How much do you know about IAS 8 Changes in accounting policies, estimates and errors?
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Question
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.
Part 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.
Change in Accounting Policy
Correct.
Basis of measurement of the elements of financial statements (e.g. historical cost, fair value, etc.) represent accounting policies.
Any change in the basis of measurement therefore constitutes a change in accounting policy.
Revision of Accounting Estimate
Incorrect.
Correction of Prior-Period Error
Incorrect.
Part 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.
Change of Accounting Policy
Incorrect.
Revision of Accounting Estimate
Correct.
Change in the depreciation method merely reflects a shift in the management's expectation of the pattern of periodic consumption of equipment and therefore represents a revision in accounting estimate.
Correction of Prior-Period Error
Incorrect.
Part 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.
Change in Accounting Policy
Incorrect.
Revision of Accounting Estimate
Incorrect.
Correction of Prior-Period Error
Correct.
The restatement of last year's closing inventory in current period financial statements therefore represents a correction of prior-period error rather than a change in accounting policy or estimate.
Part 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.
Change in Accounting Policy
Correct.
Variation in rules and practices used in the preparation of financial statements represents a change in accounting policy.
Revision of Accounting Estimate
Incorrect.
Correction of Prior-Period Error
Incorrect.
Part 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.
Change in Accounting Policy
Incorrect.
Revision of Accounting Estimate
Incorrect.
Correction of Prior-Period Error
Correct.
Failing to consider material information while developing estimates that was already available at that time constitutes an accounting error.