A Accounting policies, Changes in Accounting Estimates and Errors, Events after the Reporting Period aeLEARNING OBJECTIVES Course Introduction Dene ae ee ee Ee eect Dee ete eta a ee Me eae Cec tered Be ema et a Mee Cura DO esi ese er Oeant CHANGES IN ACCOUNTING POLICIES A Definition What are changes in accounting policies and when do they happen? Accounting policies are: + The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements + Achange in accounting policy is a change from one GAAP to another GAAP oe & 90% accounting policies change: + When required by standard or an interpretation + Ifthe change results in the financial statements providing reliable and more relevant information5A CHANGES IN ACCOUNTING POLICIES Accounting for Changes in Accounting Policies WER ee etree oll ec Role Relea tle id If changes in accounting policy is due to: + Adoption of a new standard ¥ Follow ‘transitional provisions’ ¥ Use the retrospective method if there are no transitional provisions + Voluntary change ¥ Use the retrospective method Disclosure requirements: Nature and effect of change on: v Prior year ¥ CurrentyearCHANGES IN ACCOUNTING POLICIES Accounting for Changes in Accounting Policies aware Examples of changes in accounting policies + AGAAP to GAAP change ee uu eer tae + The adoption of a new accounting standard Eg. Change of accounting standards for IP + Achange in the measurement model of PPE from Cost to Revaluation eR endCHANGES IN ACCOUNTING POLICIES ° Accounting for Changes in Accounting Policies WER ee etree oll ec Role Relea tle id Peng eed = = Weighted Average > FIFO + AGAAP to GAAP change ree) ee augers Examples of changes in accounting policies The adoption of a new accounting standard Eg. Change of accounting standards for IP A change in the measurement model of PPE from Cost to Revaluation eR endCHANGES IN ACCOUNTING POLICIES Accounting for Changes in Accounting Policies WER ee etree oll ec Role Relea tle id Examples of changes in accounting policies + AGAAP to GAAP change ee augers Dears pea Doe - hare The adoption of a new accounting standard rer Uns lich Seda eee rr] aie Tas ee eu aCe A change in the measurement model of PPE from Cost to Revaluation eR endCHANGES IN ACCOUNTING POLICIES Accounting for Changes in Accounting Policies awe c Note: The initial application of a policy to revalue assets is a change in accounting policy to be dealt with as a revaluation in accordance with the SFRS(|) for Property, Plant and Equipment or Intangible assets, rather than in accordance with the SRS(I) for Accounting policies and Changes in Accounting Estimates. rirorcrcd * ‘The fair value can be Pee lac etches een ener Cost Model ® Revaluation Model CET Re rt aC Examples of changes in accounting policies + AGAAP to GAAP change ee augers + The adoption of a new accounting standard Eg. Change of accounting standards for IP + Achange in the measurement model of PPE from Cost to Revaluation eR end 521CHANGES IN ACCOUNTING POLICIES o Exclusions woe et ase sabi Teles cel tad The following are not changes in accounting policies: + Achange from a non-GAAP to GAAP is treated as a ‘correction of errors + Anew GAAP applied to a new transaction is weated as‘no change’ + Achange due to change in estimate is treated as a ‘change in estimate’PRIOR PERIOD ERRORS mm A Definition ee tem el hard Prior period errors are: + Omissions from, and misstatements in, the entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: ¥ Was available when financial statements for those periods were authorised for issue ¥ Could reasonably be expected to have been obtained and taken into accountin the preparation and presentation of those financial statements731 PRIOR PERIOD ERRORS A Definition ee tem el hard Prior period errors are: * Effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud, etc. ¥ Wrong computation of depreciation ¥ Change from non-GAAP to GAAP, etc.PRIOR PERIOD ERRORS Accounting for Prior Period Errors How are prior period errors accounted for and disclose Prior period errors are accounted for usin, + The retrospective method Disclosure requirements: Nature and effect of correction on ¥ Prior year Examples of prior period errors: + The use of inappropriate accounting principles + Mistakes in applying GAAP Arithmetic mistakes + Fraud/gross negligence in reporting For all years disclosed, financial statements are retrospectively restated to reflect the correctionPRIOR PERIOD ERRORS Accounting for Prior Period Errors aL ela) Place Role Relia lent el Examples of corrections of prior period errors + ALIFO to FIFO correction Se ee os he | + The correction of PPE without depreciation to PPE with depreciation eee ee egPRIOR PERIOD ERRORS Accounting for Prior Period Errors Ee em dr Reece mle Relea Cle id eee Trey Examples of corrections of prior period errors Ata Paice ageism uci * ALIFO to FIFO correction foes the SFRS(I) Pia + The correction of PPE without depreciation to PPE with depreciation eee ee ega1 PRIOR PERIOD ERRORS Accounting for Prior Period Errors Ee em dr Reece mle Relea Cle id Examples of corrections of prior period errors + ALIFO to FIFO correction Re eRe | Tee Ces csc COm Emsam «The correction of PPE without depreciation to ial beg PPE with depreciation ive | depreciated. If not, this i pao srheienpeen tiered man CMeCHANGES IN ACCOUNTING ESTIMATES A Definition A change in accounting estimate is: + An adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities Changes in accounting estimates result from: + New information or new developments ¥ Not correction of errors10731 CHANGES IN ACCOUNTING ESTIMATES Accounting for Changes in Accounting Estimates aR Mae eee ete eat a Bleue Re ee Coke Ea Changes in accounting estimates are accounted for using: + The prospective method Disclosure requirements: Nature and effect of change for: v Currentyear v Future years (if practicable) Required only if change is significantCHANGES IN ACCOUNTING ESTIMATES om Accounting for Changes in Accounting Estimates Pe Mae eee ed Bleue Rhee rg Examples of changes in accounting estimates: + An entity changes the useful life of PPE from 10 years to 7 years ‘An entity changes the salvage value of PPE from $15,000 to $10,000 An entity changes the provision for litigation expense fram $30,000 to $40,000 Changes in accounting estimates should be accounted for using the prospective method11e1 ACCOUNTING FOR CHANGES An Example - How do we account for a change in the depreciation metho [* Balance Years Years @ change in accounting policy (i eee Depreciation Expense Depreciation Expense ets1281 ACCOUNTING FOR CHANGES An Overview i en ee Peres ‘Adopt anew FRS standard. ‘Change methed of inventory costing (Change rom revaluation method to cost method, or vice versa (Change from cost method to FY method Change from one generaly accepted ein Accounting Policies eR ‘accounting principleto another. ‘Change depreciation methods Change estimate of usetuife of depreciable asset Revision of an estimate because ©. Change estimate of residual value of depreciable asset ‘new information new experience CChangein Accounting Estimate Change estimate of bad debt % (Change actuarial estimates pertaining io a persion plan + Mathematical mistakes Correctionof an erorcausedby a Inaccuracte physical unt of inventory. Errorcorrection transaction bing recerded incorrectly + Change from the cash basis of accountng to the acerual basis cornoi atl) + Fallure to record an adjusting entry Recording an assei as an expense, or vice versa13781 ACCOUNTING TREATMENTS Retrospective Method and Prospective Method SSR mm RC er = | Retrospective Method Prospective Method - Change in Accounting Policy - Change in Accounting Estimate - Correction of prior period error Prior year Current and future years1481 ACCOUNTING TREATMENTS Retrospective Method ee me eee Restate prior year’s statements (that are presented for comparative purposes) to reflect impact of the change + Adjust the balance in each account affected, to appear as if the newly adopted accounting policy had been applied all along or that the error had never occurred + Adjust beginning balance of retained earnings for the earliest period reported in the comparative statements Apply to each year reported in the ‘comparative statements1481 ACCOUNTING TREATMENTS Retrospective Method ee me eee There are four steps to apply the Retrospective Method: Step One: Calculate the cumulative effect (CE) Step Two: CE adjusted against Beginning Retained Earnings (BRE) Step Three: ‘Amend comparative figures Step Four: Disclose the nature and effect15731 ACCOUNTING TREATMENTS Prospective Method Per Tt -<) Plt Ra Meee eM ace leeylaabC lig Changes are reflected in the financial statements of the current and future years only + No change to prior years’ statements and account balances Thereis no cumulative effect + There is no amendment to comparative figures + Disclose if significant167931 ACCOUNTING TREATMENTS Change in Accounting Policy Preparing and presenting the three types of accounting changes es sean 18a anise in Retrospective MethodSe Rut Oe incorporation. However, the director decided to change the inventory valuation method to weighted average from 2016 financial year end onwards. The director believes that the company could only Ce et ere ee Ee uu ee Sea weighted average method. The cost of inventory at th Cee teas FIFO nN 3112/15 $15,000 $16,000 31/12/16 $12,000 $12,500 4-step Approach Step 1 Calculate cumulative effect of prior years Lila iy 31/12/15 $15,000 $16,000 Cumulative effect = $16,000 - $15,000 = $1,000 2015: Ending inventory understated, COGS overstated, Profit understatedSe Rut Oe incorporation. However, the director decided to change the inventory valuation method to weighted average from 2016 financial year end onwards. The director believes that the company could only Ce et ere ee Ee uu ee Sea weighted average method. The cost of inventory at th Cee teas FIFO nN 3112/15 $15,000 $16,000 31/12/16 $12,000 $12,500 4-step Approach Step 2 Cumulative effect adjusted against Beginning Retained Earnings (BRE) Since prior year profit is understated, we credit $1000 to BRE. Since Beginning Inventory (BI) for 2016 is understated, we debit the current year’s COGS Pr Cost of Goods Sold $1,000 3 Deu iu Red16731 ee U I Cue ue ae es RC Rt a incorporation. However, the director decided to change the inventory valuation method to weighted average from 2016 financial year end onwards. The director believes that the company could only Ce et ere ee Ee uu ee Sea weighted average method. The cost of inventory at the end of 2015 and 2016 under the two Cee teas FIFO nN 3112/15 $15,000 $16,000 31/12/16 $12,000 $12,500 4-step Approach Step 3 Amend Comparative Figures FIFO rz 31/12/16 $12,000 $12,500 Cumulative effect = $12,500 - $12,000 = $500 2016: Ending inventory understated, COGS overstated $500 PrSe Rut Oe incorporation. However, the director decided to change the inventory valuation method to weighted average from 2016 financial year end onwards. The director believes that the company could only Ce et ere ee Ee uu ee Sea weighted average method. The cost of inventory at th Oe ces 3112/15 31/12/16 4-step Approach Step 4 Disclosure the nature and effect Nature and effect for prior year (2015) and current year (2016)PRESENTATION AND DISCLOSURE ™ Statement of Changes in Equity Cele eee tae ea ee) Cyt] | 000% 000 Issue of share capital Note 11) vx : ~~ Dividends «Note 12) : 009 : 00) ‘Total comprehensive income forthe year : yoo vo 00 a * ° c ‘Transfert retained earnings : Ey 0 (0) : 2000 000% 2% 10% 0001 Balance at 31 December 2016@ ALT] Souk Ce ane eae ee Share Capital Retained Revaluation Fv Total equity earnings reserve reserve 7000 $000 5000 000 s'000 Balance at 1 January 2016 XK XXX : XK XXX Restated balance at 1 January 2016 200K 20K . 20K OX Changes in equity for 2016 Issue of share capital ( Note 11) xx : : : XK Dividends (Note 12) = 000) - 5 00 ‘Total comprehensive income for the year . XXX XXX HK Tee A B ce ‘Transfer to retained earnings - x (%) (0) A Balance at 31 December 2016 200K HK xx Xxx 2K18/31 PRESENTATION AND DISCLOSURE Notes to the Financial Statements Pita te eet oe Ue tte lela aye) Notes to the financial statements for the year ended 31 December 2016 10 Change in accounting policy During the year, the company has changed its inventory cost flow assumption from first-n first-out to weighted average as it would result in more relevant information. ‘The change has been accounted for using the retrospective method. The effects on the 2015 and 2016 financial statements ar follows: 000 $000 Increase/(Decrease) in COGS os a (Decrease) /Increase in profit before tax 5) 1 Increase in beginning retained earnings 1 5 Increase in ending retained earnings os 1 Increase in ending inventory os 118731 Na TTaes) Notes to the financial statements for the year ended 31 December 2016 10 Change in accounting policy During the year, the company has changed its inventory cost flow assumption from first-in-first-out to weighted average as it would result in more relevant information. The change has been accounted for using the retrospective method. The effects on the 2015 and 2016 financial statements are as follows: 2016 2015 $'000 $000 Increase/(Decrease) in COGS 0.5 a (Decrease) /increase in profit before tax (0.5) 1 Increase in beginning retained earnings 1 Increase in ending retained earnings 0.5 1 Increase in ending inventory 05. 119781 ACCOUNTING TREATMENTS Correction of Prior Period Error Poe eC Ue ele etd Period Error Retrospective Method1971 URC Lee a eee a eked $10,000 was not depreciated since its purchase on 1 Jan 2011. The useful life of the furniture is estimated eee eeu EC ead 4-step Approach Step 1 Calculate cumulative effect of prior years Wrong Correct aay $0 $1,000 3122 $0 $1,000 312130 $1,000 3124 $0 $1,000 Dee ae) 312/5__so___$1,000 = $10,000 / 10 years = $1,000 010116 $0 $5,000 Profit for prior years was overstated by $5,000.In 2016, an accountant who just joined the company realised that a piece of furniture which cost $10,000 was not depreciated since its purchase on 1 Jan 2011. The useful life of the furniture is est PTE ee Oe eu EC ead 4-step Approach Step 2 CE adjusted against BRE Journal entry for correction of errors DR ee eee aad $5,000 cR Peeters aes a) Step 3 Amend Comparative Figures Journal entry for year-end adjustment Py Peeters er) cR Peer eds sees Ee) Step 4 Disclose the nature and effect of correction (for prior years only) 19731PRESENTATION AND DISCLOSURE Statement of Changes in Equity fe deat g Cet Ba ee a ere tials Ca) Total equity ‘5000 $000 Balance at 1 january 2016 000K 000K 40,000 200K 200 Correction of errors : o Wote 13) Restated balance at 1 January 2016 2000 : v0 000 ‘Changes in equity for 2016 Issue of share capital Note 11) xx > x Dividends (Note 12) : 000) (09 ‘etal comprehensive income for the year 2000 08 vox 2000 ‘Transfer to retained earnings 5 1 () (2) : Balance at 31 December 2016 2000 2000 100 20K 2000Balance at 1 January 2016 = Restated balance at 1 January 2016 Changes in equity for 2016 Issue of share capital ( Note 11) Dividends (Note 12) ‘Total comprehensive income for the year ‘Transfer to retained earnings Balance at 31 December 2016 areyre) Statement of Changes in Equity ae eee end Share Capital Retained Revaluation earnings reserve 1000 5000 1000 200K OOK 40,000 = we OOK 00K : xx : 7 : 009 7 : YOK A XxX 8. : xx (009) XXX, XK 20x reserve 1000 2000 XK (009) 20781 Total equity21a PRESENTATION AND DISCLOSURE Notes to the Financial Statements Peta C Re od ile ell Reed aa) aoe as a ——— = ——21a aTeIe] DCRR LS LCL ULL SIAM ULSD Loco ALS SRL tL Lee 5 Property, plant and equipment Building Furniture Total $000 $000 $1000 Cost/Valuation At 1/1/16 xx 10 xx Revaluation XX - XX At 31/12/16 XX 10 XX Accumulated depreciation At i/i6 XX i _ . Restated Xx Charge for year Xx At 31/12/16 XX NBV at 31/12/16 XKPRESENTATION AND DISCLOSURE “ Notes to the Financial Statements 13 Correction of errors During the year, it was discovered that the furniture was not depreciated since it was acquired in 2011. This errors has been corrected by using the retrospective method. Thag"igcts of the correction on the 2015 financial statements are as f $000 Increase in depreciation charge 1 (Decrease) in profit before tax a (Decrease) in ending retained profits (5) (Decrease) in net book value of furniture 6)Tahal) 13 2271 AC Pte Ltd | statements for the year ended 31 December 20 Elita Correction of errors During the year, it was discovered that the furniture was not depreciated since it was acquired in 2011. This errors has been corrected by using the retrospective method. The effects of the correction on the 2015 financial statements are as follows: $000 Increase in depreciation charge 1 (Decrease) in profit before tax (1) (Decrease) in ending retained profits (5) (Decrease) in net book value of furniture (5)231 ACCOUNTING TREATMENTS Changes in Accounting Estimates Poe eC Ue ele etd Change in eccountIog: Estimate 9 ne Prospective Method231 ee oe tees CL Ue Cee te us) basis with estimated useful life of 10 years. Before the financial year ended on 31 December 2016, AC decided to revise the remaining estimated useful li Remember: Change is implemented in the current period, and its effects are reflected in the financial statements of the current and future years only Original (Year 2011 to 2015) Pere] Depreciable value = $20,000 Dee ae ($20,000 - $10,000) Useful life = 10 years Tee een Annual depreciation = $2,000 Oe ea ee rau Year-end journal entry (31 December 2016) Perens aed Sard 3 Accumulated Depreciation a No prior year effect, do not adjust BRE2431 PRESENTATION AND DISCLOSURE Notes to the Financial Statements yea CTC mts Mee it lk aye Poe ea ee ed 5 Property, plant and equipment Machine Equipment Total $000 000 000 Cost/Valuation AUIANG x AC31/12/16 xx Accumulated depreciation ALINE 10 x XK Charge for the year 25 x x At3I/12/16 125 x xx NBV at 31/12/16 75 x xAC Pt Rl ea eee Me 5 Property, plant and equipment anci Machine Equipment Total $000 $'000 $000 Cost/Valuation AtI/1/16 20 XX XX Revaluation 0 XX XX At31/12/16 20 XX XX Accumulated depreciation At 1/1/16 10 XX XX ‘Charge for the year 25 xX XxX At 31/12/16 125 XX XX NBV at 31/12/16 I xX xX2571 PRESENTATION AND DISCLOSURE Notes to the Financial Statements boy Eta CoC eo melas Ere ey AC Pte Ltd eu ame cau Rented Deen aie urs 43 Change in accounting estimates During the year, the estimate | life of machine was changed from 10 years to remaining 4 years alvage value remains unchanged. The effect of the change is to reduce the pre-tax profit of the current year and each of the remaining three years 2017 to 2019 by $500, and to increase pre-tax profit of 2020 by $2,000Lele RR 13 PX ae ame) jal statements for the year ended 31 December 2016 Change in accounting estimates During the year, the estimated useful life of machine was changed from 10 years to remaining 4 years. Zero salvage value remains unchanged. The effect of the change is to reduce the pre-tax profit of the current year and each of the remaining three years 2017 to 2019 by $500, and to increase pre-tax profit of 2020 by $2,000ACCOUNTING TREATMENTS An Overview pe Tae ela cid Retrospective Prospective Coote cd Retrospective reese Yes Yes No Revise current year’s BRE? Yes Yes No + DRBRE if profit was + DRERE if profit was + As per normal overstated overstated + No adjustment to BRE + CRBRE If profit was CRBREIf profit was understated understated + Nature of the change + Nature of the prior period + Nature and amount of the + The amount of adjustment error change n estimate that has for each F/Sline item The amount of the correction aneffectin the current Preeti’ affected in current period for each F/SIine item period or is expected to have and each prior period affected in each prior period am effect in future periods presented presented27831 EVENTS AFTER THE REPORTING PERIOD A Definition Mae Lm ead ee eld Date when financial Balance sheet date “D statements are authorised for issueEVENTS AFTER THE REPORTING PERIOD e A Definition Maem ead iea Cle Beginning of year End of year Date of authorisation for issuance viis 317s 31/03/16 3112/16 ¢ + + ¢ Business processes during the year: 3) Financing activities Accounting processes: 1) Measuring. 2) Recording 3) Reporting, 1) Changes in accounting policies 2) Changes in accounting estimates 3) Correction of errors ee Events after the reporting period27831 EVENTS AFTER THE REPORTING PERIOD A Definition Maem eld di Date of authorisation for issuance Different entities have different authorisation processes for issuing financial statements * Could be on the date of issue, and not the date When are when shareholders approve the financial financial statements Statements pain iste Sr esa + Could be when management authorises them for issue to the supervisory board + Disclose the date when the financial statements were authorised for issue, and who gave the authorisation °TYPES OF EVENTS AFTER THE REPORTING PERIOD Adjusting Events and Non-Adjusting Events Miele a oe eee me tad e Adjusting Events . + Events that provide evidence of conditions that existed at the balance sheet date ® . 4 e . + Adjust and disclose a | win [u- ] Non-Adjusting Events -/ — oa) + Are those post balance sheet events that are whe es > indicative of conditions that arose — subsequent to the balance sheet date > —S + Noadjustment made but may be disclosed 28131TYPES OF EVENTS AFTER THE REPORTING PERIOD “ Adjusting Events and Non-Adjusting Events Bee eae a oe ee mead ea ile No Adjusting Events Non-Adjusting Events29781 ADJUSTING EVENTS Examples of Adjusting Events re eo Cl ome eee eld cs Determination after the reporting periad of the cost of assets purchased, ‘or the proceeds from assets sold before the end of the reporting period Settlement of a court case New receipt of information indicates an asset was impaired at the end of the reporting period, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted Determination after the reporting period of the amount of profit-sharing ‘or bonus payments # the entity had 2 present legal or constructive obligation at the end of the reporting periad to make such payments as a result of events before that date For example: () Bankruptey of a customer (i Sale of inventories Discovery of fraud or errors after the reporting period30/31 NON-ADJUSTING EVENTS Examples of Non-Adjusting Events Li Pere cu ee meee [ ie Fee me ea eee Dividends declared to holders of equity instruments after the reporting period Business combination, or disposal of a major subsidiary after the reporting period Commencing major litigation arising solely out of events that occurred after the reporting period Significant commitments or contingent liabilities after the reporting period, for example, by issuing significant guarantees a a g Major restructuringNON-ADJUSTING EVENTS “ Examples of Non-Adjusting Events Here are some examples of non-adjusting events after the reporting period Some non-adjusting events require disclosure + Dividends proposed or declared after the reporting period ¥ Should not be recognised as a liability in the current financial year ¥ Ifdeclared before the financial statements are authorised for issue, itis a non- adjusting event to be disclosed in the notes to the current year’s financial statements + Disclose the date when the financial statements were authorised for issue, and who gave the authorisationEVENTS AFTER THE REPORTING PERIOD “e A Summary End of year Date of authorisation for issuance 31/12/15 31/03/16 ee Events after the reporting period Adjusting f aging Adjust and | Disclose or Disclose ignore