ZeePedia buy college essays online


Advanced Financial Accounting

<<< Previous ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2 Next >>>
 
img
Advance Financial Accounting (FIN-611)
VU
LESSON # 30
IAS 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND
ERRORS
CHANGES IN ACCOUNTING ESTIMATES:
As a result of the uncertainties inherent in business activities, many items in financial
statements cannot be measured with accuracy but can only be estimated. Estimation
involves judgments based on the latest available and reliable information. For
example, estimates may be required for:
a)
Doubtful debts,
b)
Inventory obsolescence;
c)
The fair value of financial assets or financial liabilities;
d)
The useful lives of, and expected pattern of consumption of the future economic
benefits embodied in depreciable asset, and
e) Warranty obligations.
The effect of a change in an accounting estimate, other than a change to which
following paragraph applies, shall be recognized prospectively by including it in
profit or loss in:
a) The period of the change, if the change affects that period only; or
b) The period of the change and future period, if the change affects both.
To the extent that a change in an accounting estimate gives rise to changes in assets
and liabilities, or relates to an item of equity it shall be recognized by adjusting the
carrying amount of the related asset, liability or equity item in the period of the
change.
a) Prospective recognition of the effect of a change in an accounting estimate
means that the change is applied to transactions, other events and conditions
from the date of the change in estimate.
b) A change in an accounting estimate may affect only the current period's profit
or loss, or the profit or loss of both the current period and future periods.
For example, a change in the estimate of the amount of bad debts affects only the
current period's profit or loss and therefore is recognized in the current period only.
However, a change in the estimated useful life of, or the expected pattern of future
economic benefits embodied in a depreciable asset affects depreciation expense for the
current period and future periods during the asset's remaining useful life. In both
cases, the effect of the change relating to the current period is recognized as income or
expense in the current period. The effect, if any, on future periods is, recognized as
income or expense in those future periods.
160
img
Advance Financial Accounting (FIN-611)
VU
Example-8:
Idrees Sports Private Limited purchased an asset with followings details:
Cost Price
=
Rs. 2,500,000
Estimated useful life
=
10 years
Estimated residual value
=
Rs. 100,000
In third year, the company estimates the useful life of its asset at 6 years with residual
value of Rs. 220,000. The company depreciates its asset on straight line method.
Required: Account for the above Accounting Estimates in the Financial Statements of Idrees
Sports Private limited, in the third year.
Solution:
Idress Sports Private Limited
Extract from cost of goods sold statement
Rs
Rs
Manufacturing Expenses
Depreciation (W-2)
300,000
Note: This change in Accounting Estimate has been accounted for prospectively.
Working:
(W-1)
Year
Cost Depreciable
Depreciation Depreciation
Book
Amount
Rate (W-3)
Amount
Value
(Rs)
(Rs)
%
(Rs)
(Rs)
1
2,500,000 2,400,000
10%
240,000
2,260,000
2.
2,400,000
10%
240,000
2,020,000
(W-2)
Year Carrying Depreciable DepreciableDepreciation
Book
Amount Amount
Rate
Value
Rs
Rs
%
Rs
Rs
(2,020,000 ­ 220,000)
3
2,020,000 1,800,000
16.67%
300,000
1,720,000
4
16.67%
300,000
1,420,000
5
16.67%
300,000
1,120,000
6.
16.67%
300,000
820,000
7.
16.67%
300,000
520,000
8
16.67%
300,000
220,000
161
img
Advance Financial Accounting (FIN-611)
VU
(W-3) Depreciation rate in first two years
1
Depreciation Rate
=
x 100
Estimated useful life
1
Depreciation Rate
=
x100
10
Depreciation Rate
=
10%
(W-4) Depreciation rate from third year
1
Depreciation Rate
=
x 100
Estimated useful life
1
Depreciation Rate
=
x100
6
Depreciation Rate
=
16.67%
Disclosure:
An entity shall disclose the nature and amount of change in an accounting estimate
that has an effect in the current period or is expected to have an effect in future
periods, except for the disclosure of the effect on future periods when it is
impracticable to estimate that effect.
If the amount of the effect in future periods is not disclosed because it is impracticable,
an entity shall disclose that fact.
Errors:
a) Errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements.
b) Financial statements do not comply with IFRSs if they contain either material
errors or immaterial errors made intentionally to achieve a particular
presentation of an entity's financial position, financial performance or cash
flow.
c) Potential current period errors discovered in that period are corrected before
the financial statements are authorized for issue. However, material errors are
sometimes not discovered until a subsequent period, and these prior period
errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
If it is not impracticable, an entity shall correct prior period errors retrospectively in
the first set of financial statements authorized for issue after their discovery by:
a) Restating the comparative amounts for the prior period(s) presented in which
the error occurred; or
b) If the error occurred before the earliest prior period presented, and then
restating the opening balances of assets, liabilities and equity for the earliest
prior period presented.
162
img
Advance Financial Accounting (FIN-611)
VU
Example-9:
During 2008, Saleem Co discovered that some products that had been sold during
2007 were incorrectly included in inventory at 31 December 2007 at Rs. 6,500.
Saleem Co's accounting records for 2008 show sales of Rs. 104,000, cost of goods sold
of Rs.86,500 (including Rs. 6,500) for the error in opening inventory), and income taxes
of Rs. 5,250.
In 2007, Saleem Co's reported:
2007
Rs.
Sales
73,500
Cost of goods sold
(53,500)
Profit before income taxes
20,000
Income taxes
(6,000)
Profit
14,000
2007 opening retained earnings was Rs. 20,000 and closing retained earning was Rs.34,
000.
Saleem Company's income tax rate was 30 percent for 2008 and 2007. It had no other
income or expenses
Saleem Company's had Rs. 50,000 of share capital throughout and no other
components of equity except for retained earnings.
Solution:
Saleem Co's
Extract from the Income Statement
(Restated)
2008
2007
Rs.
Rs.
Sales
104,000
73,500
Cost of goods sold
(80,000)
(60,000)
Profit before income taxes
24,000
13,500
(4,050)
Income taxes
(7,200)
Profit
16,800
9,450
163
img
Advance Financial Accounting (FIN-611)
VU
Saleem Co's
Statement of Changes in Equity
2008
2007
Rs.
Rs.
Rs.
Opening Balance (Retained Profit b/f)
34,000
20,000
Adjustment in opening retained profit
6,500
4,550
Income tax effect at 30%
(1,950)
Adjusted Retained profit
29,950
Profit after tax for the current year
16,800
9,450
Closing Balance at (Retained Profit c/f)
46,250
29,450
164
Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet