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- This topic has 6 replies, 2 voices, and was last updated 7 years ago by MikeLittle.
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- November 22, 2016 at 6:56 am #350543
Hi Mike,
I’m still a little confused about the appropriate adjustments needed when a change in accounting policy occurs:
Company’s year end is 31 December. On 1 January 2000 it bought a machine with a useful life of 10 years for $200,000 and depreciated it at 15% per annum on the reducing balance basis. On 31 December 2013 the accumulated depreciation was $95,600 and the carrying amount $104,400. During 2014 the company changed the basis of depreciation to straight line.
How should this be accounted for in the financial statements for the year ended 31 December 2014?
SOPL:
Depreciation: $200,000/ 10 = $20,000 (retrospective application)SOFP:
Machine: 200,000 x 6/10 = 120,000SOCIE:
Adjustment to opening balance retained earnings: $35,600 (W)Working:
Accumulated depreciation – depreciation that should have been charged
95,600 – (20,000*3)
= 35,600Did I get the above right? If I did not, what should I have done instead? Hoping to hear from you, thank you π
November 22, 2016 at 8:04 am #350554The accounting policy of the entity with reference to TNCA is to depreciate the assets over their estimated useful lives
How they achieve that objective is called an accounting base
Initially our entity above has chosen to depreciate on the basis of 15% reducing balance
Subsequently it has reassessed the useful life of the asset and determined that a more realistic base would be straight line
So the entity has changed the accounting BASE
But the accounting POLICY continues to be to depreciate over estimated useful life and therefore there is no change in accounting policy!
November 22, 2016 at 9:10 am #350576Oh boy I thought that was a change in accounting policy all along! Thanks for correcting me π
What if it is a change in classification of an item of expense?For example (I apologize- this may not be a good one),
The current year relates to 31 December 2012. The company’s machinery had suffered impairment losses of total $5,000 (of which $3,000 relates to 31 December 2010; and $2,000 relates to the current year). The company has always charged impairment costs to administrative expenses, but due to a recent change as required by the IFRS, the company has decided to charge impairment costs to cost of sales instead. How should this be accounted for in the financial statements of 31 December 2012?SOPL:
Charge $2,000 to cost of salesSOCIE:
Prior period adjustment
CREDIT $3,000 to opening balance retained earningsWould this be correct?
November 22, 2016 at 9:34 am #350578Silly me! On second thoughts my ‘answer’ seems obviously wrong- prior period profits wouldn’t be affected due to the change so no adjustments are needed to opening retained earnings..
But just to confirm, if a change in accounting policy results in an increase in previous year profits, we should credit the increase to opening balance retained earnings (and likewise for decrease in previous year profits where the decrease will be charged to opening balance retained earnings), is that correct?
November 22, 2016 at 10:21 am #350589“On second thoughts my βanswerβ seems obviously wrong- prior period profits wouldnβt be affected due to the change so no adjustments are needed to opening retained earnings..”
Yes, they would be affected
A change in presentation / classification IS a change in policy and is applied retrospectively so, although the overall bottom line wouldn’t change and therefore the retained earnings wouldn’t change, the gross profit would decrease and administrative expenses would decrease correspondingly
November 22, 2016 at 12:30 pm #350623OK, I get it now, thanks for your help!
πNovember 22, 2016 at 12:34 pm #350626You’re welcome
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