100,000 572,000 672,000
Extracts from Notes to the Financial Statements
During 2015, the entity changes its accounting policy for the treatment of borrowing costs related to a
hydro-electric power station. Previously, the entity capitalised such costs. They are now written off as
expenses as incurred. Management judges that this policy provides reliable and more relevant
information, because it results in a more transparent treatment of finance costs and is consistent with
local industry practice, making the financial statements more comparable.
Tabulated effect on the financial statements
Tk.
Effect on 2014
(Increase) in interest expense 26,000
(Decrease) in surplus 26,000
Effect on periods prior to 2014
(Decrease) in surplus 52,000
(Decrease) in assets in the course of
construction and in accumulated surplus 78,000
Illustrative Example 3: Prospective Application of a Change in Accounting Policy when
Retrospective Application is not applicable
During 2015, an entity changed its accounting policy for depreciating property, plant and equipment,
so as to apply much more fully a components approach, while at the same time adopting the
revaluation model.
In years before 2015, the entity’s asset records were not sufficiently detailed to apply a components
approach fully.
At the end the year 2014, management commissioned an engineering survey. The survey provided
information on the components held and their fair value, useful lives, estimated residual values, and
depreciable amounts at the beginning of 2015.
It however did not provide a sufficient basis for reliably estimating the cost of those components that
had not previously been accounted for separately, and the existing records before the survey did not
permit this information to be reconstructed.
Management considered how to account for each of the two aspects of the accounting change. They
determined that it was not practicable to account for the change to a fuller components approach
retrospectively, or to account for that change prospectively from any earlier date than the start of
2015.
Also, the change from a cost model to a revaluation model is required to be accounted for
prospectively.
Therefore, management concluded that it should apply the entity’s new policy prospectively from the
start of 2015.
Additional Information:
Tk.
Property, plant and equipment
Cost 250,000
Depreciation (140,000)
Net Book Value 110,000
Prospective depreciation expense for 2015 15,000
Solution:
Prospective depreciation expense for 2015 (old basis):
Some results of the engineering survey
Valuation 170,000
Estimated residual value 30,000
Average remaining assets life (years) 7
Depreciation expense on existing property,
plant and equipment for 2015 20,000
Extracts from Notes to the Financial Statements
1. From the start of 2015, the entity changed its accounting policy for depreciating property, plant and
equipment, so as to apply much more fully a components approach, while at the same time adopting
the revaluation model.
Management takes the view that this policy provides reliable and more relevant information, because
it
deals more accurately with the components of property, plant and equipment and is based on up-
todate values.
The policy has been applied prospectively from the start of 2015, because it was not practicable to
estimate the effects of applying the policy either retrospectively or prospectively from any earlier
date.
Accordingly, the adopting of the new policy has no effect on prior periods.
The effect on the current year is to:
a) Increase in the carrying amount of property, plant and equipment as the start of the year by Tk.
60,000
b) Create a revaluation reserve at the start of the year of Tk. 60,000
c) Increase depreciation expense by Tk. 5,000.
Illustrative Example 4
IAS 8/IPSAS 3 specifies disclosure requirements “[w]hen an entity has not applied a new
IFRS/IPSAS that has been issued but is not yet effective”.
Q. Is the application of this paragraph limited to IFRSs/IPSAS issued before the end of the reporting
period, or are the disclosures also required in respect of IFRSs/IPSAS issued between the end of the
reporting period and the date when the financial statements are authorized for issue?
Solution
The disclosures required by IAS 8/IPSAS 3 should be made in respect of all IFRSs/IPSAS issued
before the date of issue of the financial statements that are not yet effective.
It will be helpful if the relevant note to the financial statements either specifies the date at which
the
details are given or refers explicitly to them being as at the date of authorization of the financial
statements.
Illustrative Example 5
Should an entity consider applying the requirements of IFRSs/IPSAS even when the effect is not
material?
Solution
IAS 8/IPSAS 3 states that the accounting policies required under IFRSs/IPSAS “need not be
applied
when the effect of applying them is immaterial”.
However, the Standard also clarifies that this does not mean that immaterial departures from
IFRSs/IPSAS can be made, or left uncorrected, in order to achieve a particular presentation of an
entity’s financial positions, performance or cash flows.
In practice, an entity will sometimes wish to consider applying the requirements of IFRSs/IPSAS
even when the effect is immaterial.
This is in part because materiality is subject to judgement based on both quantitative and
qualitative factors, but also because items that are not material in the current period may become
material in a subsequent period.
Illustrative Example 6
How should a change in accounting estimate be presented in profit or loss?
Solution
When a change in an accounting estimate is recognised in profit or loss, the change should be
recognised in the same line item as the underlying item except when an IFRS/IPSAS requires a
different treatment.
For example, if the best estimate of a provision for a legal claim is reduced, the credit in profit or
loss
should be included within the same expense heading as the original expense was recognised.
This ensures that the cumulative expense recognised under that heading is correct.
The disclosure requirements of IAS 8/IPSAS 3 should be complied with.
In addition, if the change in accounting estimate causes a material distortion in a particular expense
heading, additional disclosure may be required in accordance with of IAS 1/IPSAS 1 Presentation of
Financial Statements.
Practice:
3. You are the Chief Accountant at EFG PLC.
Clark, a Senior Accountant, has brought to your attention some matters for consideration of their
impact on the financial statements for the year ended 30 June 2014 before they are issued to public.
Suggest the amounts to be recognized in respect of the following transactions and balances for current
year as well as the prior year comparatives to be reported in the financial statements for the year
ended 30 June 2014.
a) EFG PLC has changed its accounting policy for recognition of revenue during the current period.
The balance of retained earnings, as reported in the statement of changes in equity in last year's
financial statements are as follows:
Balance at 30 June 2011 $50,000
Balance at 30 June 2012 $70,000
Balance at 30 June 2013 $100,000
Profit before tax for the current year ended 30 June 2014 is $40,000 accounted for in accordance with
the new revenue recognition policy. The effect of change in accounting policy on revenue recognized
in previous accounting periods is as follows:
Year End Value Increase (Decrease) in Revenue
30 June '13 $10,000
30 June '12 ($25,000)
30 June '11 $5,000
The effect of change in revenue recognition policy is determinable till the accounting year ended 30
June 2011 prior to which the computation of the effect of change is impracticable.
Tax rate is 20%.
What amounts of retained earnings should be reported the statement of changes in equity in the
financial statements under consideration for:
i) Balance at 30 June 2012 ii) Balance at 30 June 2013 and iii) Balance at 30 June 2014 $
Correct Answers:
Balance at 30 June 2012 $54,000 (W1)
Balance at 30 June 2013 $108,000 (W2)
Balance at 30 June 2014 $140,000 (W3)
W1: $70,000 + $5,000 x 0.8 (W4) - $25,000 x 0.8
= $54,000.
W2: ($100,000-16000*) + $10,000 x 0.8
= $92000.
*(70000-54000)
W3: $92,000 (W2) + $40,000 x 0.8
= $124,000.
W4: 1 - 0.2 (Tax Rate) = 0.8
A change in accounting policy is applied retrospectively by adjusting the opening balance of the
relevant equity component of the earliest prior period presented as if the new accounting policy had
always been in place.
However, as in the case of EFG PLC, where it is not possible to determine the effect of a change in
accounting policy for all prior periods, the change must be accounted for prospectively from the
earliest date practicable.
Therefore, the retained earnings balance as at 30 June 2012 (i.e. the earliest prior period) shall be
adjusted to account for the cumulative effect of the change in policy in that period and all preceding
periods for which the effect of change is determinable (i.e. year ended 30 June 2011).
b) EFG PLC has been valuing its buildings on the historical cost basis until last year.
From the current period, management has planned to apply the revaluation model of IAS 16 to
account for its buildings.
The carrying values of buildings calculated using the two basis of valuation are as follows:
As at As at
30 June '14 30 June '13
Historical Cost $800,000 $900,000
Revalued Cost $2,700,000 $2,200,000
What carrying values of buildings should be presented in the Statement of Financial Position as at 30
June 2014 for: i) Current Year End As at 30 June '14 ii) Comparative Year End As at 30 June '13.
c) EFG PLC acquired an equity investment in an unquoted company on 1 July 2012 which it values
on the basis of its fair value.
Last year, the fair value of the investment as at 30 June 2013 was estimated to be $20,000 by an
actuary.
This year, the actuary estimated a fair value of $25,000 as at 30 June 2014. However, the actuary
asserted that he had used a different estimation technique this year in arriving at the fair value and that
if he had used the same estimation method last year, the fair value of the investment would have been
$18,000 as at the 30 June 2013.
It is difficult to conclude whether the change in estimation technique used in determination of the fair
value of investment constitutes a change in accounting policy or estimate.
What value of investment should be presented in the financial statements under consideration for:
i) Current Year End As at 30 June '14 ii) Comparative Year End As at 30 June '13.
4. You are the Chief Accountant at DEF PLC.
Steve, the Accounts Officer, has brought to you the following matters for an assessment of their
impact on the financial statements for the year ended 30 June 2014 which are in the process of being
finalized.
Determine the amounts to be recognized in respect of the following transactions and balances for the
current period as well as the prior period comparative s to be reported in the financial statements for
the year ended 30 June 2014.
a) DEF PLC has been valuing inventory on the basis of Average Cost Method (AVCO) until 30
June 2013.
DEF PLC is involved in a seasonal business and the use of AVCO method dilutes the effect of
seasonal fluctuation on the cost of inventory.
Management believes FIFO Method will provide more relevant information regarding the value of
inventory held by DEF PLC and has decided to apply it for the first time starting from the current
period.
Value of inventory calculated using the two basis is as follows:
As at As at
30 June '14 30 June '13
FIFO $275,000 $250,000
AVCO $300,000 $200,000
What amount of inventory should be presented in the financial statements under consideration for:
i) Current Year End As at 30 June '14 ii) Comparative Year End As at 30 June '13.
b) Last year, DEF PLC was involved in a litigation.
The litigation against the Company was in progress in a civil court at the time of issuance of the
financial statements for the year ended 30 June 2013 and a disclosure was included to this effect. No
liability had been recorded however since the Company's legal advisors firmly believed in a favorable
outcome.
As per the expectation of the legal advisors, the Company won the case in civil court this year.
However, the decision of the civil court was subsequently overturned by the High Court and the
Company was forced to pay $500,000 to the claimants on 31 May 2014.
What amount of liabilities, if any, should be reported in respect of the legal claim in the financial
statements under consideration for:
i) Current Year End As at 30 June '14 ii) Comparative Year End As at 30 June '13.
c) DEF PLC acquired a factory on 1 July 2012 for $1,000,000.
In the last accounting period, DEF PLC depreciated the factory building on straight line basis
assuming a useful life of 10 years.
In the current period, the useful life of the factory premises has been revised to 20 years instead of 10
years assessed last year.
Amounts of depreciation expense calculated using the different assumptions are as follows:
Net Book
Value Useful Life Depreciation Expense
$1,000,000 10 years $100,000
$1,000,000 20 years $50,000
$900,000 19 years $47,368
$950,000 19 years $50,000
What amount of depreciation expense should be presented in the financial statements under
consideration for:
i) Current Year End As at 30 June '14 ii) Comparative Year End As at 30 June '13.
d) DEF PLC has a policy of recognizing revenue upon the sale of their goods by its distributors to the
retailers.
This year has been particularly hard for the Company's business. In order to improve the profitability
of DEF PLC, Steve has suggested recognizing sales revenue upon the delivery of goods to the
Company's distributors instead of delaying it until the sales are made to retailers.
Comparison of the sales revenue using the different revenue recognition policies is as follows:
Sales for the Sales for the
Current comparative
year ended year ended
30 June '14 30 June '13
Old policy $2,500,000 $3,000,000
New policy $3,500,000 $2,800,000
5. You are a senior accountant at ABC LTD.
While proof-reading financial statements for the year ended 30 June 2014, Liza, a trainee accountant,
has identified certain changes from last year's financial statements but she is unsure whether they
represent a change in accounting policy, a revision in accounting estimate or a correction of prior-
period error.
Identify whether the following constitute a change in accounting policy, a revision in accounting
estimate or a correction of prior-period error.
a) Previously, ABC LTD accounted for its non-current assets using the historical cost basis.
In the current period, however, ABC LTD has adopted the revaluation model of IAS 16 to account for
its non-current assets.
b) ABC LTD previously had a policy of calculating depreciation on equipment using the straight line
method @ 10%.
However, In light of significant losses recognized on recent disposals the management has decided to
depreciate equipment by using the reducing balance method @ 20% which shall more accurately
reflect the wear and tear of equipment.
c) ABC LTD has a policy of valuing inventory using the FIFO method.
Liza noticed the value of inventory brought forward in the current period (i.e. last year's closing
inventory balance) has been changed because it had erroneously been valued using the LIFO method
last year.
d) ABC LTD has a past practice of recognizing sales revenue at the time of dispatch of goods to the
retailers.
In the current period, however, sales revenue has not been recognized by ABC LTD until the goods
sold to retailers have been re-sold to the end-consumers.
Management believes the new recognition rule more accurately reflects the economic substance of the
sales and returns arrangement with retailers.
e) In estimating the employee benefits obligations of ABC LTD at the previous year end, the actuary
failed to take into account ABC LTD's plan to discontinue operations in one of its geographic
segments. Management had announced its plan three years ago.
Recently, the actuary furnished revised estimates of ABC PLC's liability with respect to employee
benefits of the current and prior periods taking into account the plans for discontinuation.
Financial statements of this year have been amended accordingly.
