Week 10: Accounting Policies, Estimates, Errors and Omissions Flashcards
What are accounting policies?
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements (IAS8 Para5).
What must accounting policies complying with IFRS and interpretations so that the financial statements provide what kind of info?
All financial statements must be:
relevant
reliable
represents faithfully
reflect economic substance
neutral pruednat and complete
accounting policies should only be changed if the change…
accounting policies should only be changed if the change…
is required by an IFRS standard
results in the more reliable and relevant information
these are not changes in accounting policies:
applications of an accounting policy for transactions or events that differ in subsatnce from previously occuring
application of of new policy that did not occur previously or was immaterial
What are accounting estimates?
accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty and require the use of judgement or assumptions based on latest information available.
Examples: Depreciation, Fair value, NRV
how do you account for a change in accountign policy?
If the change is from historical to revaluation method, it is dealt with under IAS16 and IAS38.
If the change in accounting policy is voluntary, or if the change in an IFRS does not include transitional arrangements then:
Applied retrospectively (for earliest comparative presented)
Adjusting opening balance of retained earnings (R/E) in Statement of Change in Equity (SOCE)
Restate comparatives (unless impracticable)
If unable to determine effect on R/E, adjusted prospectively (included in current SOI and future)
Name some examples of changes in accounting estimates?
Examples of Changes in Accounting Estimates:
Useful life of non-current assets (NCA)
Method of depreciating NCA
Warranty provisions based on more up-to-date claims history and value
In accordance with IAS8 Accounting Policies, Change in Accounting Estimates and Errors, how is a change in accounting estimate accounted for?
By changing the current year figures but not the previous years’ figures
By changing the current year figures and the previous years’ figures
No alternation of any figures but disclosure in the notes
Neither alteration of any figures nor disclosure in the notes
In accordance with IAS8 Accounting Policies, Change in Accounting Estimates and Errors, how is a change in accounting estimate accounted for?
By changing the current year figures but not the previous years’ figures
Which is the accounting policy?
A non-current asset has a depreciable amount of $5,000. It should be written off over 5 years, using reducing balance method (RBM)
Non-current assets are written off over their useful lives
A non-current asset has a depreciable amount of $5,000. It should be written off over 5 years, using reducing balance method (RBM)
Accounting Estimate as choice of method is how you implement an accounting policy
B. Non-current assets are written off over their useful lives
Accounting Policy
Which of the following is a change in accounting estimate?For each of the items, ask whether this involves a:
- Change in Recognition
- Change in Presentation
- Change in Measurement basis
An entity has previously charged interest incurred during construction of NCA to SOI. Following a change in IAS treatment, interest is now capitalised
Vehicles will now be depreciated using RBM instead of SLM
Overheads reclassified from CGS to admin expenses
Inventory measured at Weighed average cost (AVCO) rather than First in First Out (FIFO)
An entity has previously charged interest incurred during construction of NCA to SOI. Following a change in IAS treatment, interest is now capitalised - An entity has previously charged interest incurred during construction of NCA to SOI. Following a change in IAS treatment, interest is now capitalised
Vehicles will now be depreciated using RBM instead of SLM - 2. Answer to all 3 is no. Change in estimation technique
Overheads reclassified from CGS to admin expenses - Change in presentation. Change in Accounting Policy
Inventory measured at Weighed average cost (AVCO) rather than First in First Out (FIFO). Inventory measured at Weighed average cost (AVCO) rather than First in First Out (FIFO)
What are prior period errors or omissions?
Omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use or misuse of information that
Was available when statements were authorised for issue
Could reasonably have been expected to have been included in the financial statements
Name some examples of prior period errors?
Examples of Prior Period Errors:
Mathematical Mistakes
Misapply Accounting Policy
Oversight
Misinterpretation of Facts
Fraud
How do you account for prior period errors?
Accounting For Prior Period Errors
Correct retrospectively by restating opening balance of assets, liabilities and equity as if error had never occurred
Present the adjustment to opening balance in R/E in SOCE
Restate comparative figures presented as if error had never occurred
Disclose nature of error and amount of correction to prior period for each line item presented
Present a SOFP at the beginning of the earliest comparative period. This means 3 SOFP are presented: at end of the current year, and beginning and end of the previous year
What are some key disclosures for prior period errors disclosures
Key disclosures
a) the nature of the prior period error
b) the amount of the correction for each prior period presented for each line item affected
c) the amount of the correction at the beginning of the earliest prior period presented
According to IAS8, how should a material error in previous reporting period be accounted for in current period?
Adjust financial statements current period as a movement on reserves and disclose the nature of the error in a note
Adjust financial statements current period through the SOPL and disclose the nature of the error in a note
Restate opening balances for current period, restate comparatives for the previous period, beginning and end, show movement in reserves in current period, and disclosing the nature of the error in a note
Restate comparatives to their correct value, but without the requirement for a disclosure of the nature of the error in a note
According to IAS8, how should a material error in previous reporting period be accounted for in current period:
Restate opening balances for current period, restate comparatives for the previous period, beginning and end, show movement in reserves in current period, and disclosing the nature of the error in a note
Which two of the following would not require restated comparatives under IAS8?
In last year’s financial statements, inventories were understated by a material amount due to system error.
A company has changed its allowance for doubtful debts from 10% of outstanding debt to everything over 120 days old
A new accounting standard has been issued that requires a company to change its accounting policy but gives no guidance on the specific application of the change itself
A company has chosen to value inventory using FIFO rather than AVCO as in previous periods
A company has decided to move from charging depreciation on a S/L basis to the RBM.
A company has changed its allowance for doubtful debts from 10% of outstanding debt to everything over 120 days old (Change in estimation)
A company has decided to move from charging depreciation on a S/L basis to the RBM. (Change in estimation)
