IAS 8- Change in Accting or Errors

Question 1

31.Rubul Co

Answer 1

• Impact of Currency Exchange Rates on Financial Trends:
  
  • Fluctuations in currency exchange rates can significantly alter a company’s revenue and profit trends over multiple periods.
  • Changes in foreign exchange rates may obscure both positive and negative trends in the financial performance of foreign subsidiaries.
  • Conducting a constant currency analysis allows for a clearer evaluation of the company’s actual earnings changes, excluding the influence of foreign currency gains and losses.
• Application of IAS 21 and Limitations of Using Historic Exchange Rates:
  
  • Under IAS 21, assets and liabilities of international subsidiaries must be translated at the closing rate on the statement of financial position date, while income and expenses are translated at transaction dates’ exchange rates.
  • While a simplified approach like using average rates may be permissible under IAS 21, employing a single historic fixed exchange rate is not acceptable.
  • Constant currency rates, although beneficial for analysis, are not permitted under IFRS standards, including IAS 21.
• Consideration of Reporting Effects in Financial Statements and Conceptual Framework:
  
  • Exchange differences on monetary items are typically reported in the profit or loss for the period.
  • It may be prudent to assess whether recognizing foreign exchange gains or losses on monetary items in other comprehensive income (OCI) rather than profit or loss is more appropriate, especially for items with a high likelihood of reversal.
  • The reclassification of items recognized in OCI raises questions about the potential impact on profit or loss and whether such reclassification is permissible under the Conceptual Framework.

Question 2

20. Renshu

Answer 2

• Recognition Criteria for Intangible Assets:
  
  • Renshu Co should have assessed whether the recognition criteria outlined in IAS 38 or for internally generated intangible assets were met when initially capitalizing the intangible assets.
  • If it’s discovered in the current period that the criteria weren’t met and the payments should have been expensed, Renshu Co must rectify the error retrospectively, adjusting the opening balance of affected equity components, likely retained earnings, for the earliest prior period presented.
• Reclassification of Intangible Assets and Accounting Estimates:
  
  • Reclassifying intangible assets as research and development costs does not constitute a change in accounting estimate, as estimates are revised based on new information affecting the circumstances upon which they were formed.
  • The payments made for the app are not estimates of development costs but rather the acquisition of intangible assets.
• Treatment of Payments and Impairment Testing:
  
  • If the payments qualified as intangible assets, they should be recognized and subjected to impairment testing.
  • If the payments did not meet the criteria for intangible assets, they should be treated as prior period errors.