How much do you know about IAS 8 Changes in accounting policies, estimates and errors?
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Question
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.
Part A
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 30 June 2014 | As at 30 June 2013 | |
|---|---|---|
|
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:
a) Current Year End As at 30 June 2014
$800,000
Incorrect.
$2,700,000
Correct.
The retrospective application of a change in accounting policy under IAS 8 does not apply to the initial change from historical cost basis to revaluation model under IAS 16 and IAS 38.
b) Comparative Year End As at 30 June 2013
$900,000
Correct.
EFG PLC must report the prior period comparative balance of buildings on historical cost basis.
$2,200,000
Incorrect.
Part B
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 2013 |
$10,000 |
|
30 June 2012 |
($25,000) |
|
30 June 2011 |
$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:
Balance at 30 June 2012: $54,000
Balance at 30 June 2013: $108,000
Balance at 30 June 2014: $140,000
Correct.
W1: $70,000 + $5,000 x 0.8 (W4) - $25,000 x 0.8
= $54,000.
W2: $100,000 + $10,000 x 0.8
= $108,000.
W3: $108,000 (W2) + $40,000 x 0.8
= $140,000.
W4: 1 - 0.2 (Tax Rate) = 0.8
Balance at 30 June 2012: $70,000
Balance at 30 June 2013: $100,000
Balance at 30 June 2014: $124,000
Incorrect.
Explanation:
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).
Part 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:
a) Current Year End As at 30 June 2014
$25,000
Correct.
IAS 8 requires that in cases where it is hard to differentiate between a change in policy and a change in estimate, the change is accounted for prospectively.
$23,000
Incorrect.
b) Comparative Year End As at 30 June 2013
$20,000
Correct.
The comparative value of the investment need not be restated in the current financial statements.
$18,000
Incorrect.