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Emerald has had a policy of writing off development expenditure to the income statement as it was incurred. In preparing its financial statements for the year ended 30 September 2007 it has become aware that, under IFRS rules, qualifying development expenditure should be treated as an intangible asset. Below is the qualifying development expenditure for Emerald: $’000
Year ended 30 September 2004 300
Year ended 30 September 2005 240
Year ended 30 September 2006 800
Year ended 30 September 2007 400
All capitalised development expenditure is deemed to have a four year life. Assume amortisation commences at the beginning of the accounting period following capitalisation. Emerald had no development expenditure before that for the year ended 30 September 2004.
Required:
Treating the above as the correction of an error in applying an accounting policy, calculate the amounts which should appear in the income statement and balance sheet (including comparative figures), and statement of changes in equity of Emerald in respect of the development expenditure for the year ended 30 SeptemberI dont understand how to do this question..can anyone explain in detail?
Thanks.Yes, you need to apply the amortisation to the accumulated data.
A change in accounting policy involves restating the fin stats from earlier years.
So, ask yourself “How much of the 300 in ’04 should have been amortised by the start of this year, and how much therefore remains to be amortised this year?”
Then repeat the exercise for ’05 and ’06
Whatever should have been the amount remaining as yet unamortised ( if they had been applying the policy from day 1 ) at the end of ’06 now needs to be amortised ( 1/4 x 300 + /2 x 240 + 3/4 x 800 ) as at the start of ’07
Now, add on ’07’s 400.
then amortise – the remaining 1/4 of ’04, a half of the remaining ’05, a third of the remaining ’06 and a quarter of the ’07 – that should appear as a write off in the ’07 accounts – i think it’s 440 in total should be the ’07 figure for Dev Exp amortisation.
On the ’07 SoFP should be 760 ( the last 1/4 of ’05, a half of ’06 and 3/4 of ’07 )
ok I have understood the whole thing except the 465 added back to retained earnings as prior period adjustment. Its the carrying amount for 04 and 05..what does this mean?
Thanks a lot.
1/4 of 2004 will have been charged in ’04 leaving 225 cv at end ’04. The restatement exercise has the effect of changing the figures as though the new policy had always been in existence. So, here we are at end ’07, ‘6 and the comparative amounts, and retained earnings for ’06 will start with retained earnings b/fwd.
So, we need to find the “corrected ” ret ears as at Sept ’05. The amounts which have cumulatively been written off as at ’05 would be the 300 and 240. With the new policy, only 1/4 of the ’03 3expenditure should have been written off, therefore we need to add back the 3/4 x 300 + all the 240 ( ie 465 )
I dont understand the date, why should we find the corrected retained earnings as at sept 05 when we are calculating as at sept 07?
thanks again.because sept 05 is the opening position for sept 06 ret ears calcn in SoCieETY.
In practice, you’d have to go back to calculate the effect of a change right the way back to when an asset was acquired in order to see the cumulative effect of ret ears b/fwd from 2 years ago, then the effect on the ret ears b/fwd into the current year and then the effect on this year’s results
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