IAS 8 Assessment Quiz | Part I
Difficulty: ✭ ✭ ✭
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.
Correct answer is Change in Accounting Policy.
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.
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.
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.
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.
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.