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hello tutor,
could you please illustrate how the increasing profit before tax in 2017 2.3% comes from? my calculation is 18% (130-110)/110
a prior year adjsutment is simply add $20m back to SFP, but change in estimation is to adjust retrospectively, is it correct? that is how the non-crrent assets and RE been overstated.
many thanks
As it says in the answer the reduction in expense is $3m which is 2.3% of current year profit (3/130).
You should know even from FR that PYA is retrospective (adjustment to opening retained earnings in SoCIE) change in accounting estimate is ALWAYS current year (and prospective). Consider the simplest of examples – an estimate of an accrued expense at the end of the year – the following year you don’t make a prior period adjustment – any under/over estimate will simply “fall out” in profit or loss.
Suppose there was a single asset cost $150 annual depreciation $15 with a carrying amount $90 at the beginning of the year – i.e. it has been depreciated for 4 years and has 6 years useful life remaining.
Management decides useful life is not 10 years after all but 15. Management cannot go back to the beginning and say “aha – we should have only charged $10 depreciation a year so let’s add 4 years’ x $5 back to retained earnings”. Instead, the so far undepreciated cost ($90) must now be depreciated over the remaining useful life which is now 11 years rather than 6. So depreciation would be only $8. (This is just for illustration – it’s not necessary to work out the numbers behind the numbers in the scenario because the examiner gave you the necessary amounts.)
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