Accounting policies, changes in accounting estimate and errors (IAS 8)

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IAS 8: accounting estimates, accounting policies, prior period errors

1 Accounting policies

Change in accounting policy: new IFRS or voluntary change

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Error

Adomas Co Statement of Profit or Loss and Other Comprehensive Income extract and summarised Statement of Financial Position for the year ended 31 December, 2008

	$’000
Revenue	2,500
Cost of sales and expenses	(1,200)
Profit for the year	1,300

Statement of Financial Position at 31 December, 2008
Non-current assets	2,000
Current assets	800
	2,800
Share capital	600
Reserves	2,000
	2,600
Current liabilities	200
	2,800

During 2009 it was discovered that certain non-current assets had been included in the records at 31 December 2008 at $500,000 in excess of their recoverable amount and that this situation was unlikely to change.

Prior to making any adjustment for the above the results and summarised Statement of Financial Position of Adomas Co for 2009 was as follows:

Statement of Profit or Loss (extract) for the year ended 31 December 2009

	$’000
Revenue	2,600
Costs and expenses	(1,400)
Profit for the year	1,200

Statement of Financial Position at 31 December 2009

	$’000
Non-current assets	2,800
Current assets	1,700
	4,500
Share capital	600
Retained earnings	3,500
	4,100
Current liabilities	400
	4,500

During 2009 some other items of property had been revalued by $300,000 (included in the above retained earnings figure).

Prepare extracts from Adomas Co’s financial statements for the year ended 31 December, 2009.

Profit or loss and other comprehensive income for the year ended 31 December 2009

	2009	2008
	$’000	$’000
	as restated
Revenue	2,600	2,500
Costs and expenses	(1,400)	(1,700)
Profit for the year	1,200	800
Gain on revaluation of properties	300	–
Total comprehensive income	1,500	800

Statement of Financial Position as at 31 December, 2009

	2009	2008
	$’000	$’000
	as restated
TNCA	2,300	1,500
Current assets	1,700	800
	4,000	2,300
$1 Equity shares	600	600
Retained earnings	2,700	1,500
Revaluation reserve	300	–
	3,600	2,100
Current liabilities	400	200
	4,000	2,300

Statement of Changes in Equity for the year ended 31 December 2009

	Share capital	Revaluation reserve	Retained earnings	Total
	*$’000*	*$’000*	*$’000*	*$’000*
Balance at 31 December, 2008	600	–	2,000	2,600
Material error	–	–	(500)	(500)
Restated balance	600	–	1,500	2,100
Surplus on revaluation of properties		300		300
Net Profit for the year			1,200	1,200
Balance at 31 December, 2009	600	300	2,700	3,600

2 Accounting estimates

Changes in accounting estimate are recognised prospectively:

Period of change
Period of change and future periods

Accounting Estimates

Would the following be a change in accounting policy or revision of an estimate?

If a company decides to change its method of depreciation from straight line method to reducing balance method.
If a company decides to change from capitalising finance costs to immediate write off.

The change in method is a change in accounting estimate.

The changing of the capitalisation of finance costs is a change in accounting policy.

3 Prior period error

Accounting errors (omissions and misstatements) include:

Errors in applying accounting policies
Oversights
Fraud and the effects of fraud

Material errors are corrected retrospectively, the same as for a change in accounting policy.

Retrospectively means adjusting the brought-forward figures and restating the comparatives, so that the prior year is shown as though the new policy had always applied, or as though the error had never been made. The part that belongs to earlier years goes to opening retained earnings in the statement of changes in equity, and only the part that belongs to the current year goes through this year's profit — in the Dodgy Co example below, $1.0m is an expense this year and $2.4m adjusts opening retained earnings.

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Prior year error

Fraudulent financial reporting has been found within the accounts of Dodgy Co, which amounts to $3.4m of trade receivables that need to be written off. Of the total $3.4m, $1.0m relates to the current reporting period, and the remaining $2.4m relates to pervious period.

Explain the accounting treatment of the fraudulent financial reporting in the financial statements of Dodgy Co.

The total receivables of $3.4m should be removed from the statement of financial position in the current year.

$1.0m should be recognised as an expense in the statement of profit or loss in the current year, through operating expenses.

The $2.4m that relates to previous periods is a prior year error and should be recognised through the statement of changes in equity as an adjustment to the opening retained earnings.

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