Accounting Standards A Comprehensive Question Book... - (IAS 8 Accounting Policies Changes in Accounting Estimates and Errors)

IAS 8
Accounting policies, changes in accounting

estimates and errors
__________________________________________________________________
 QUESTIONS AND SOLUTIONS
IAS 8.1 Evaluation of accounting policy notes: discussion

IAS 8.2 Change in accounting estimate – method of depreciation, without tax:
calculations, correcting journals and disclosure notes
IAS 8.3 Change in accounting estimate – method of depreciation, with tax:
calculations, journals and discussion of disclosure
IAS 8.4 Prior period error with taxation: preparation of financial statements and notes
IAS 8.5 Change in accounting estimate (residual value) and prior period error with tax:
preparation of financial statements and notes
IAS 8.6 Change in accounting policy of inventory (prospectively and retrospectively)
(voluntary): preparation of financial statements and notes
 QUESTIONS
IAS 8.7 Drafting of accounting policy notes: discussion

IAS 8.8 Change in accounting estimate – useful life with tax: preparation of financial
statements and notes
IAS 8.9 Prior period error with tax: correcting journal entries and preparation of
financial statements and notes
IAS 8.10 Evaluation of accounting policies: discussion
IAS 8.11 Change in accounting policy of inventory (voluntary): preparation of financial
statements and notes
Copyright © 2018. Juta & Company, Limited. All rights reserved.
IAS 8.12 Change in accounting policy (limited retrospective application) (voluntary)

and prior period error: preparation of financial statements and notes
IAS 8.13 Prior period error: journal entries and note disclosures
IAS 8.14# Change in accounting policy (in terms of standard on borrowing costs
(IAS 23)): preparation of note disclosures
IAS 8.15@ Change in accounting estimate (repayment of government grant i.t.o. IAS 20):
preparation of financial statements and notes
@
This question contains topics or principles that were not included in the ITC syllabus of
SAICA at the time of publishing this book, but might still be included in university syllabi.
#
This question contains topics or principles that were at an awareness level of proficiency
in the ITC syllabus of SAICA, at the time of publishing this book.
102
Opperman, H.R.B.. Accounting Standards: a Comprehensive Question Book on International Financial Reporting Standards, Juta &
Company, Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/durbanut-ebooks/detail.action?docID=6483155.
Created from durbanut-ebooks on 2022-03-10 13:41:54.
Accounting policies, changes in accounting estimates and errors
 QUESTION IAS 8.1
The following notes regarding accounting policy were prepared for inclusion in the financial
statements of a company:
1. Investment property
Investment property is accounted for on the fair value model.
2. Revenue
Revenue consists of goods invoiced to customers.
3. Leased assets
Lease agreements are capitalised.
4. Unlisted investments
The unlisted investments of the company represent long-term investments and are
carried at fair value.
5. Finance charges on instalment credit purchases
Finance charges on instalment credit purchases of plant and equipment are written off
over the period of the agreement on a straight-line basis.
Required
Suggest improvements to the proposed accounting policy notes in the interest of good
disclosure and reporting practice according to the requirements of IAS 8. You are not
required to rewrite the notes.
 Suggested solution IAS 8.1
1. Investment property
 Suggested improvements:
– Mention the fact that investment property consists of land and buildings held
to earn rental income or for capital appreciation, or both.
– Fair value gains or losses are recognised in profit or loss.
– The fair value is determined at reporting date by an independent sworn
appraiser based on market evidence of the most recent prices obtained in
arm’s-length transactions of similar properties in the same area.
2. Revenue
– Mention that revenue is measured at the consideration the entity is expected
to be entitled to.
– The fact that VAT is excluded.
– The fact that revenue is recognised when control of the goods is transferred
to the buyer.
– Any other relevant principles in IFRS 15 applicable to the entity should be
mentioned.
103
3. Leased assets
– Indication of the treatment of short-term leases and leases for which the
underlying assets are of low value.
– That the asset is capitalised at the present value of the future lease payments,
and a corresponding liability is raised.
– The method which is used for recognition of finance costs over the term of
the lease agreement (effective interest method).
– Indication of methods and rates of depreciation applied to allocate the cost
of such assets (this could, however, be included under the property, plant
and equipment accounting policy note).
4. Unlisted investments
 Suggested improvement:
– Also indicate how gains/losses on fair value adjustments should be treated
(e.g. mark-to-market reserve).
5. Finance charges on instalment credit purchases
 The straight-line write-off of finance costs is not related to the capital balance of
the outstanding liability and is therefore not in accordance with the matching
concept.
 Suggested improvement:
– The policy should state that finance charges are recognised according to the
effective interest method.
After the financial statements for 20.4 had been prepared, Vink Ltd changed its method of
depreciating machinery. The previous pattern of depreciation differed from the actual
pattern of economic benefits derived from the depreciable assets. As a result, the reducing
balance method at 20% p.a. will be applied in future instead of the straight-line method over
five years as in the past.
A summary of the machinery account at 30 June 20.3, the previous financial year end of the
company, is as follows:
Rand
Carrying amount of machinery 400 000

Cost 800 000
Accumulated depreciation (400 000)
No machinery has been purchased or disposed of during the year ended 30 June 20.4.
Ignore all tax implications.
104
Required
a. Calculate the following amounts resulting from the change in accounting estimate for
inclusion in the financial statements of Vink Ltd for the year ended 30 June 20.4:
 Depreciation for the current year.
 Depreciation for 20.5 and 20.6.
b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.4.
c. Assume the amounts involved in the change in accounting estimate to be material, and
disclose these in terms of the requirements of International Financial Reporting
Standards (IFRS). Accounting policy notes are not required.

In terms of IAS 16.61, a change in the depreciation method for property, plant and
equipment resulting from a change in the expected pattern of economic benefits from these
assets is not classified as a change in accounting policy, but as a change in accounting
estimate.
a. Depreciation
Rand
Carrying amount – 30 June 20.3 400 000

Depreciation 20.4 – new (1) (80 000)
(1) 400 000 × 20% = 80 000

(2) 320 000 × 20% = 64 000
(3) 256 000 × 20% = 51 200
 Current year’s depreciation = R80 000

 Depreciation for 20.5 = R64 000
 Depreciation for 20.6 = R51 200
b. Correcting journal entries
Correcting journal entries is necessary as the depreciation for 20.4 was calculated by
applying the straight-line method instead of the reducing balance method. The
correcting journal is as follows:
Rand
Dr/(Cr)
Accumulated depreciation – machinery (SFPos) 80 000

Depreciation (P or L) (1) (80 000)
Adjustment of depreciation written off in 20.4
(1) (800 000 × 20%) – (400 000 × 20%) = 80 000
105
c. Disclosure
VINK LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.4
6. Profit before tax
Profit before tax is stated after taking into account the following:
Rand
Expenses:
Depreciation 80 000
Change in accounting estimate:

The depreciation method of machinery changed from the straight-line method to the
reducing balance method. This resulted in a decrease in depreciation for the current
year of R80 000 (1) and a cumulative increase in future periods of R80 000 (2).
(1) [(800 000 × 20%) (old method) – 80 000 (new method)] = 80 000 decrease
(2) Future depreciation (old method) 240 000 – future depreciation (new method)
320 000 = 80 000 increase
Records of the property, plant and equipment of Reier Ltd showed the following at
1 July 20.6:
Rand
Machinery at cost 600 000

Accumulated depreciation (292 800)
307 200
In the past the company accounted for depreciation at 20% per annum using the reducing
balance method. However, at a meeting of the board of directors during 20.7 it was decided
that from the beginning of the year ending 30 June 20.7, machinery would be depreciated on
the straight-line method as it better reflects the economic benefits from the machinery. The
total useful life of the machinery had originally been estimated as seven years. (It may be
assumed that this estimate is still correct.) No depreciation charge has been accounted for in
the current year.
The South African Revenue Service allows a wear-and-tear allowance of 20% using the
reducing balance method. Tax rates for the past five years have remained unchanged at 28%.
The company will earn sufficient taxable income in future to justify the creation of a debit
balance on the deferred tax account should it be necessary.
Required
a. Calculate the following amounts for inclusion in the financial statements of Reier Ltd
for the year ended 30 June:
 Depreciation for the current year (20.7).
 Depreciation for 20.8 and 20.9.
106
b. Journalise all necessary adjustments to account for the change in accounting estimate
in 20.7.
c. Discuss the disclosure requirements relating to the above change in accounting
estimate so as to comply with the requirements of International Financial Reporting
Standards (IFRS).
Calculations
Carrying Tax Temporary Deferred Profit or
amount base difference tax loss
Rand Rand Rand Rand Rand
Reducing balance method –
old
Cost – 1 July 20.3 600 000 600 000
Depreciation 20.4 (1) (120 000) –
Wear-and-tear allowance (1) – (120 000)
30 June 20.4 480 000 480 000
Depreciation 20.5 (2) (96 000) –
30 June 20.5 384 000 384 000
Depreciation 20.6 (3) (76 800) –
30 June 20.6 307 200 307 200
Straight-line method – new

Depreciation 20.7 (4) (76 800) –
30 June 20.7 230 400 245 760 (15 360) (4 301) 4 301 cr
Depreciation 20.8 (6) (76 800) –
30 June 20.8 153 600 196 608 (43 008) (12 042) 7 741 cr (8)
(1) 600 000 × 20% = 120 000

(2) 480 000 × 20% = 96 000
(3) 384 000 × 20% = 76 800
(4) 307 200/(7 – 3) = 76 800

(5) 307 200 × 20% = 61 440
(6) 307 200/4 = 76 800
(7) 245 760 × 20% = 49 152
(8) 12 042 – 4 301 = 7 741
a. Depreciation
Rand
 Depreciation for current year (20.7) 76 800

 Depreciation per year for 20.8 to 20.9 76 800
b. Journal entries
Rand
Dr/(Cr)
20.7
Depreciation (P or L) 76 800
Accumulated depreciation – machinery (SFPos) (76 800)
107
Rand
Dr/(Cr)
Deferred tax (SFPos) (9) 4 301

Income tax expense (P or L) (4 301)
20.8 (only for illustrative purposes)

Depreciation (P or L) 76 800
Accumulated depreciation – machinery (SFPos) (76 800)
Deferred tax (SFPos) (10) 7 741

(9) 15 360 × 28% = 4 301

(10) (43 008 – 15 360) × 28% = 7 741
c. Disclosure requirements
In terms of IAS 8.39 the nature (change in depreciation method) and amount (increase
in depreciation in current year of R15 360) of a change in an accounting estimate
should be disclosed, including the cumulative effect of the change on future periods
(cumulative decrease in depreciation in future periods of R15 360).
The following are the statements of comprehensive income of Aaskamp Ltd for the years
ended 31 December:
20.8 20.7
Rand Rand
Revenue 79 500 52 400
Cost of sales (39 000) (26 000)
Gross profit 40 500 26 400
Other expenses (500) (400)
Profit before tax 40 000 26 000
Income tax expense (current tax only) (12 000) (7 800)
Profit for the year 28 000 18 200

Other comprehensive income – –
Total comprehensive income for the year 28 000 18 200
Included in profit before tax for 20.8 is an amount of R7 500 (20.7 – R10 000), which
represents the profit before tax of a division of Aaskamp Ltd.
When Aaskamp Ltd’s tax calculations for 20.8 and 20.7 were prepared, the inexperienced
accountant did not take into account any temporary differences and non-taxable/non-
deductible differences relating to the division. However, after the statement of profit or loss
and other comprehensive income for 20.8 had been prepared, it came to light that the
taxable temporary differences of the division amounted to R17 000 (20.7 – R14 000) and
non-taxable items of the division amounted to R12 500 (20.7 – R14 000).
Apart from the above it was also established that temporary differences occurred for the first
time in 20.7.
108
The South African Revenue Service had already assessed the company on R26 000 for 20.7.
The company applied for a reassessment, which was granted. The tax rate for the past two
years has remained constant at 30%.
Aaskamp Ltd paid a dividend of R10 000 for 20.8 and for 20.7. The retained earnings on
1 January 20.7 amounted to R17 000.
Required
Prepare the statement of profit or loss and other comprehensive income and statement of
changes in equity (retained earnings only) of Aaskamp Ltd for the year ended
31 December 20.8 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those concerning the rectification of the prior
period error and tax.
AASKAMP LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 20.8
Note 20.8 20.7

Rand Rand
Revenue 79 500 52 400
Cost of sales (39 000) (26 000)
Gross profit 40 500 26 400
Other expenses (500) (400)
Income tax expense 1 (8 250) (3 600)
AASKAMP LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.8
Note Retained
earnings
Rand
Balance at 1 January 20.7 17 000
Changes in equity for 20.7
Total comprehensive income for the year – restated 2 22 400
Profit for the year – restated 22 400
Other comprehensive income –
Dividends (10 000)
Balance at 31 December 20.7 – restated 29 400
Total comprehensive income for the year 31 750
Profit for the year 31 750
Dividends paid (10 000)
Balance at 31 December 20.8 51 150
109
AASKAMP LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.8
1. Income tax expense 20.8 20.7

Rand Rand
Major components of tax expense
Current tax expense: current year 2 550 –
Deferred tax expense: current year 5 700 3 600
Tax expense 8 250 3 600
Tax rate reconciliation % %
Statutory tax rate 30 30

Decrease attributable to:
Non-taxable items (1) (9) (16)
Effective tax rate (2) 21 14
(1) (12 500 × 30%)/40 000 × 100 = 9; (14 000 × 30%)/26 000 × 100 = 16
(2) 8 250/40 000 × 100 = 21; 3 600/26 000 × 100 = 14
2. Correction of prior period error

A correction of the tax calculation in respect of 20.7 was made due to the fact that
temporary differences and non-taxable income were previously ignored in the tax
calculation. Comparative amounts have been appropriately restated. The effect of the
adjustment on the 20.7 results is as follows:
20.7
Rand
Decrease in income tax expense 4 200

Increase in profit for the year 4 200
Increase in deferred tax liability 3 600

Decrease in current tax payable to the South African Revenue Service (7 800)
Increase in equity 4 200
Increase in basic earnings per share xx

Increase in diluted earnings per share xx
Calculations
Current tax of Aaskamp Ltd after correction 20.8 20.7

Rand Rand
Taxable temporary differences (17 000) (14 000)
Non-taxable items (12 500) (14 000)
Taxable income/(tax loss) 10 500 (2 000)
Tax loss brought forward (2 000) –
Taxable income/(tax loss) 8 500 (2 000)
Current tax @ 30% 2 550 Nil
110
Temporary differences after correction 20.8 20.7

Rand Rand
Cumulative taxable temporary differences (1) 31 000 14 000

Tax loss – (2 000)
31 000 12 000
Deferred tax liability (30%) 9 300 3 600
Movement in profit or loss (2) 5 700 3 600
(1) 17 000 + 14 000 = 31 000

(2) 9 300 – 3 600 = 5 700
Total income tax expense after correction

20.8 20.7
Rand Rand
Current tax 2 550 –

Deferred tax – current year 5 700 3 600
Total income tax expense 8 250 3 600
Correcting journal entries

Rand
Dr/(Cr)
20.7
Current tax payable to SARS (SFPos) 7 800
Income tax expense (P or L) 3 600

Deferred tax (SFPos) (3 600)
Correction of error
Rand
Current tax as shown previously (20.7) 7 800

Current tax as revised –
Current tax written back (credit income tax expense) 7 800
Deferred tax (debit income tax expense) (3 600)
Net credit against income tax expense in profit or loss 4 200
111
The following are the abridged trial balances of Stressed Eric Ltd for the years ended
30 June 20.5 and 20.6:
20.6 20.5
Rand Rand
Dr/(Cr) Dr/(Cr)
Share capital (10 000) (10 000)

Net current assets 40 000 6 000
Other expenses 80 000 50 000
Depreciation (straight-line method @ 20% per annum) 16 000 16 000
Electricity expense 15 000 –
Machinery
Cost 90 000 90 000
Accumulated depreciation (56 000) (40 000)
Income tax expense 15 600 9 600
Dividends paid 5 000 5 000
Retained earnings at beginning of year (54 400) (35 000)
Profit on disposal of land (not taxable) (10 000) –
Gross profit (150 000) (100 000)
After the trial balance had been prepared as at 30 June 20.6, the board of directors re-
estimated the residual value of machinery to be R7 000. The original residual value was
R10 000. No machinery has been purchased or disposed of since 20.4. The South African
Revenue Service allows a wear-and-tear deduction of 20% per annum, straight-line, not
allocated on a pro rata basis for parts of the year.
The electricity expense of R15 000 which relates to 20.5 (per the trial balance) was paid
during 20.6, and arose in 20.6 only after the auditors found an underpayment of electricity
expense relating to 20.5. The expense was never recorded in 20.5. Assume that the amount
is material. The South African Revenue Service agreed to reopen the 20.5 tax assessment.
The following information is available:

20.6 20.5
Revenue (excluding VAT) R300 000 R200 000

Gross profit percentage on sales 50% 50%
The tax rate has remained unchanged at 30% for the past three years. Ignore capital gains
tax.
Required
changes in equity (retained earnings only) of Stressed Eric Ltd for the year ended
30 June 20.6 in accordance with the requirements of International Financial Reporting
Standards (IFRS). The only notes required are those relating to the change in accounting
estimate and the prior period error.
112
STRESSED ERIC LTD

INCOME FOR THE YEAR ENDED 30 JUNE 20.6
Note 20.6 20.5

Rand Rand
Revenue 300 000 200 000
Cost of sales (150 000) (100 000)
Gross profit (1) 150 000 100 000
Other income 10 000 –
Other expenses (calc 3) (97 200) (81 000)
Profit before tax 6 62 800 19 000
Income tax expense (calc 4) (15 240) (5 100)
(1) 300 000 × 50% = 150 000; 200 000 × 50% = 100 000
STRESSED ERIC LTD

30 JUNE 20.6
Note Retained
earnings
Rand
Balance at 1 July 20.4 35 000
Total comprehensive income for the year – restated 7 13 900
Dividends (5 000)
43 900
Balance at 30 June 20.5 – restated

Dividends (5 000)
Balance at 30 June 20.6 86 460
STRESSED ERIC LTD

NOTES FOR THE YEAR ENDED 30 JUNE 20.6
6. Profit before tax

The profit before tax is stated after taking into account the following:
20.6 20.5
Rand Rand
Expenses
Depreciation 17 200 16 000
113
Change in estimate
During the year the residual value was changed. This change in estimate resulted in an
increase in depreciation in the current year of R1 200 (1). The cumulative effect of this
change on future periods will be an increase in depreciation of R1 800 (2).
(1) 17 200 – 16 000 = 1 200

(2) 10 000 old residual value – 7 000 new residual value – 1 200 (1)
7. Correction of prior period error
Electricity was underpaid during 20.5. The resulting outstanding electricity payment
was made during 20.6, after which the comparative amounts have been appropriately
restated. The effect of the adjustment on the 20.5 results is as follows:
20.5
Rand
Increase in other expenses 15 000

Decrease in income tax expense (4 500)
Decrease in profit for the year 10 500
Increase in electricity payable 15 000

Decrease in current tax payable (4 500)
Decrease in equity 10 500
Decrease in basic earnings per share xx

Decrease in diluted earnings per share xx
Calculations
1. Change in accounting estimate 20.6
Accumulated depreciation on 30 June 20.5 40 000

Thus: Expired useful life (1) on 30 June 20.5 2,5 years
Remaining useful life on 1 July 20.5 (5 years total – 2,5 years expired) 2,5 years
Rand
Carrying amount of machinery on 30 June 20.5 (2) 50 000

Revised residual value 7 000
Thus revised depreciation for 20.6 (3) 17 200
Carrying amount on 30 June 20.6 (4) 32 800
(1) 40 000/16 000 = 2,5 years

(2) 90 000 – 40 000 = 50 000
(3) (50 000 – 7 000)/2,5 years = 17 200
(4) 50 000 – 17 200 = 32 800
114
2. Correcting journal entries Rand

Dr/(Cr)
Depreciation (P or L) (5) 1 200
Accumulated depreciation – machinery (SFPos) (20.6) (1 200)
Deferred tax (20.6) (SFPos) 360
Income tax expense (P or L) (360)
Other expenses (P or L) (20.5) 15 000
Electricity payable/Accrued expenses (SFPos) (15 000)
Current tax payable to SARS (SFPos) 4 500
Income tax expense (P or L) (20.5) (4 500)
(5) 17 200 – 16 000 = 1 200
3. Other expenses
20.6 20.5
Rand Rand
Other expenses per trial balance (given) 80 000 50 000
Depreciation
Old residual value – 16 000
New residual value 17 200 –
Prior period error – 15 000
Other expenses 97 200 81 000
4. Income tax expense

20.6 20.5
Rand Rand
Given 15 600 9 600
Correction in deferred tax movement (calc 5) (360) –
Prior period error (6) – (4 500)
15 240 5 100
(6) 15 000 × 30% = 4 500

5. Deferred tax
CA TB TD DT P or L
Dr/(Cr) Dr/(Cr)
After correction
20.5 Machinery (7) 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery (8) 32 800 18 000 14 800 (4 440) 5 640
(7) 90 000 – (90 000 × 20% × 3) = 36 000
(8) 90 000 – (90 000 × 20% × 4) = 18 000
Before correction
20.5 Machinery 50 000 36 000 14 000 (4 200) 4 200
20.6 Machinery 34 000 18 000 16 000 (4 800) 6 000
Thus correction in movement in deferred tax (9) = 360 cr
(9) 6 000 – 5 640 = 360
115
CA = Carrying amount
TB = Tax base
TD = Temporary difference
DT = Deferred tax balance
P or L = Movement in profit or loss
The following information relating to Galaxy Ltd is available:
 Revenue for 20.7 amounted to R564 000 (20.6 – R315 000).
 Purchases of inventories for the two years were as follows:

– R303 000 (20.7)
– R182 500 (20.6)
 Other expenses
– R100 000 (20.7)
– R78 000 (20.6)
 Profit before tax for 20.7 amounted to R182 000 (20.6 – R62 000).
 Retained earnings at the end of 20.7 amounted to R76 700. No dividends have been
paid in the last few years.
 The tax rate has remained unchanged at 30% for the past four years. Taxable income
was the same as profit before tax for the past four years, except for a penalty of R2
000 which was paid to the local government in 20.7. The South African Revenue
Service did not allow this penalty as a deduction.
The purchase prices of inventories have recently been very volatile and after taking into
account the above information, the directors decided to change the basis for valuing
inventories from the first-in, first-out method (FIFO) to the weighted average cost method,
as it would result in more stable inventory values.
A summary of closing inventories is provided:
20.4 20.5 20.6 20.7

Rand Rand Rand Rand
On the first-in, first-out method 18 000 19 500 27 000 48 000

On the weighted average cost method 19 000 22 900 34 800 51 000
1 000 3 400 7 800 3 000
The South African Revenue Service will only accept the new inventory values from
31 December 20.7 onwards.
116
Required
a. Prepare the statement of profit or loss and other comprehensive income (with notes)
and statement of changes in equity (retained earnings only) of Galaxy Ltd for the year
ended 31 December 20.7 applying the new method of inventory valuation so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
b. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.4 and
20.5.
c. Prepare the statement of profit or loss and other comprehensive income, statement of
changes in equity (retained earnings only) and note on change in accounting policy if
the weighted average cost of inventory could not be determined at the end of 20.6,
20.5 and 20.4.
a. GALAXY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHEN-
SIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7
Note 20.7 20.6

Rand Rand
Revenue 564 000 315 000
Cost of sales (1) (286 800) (170 600)
Gross profit 277 200 144 400
Other expenses (100 000) (78 000)
Income tax expense (2) 3 (53 760) (19 920)
(1) 34 800 + 303 000 – 51 000 = 286 800; 22 900 + 182 500 – 34 800 = 170 600
(2) 56 100 (calc 4) – 2 340 (calc 3) = 53 760; 18 600 (calc 4) + 1 320 (calc 3) = 19 920
GALAXY LTD
31 DECEMBER 20.7
Note Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (calc 5) (93 500)
Change in accounting policy 4 2 380
Restated balance (91 120)
Total comprehensive income for the year (restated) 4 46 480
117
Note Retained
earnings/
(accumulated
loss)
Rand
Balance at 31 December 20.6 (restated) (44 640)

Balance at 31 December 20.7 (3) 78 800
(3) 76 700 + 2 100 (calc 1) = 78 800
GALAXY LTD
1. Accounting policy
1.1 Inventories
Inventories are valued at the lower of cost and net realisable value on the weighted
average cost method.
1.2 Deferred tax

Deferred tax is provided for on temporary differences according to the reporting date
balance liability method.
1.3 Revenue
Revenue consists of net invoiced sales and is measured at the amount of consideration
the entity is expected to be entitled to, excluding VAT. Revenue is recognised when
control of the goods is transferred to the customer.
3. Income tax expense

20.7 20.6
Rand Rand
Major components of tax expense:

Current tax expense: current year (calc 4) 56 100 18 600
Deferred tax expense: current year (calc 3) (2 340) 1 320
53 760 19 920
Tax rate reconciliation 20.7 20.6

% %
Statutory tax rate 30,00 30,00

Non-deductible items (4) 0,34 –
Effective tax rate (5) 30,34 30,00
(4) (2 000 × 30%)/177 200 × 100 = 0,34%

(5) 53 760/177 200 × 100 = 30,34%
118
4. Change in accounting policy
During the year the company changed its accounting policy for the valuation of
inventories from the first-in, first-out method of valuation to the weighted average cost
method as it results in more stable inventory values given the recent volatile inventory
prices.
The change in policy has been accounted for retrospectively and the comparative
amounts have been appropriately restated. The effect of this change in accounting
policy is as follows:
20.7 20.6 20.5

Rand Rand Rand
(Increase)/decrease in cost of sales (4 800) 4 400

Decrease/(increase) in income tax expense 1 440 (1 320)
(Decrease)/increase in profit for the year (3 360) 3 080
Increase in inventory 3 000 7 800 3 400

Increase in deferred tax liability – (2 340) (1 020)
Increase in current tax payable (900) – –
Increase in equity 2 100 5 460 2 380
Adjustment against retained earnings at the

end of 20.5 2 380
(Decrease)/increase in basic earnings per share (xx) xx

(Decrease)/increase in diluted earnings per share (xx) xx
Calculations
1. Inventories
20.7 20.6 20.5

SFPos P or L SFPos P or L SFPos
Old method (48 000) (27 000) (19 500)

New method 51 000 34 800 22 900
Increase in equity 3 000 7 800 3 400
Increase/(decrease) in
profit for the year (4 800) (2) 4 400 (1)
Tax effect @ 30% (900) 1 440 (2 340) (1 320) (1 020)
After tax 2 100 (3 360) 5 460 3 080 2 380
(1) 7 800 – 3 400 = 4 400

(2) 3 000 – 7 800 = (4 800)
119
2. Reconstruction of the statement of profit or loss and other comprehensive income

according to the ‘old’ method to determine 20.6 figures
20.7 20.6
Rand Rand
Income tax expense (3) (55 200) (18 600)
Profit after tax 126 800 43 400
(3) 62 000 × 30% = 18 600; (182 000 + 2 000) × 30% = 55 200
3. Deferred tax CA TB TD DT P or L
Dr/(Cr) Dr/(Cr)
20.5 22 900 19 500 3 400 (1 020) 1 020
20.6 34 800 27 000 7 800 (2 340) 1 320
20.7 51 000 51 000 – – (2 340)
4. Tax calculation 20.7 20.6
Rand Rand
Profit before tax – old 182 000 62 000
Opening inventory: old (previously deducted,
now added back) 27 000 19 500
New (34 800) (22 900)
Closing inventory: old (previously added, now deducted) (48 000) (27 000)
New 51 000 34 800
Profit before tax after change in accounting policy 177 200 66 400
Non-deductible expense
Penalty 2 000
Temporary differences 7 800 (4 400)
Opening inventory: new (accounting) 34 800 22 900
old (taxation) (27 000) (19 500)
Closing inventory (4): new (accounting) (51 000) (34 800)
old (taxation) 51 000 27 000
Taxable income 187 000 62 000
Current tax @ 30% 56 100 18 600
(4) The closing inventory in 20.7 causes no temporary differences since the South
African Revenue Service has accepted the new valuation method.
5. Reconstruction of statement of changes in equity according to the ‘old’ method to
determine 20.6 and 20.5 figures
Retained
earnings/
(accumulated
loss)
Rand
Balance at 31 December 20.7 (given) 76 700
Profit/total comprehensive income for the year (calc 2) (126 800)
Balance at 31 December 20.6 (50 100)
Profit/total comprehensive income for the year (calc 2) (43 400)
120
b. As new inventory values are not available for 20.4 and 20.5, it is impossible to
calculate the effect of the change in policy on 20.6 (opening inventory for 20.6 not
determinable). As a result, the change in accounting policy should be accounted for
retrospectively from 20.7 onwards, resulting in an adjustment to the opening balance
of retained earnings. Comparative amounts will not be restated.
GALAXY LTD
20.7 20.6
Rand Rand
Revenue 564 000 315 000

Cost of sales (1) (286 800) (175 000)
Gross profit 277 200 140 000
Other expenses (100 000) (78 000)
(1) 34 800 + 303 000 – 51 000 = 286 800; 19 500 + 182 500 – 27 000 = 175 000
(2) (177 200 + 2 000) × 30% = 53 760; 62 000 × 30% = 18 600
GALAXY LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31
DECEMBER 20.7
Notes Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (refer to part a) (93 500)

Change in accounting policy (1) 4 5 460
Restated balance (44 640)
(1) 7 800 × 70% = 5 460
121
GALAXY LTD

During the year, the company changed its accounting policy for the valuation of
method as it would result in more stable inventory values in view of recent volatile
inventory prices.
Full retrospective application of the change was not possible as the company was not
able to determine the new value of inventory at the end of 20.4 and 20.5 due to
deficient costing systems. As a result, the change has been accounted for
retrospectively from the beginning of 20.7 with an adjustment of R5 460 against the
opening balance of retained earnings. The effect of the change in accounting policy is
as follows:
20.7 20.6
Rand Rand
Increase in cost of sales (4 800)
Decrease in income tax expense 1 440
Decrease in profit for the year (3 360)
Increase in inventory 3 000 7 800

Increase in deferred tax liability – (2 340)
Increase in current tax payable (900) –
Increase in equity 2 100 5 460
Adjustment against retained earnings at the end of 20.6 5 460
Decrease in basic earnings per share xx xx

Decrease in diluted earnings per share xx xx
c. As new inventory values are not available for 20.4, 20.5 and 20.6, it is impossible to
calculate the cumulative effect of the change at the beginning of 20.7. As a result, the
new policy is applied prospectively from the earliest date practicable (which will be
the end of 20.7).
GALAXY LTD
20.7 20.6
Rand Rand
Revenue 564 000 315 000
Cost of sales (1) (279 000) (175 000)
Gross profit 285 000 140 000
Other expenses (100 000) (78 000)
122
(1) 27 000 + 303 000 – 51 000 = 279 000

(2) (185 000 + 2 000) × 30% = 56 100; 62 000 × 30% = 18 600
GALAXY LTD
31 DECEMBER 20.7
Retained
earnings/
(accumulated
loss)
Rand
Balance at 1 January 20.6 (refer to part a) (93 500)
GALAXY LTD
During the year the company changed its accounting policy for the valuation of
method as it will result in more stable inventory values in view of recent volatile
inventory prices.
The change in policy could not be accounted for retrospectively, as it was not possible
to determine the cumulative effect of the change at the beginning of 20.7, due to
deficient costing systems. As a result, the change in accounting policy was accounted
for prospectively by adjusting the closing inventory for 20.7. The effect of the change
in accounting policy is as follows:
20.7
Rand
Decrease in cost of sales 3 000
Increase in income tax expense (900)
Increase in profit for the year 2 100
Increase in inventory 3 000

Increase in current tax payable (900)
Increase in equity 2 100
Increase in basic earnings per share xx

Increase in diluted earnings per share xx
123
The following information is available:
Property, plant and equipment
Plant and machinery are not revalued annually, but are shown at historical cost.
 Depreciation is recognised on the straight-line method.
 The depreciation rate is 15% per annum.
 The useful life of the assets is revised annually. Depreciation rates are adjusted where
deemed necessary.
Vehicles are shown at historical cost.

 Depreciation is recognised using the sum-of-the-digits method.
 Depreciation is calculated over five years.
 Estimated physical wear and obsolescence is taken into account in determining the
useful life of the vehicles.
 The expected scrap value is taken into account in determining the depreciation charge.
Inventories
Inventories consist of finished goods, raw materials, consumables and work in progress.
Inventories are valued at cost or net realisable value, whichever is the lower.
The following accounting bases are used in the valuation:
 Finished goods – shown at direct manufacturing cost and an applicable portion of

manufacturing overheads on the first-in, first-out basis.
 Raw materials – shown at actual historical purchase price on a first-in, first-out basis.
 Consumables – shown at actual cost on a first-in, first-out basis.
 Work in progress – shown at direct manufacturing cost and an applicable portion of
manufacturing overheads on a first-in, first-out basis.
Specific provision is made for obsolete and slow-moving inventories if necessary.

The allocation of production overheads is based on the capacity of the facilities.
The historical cost of inventories includes all costs of bringing them to their current location
and condition.
Revenue
Revenue:
 includes the amount invoiced to customers;
 excludes VAT;
 excludes sales of associated companies.
Intragroup transactions are eliminated.
124
Deferred tax
Deferred tax is calculated by applying the rate of tax to temporary differences which arise as
differences between the tax base of an asset or liability and its carrying amount in the
statement of financial position.
Required
Prepare the accounting policy notes (where applicable) dealing with the above-mentioned
matters in accordance with the requirements of IAS 8.

The following items were taken from the trial balance of Parfait Ltd for the year ended
28 February 20.4:
Rand
Sales 500 000
Cost of sales 180 000
Other expenses (not specified) 120 000
Loss on disposal of vehicle (tax deductible) 30 000
Depreciation – machinery 30 000
Net profit from inventory damaged by flood (taxable) 10 000
(Cost of inventory – R50 000; insurance claim – R60 000)
Loss due to expropriation of inventories by the government (tax deductible) 12 000
Machinery at cost 150 000
Accumulated depreciation – machinery (28 February 20.4) 60 000
Additional information
1. The useful life of machinery was originally estimated to be five years from date of
purchase. Owing to technological changes, the remaining useful life as at
28 February 20.3 is estimated to be only two years. The change in useful life has yet to
be reflected in the trial balance. The machinery has no residual value.
2. The company tax rate is 28%, and the South African Revenue Service is prepared to
allow the additional wear and tear needed to write off the value of the machinery over
the remaining useful life. There are no other non-deductible/non-taxable items.
Required
Prepare the statement of profit or loss and other comprehensive income of Parfait Ltd for the
year ended 28 February 20.4 so as to comply with the requirements of International
Financial Reporting Standards (IFRS). Only the note on profit before tax is required.
The following is a list of items in the statement of profit or loss and other comprehensive
income of Gunter (Pty) Ltd for the year ended 30 June 20.2 and 20.1:
20.2 20.1
Rand Rand
Revenue 4 800 000 3 950 000

Retained earnings – beginning of year ? 35 600
125
During the current year, Gunter (Pty) Ltd converted from a CC to a company after your
client obtained a majority interest. As a result of the conversion the audit was moved from
the previous accounting officer to your firm of registered accountants and auditors.
During the course of the audit the following information regarding the previous and the
current year was obtained:
1. The revenue figures above include dividend income of R100 000 (20.1 – R50 000).
The gross profit percentage of the company has remained constant at 50% during the
last five years. Other expenses for 20.2 amounted to R1 910 000 (20.1 – R1 670 000)
before taking into account any adjustments relating to the details below.
2. Delivery vehicles purchased on 1 July 20.0 under an instalment sales agreement (ISA)
were recorded as follows:
Details of agreement Rand
Cash price (VAT excluded) 250 000

VAT at 14% 35 000
Finance charges 148 000
Contract liability 433 000
The term of the ISA is 48 months.
Journal entries: 20.2 20.1

Rand Rand
Dr/(Cr) Dr/(Cr)
Vehicles – 433 000

ISA liability – (433 000)
ISA liability (1) 108 250 108 250

Bank (108 250) (108 250)
Depreciation at 20% (2) 86 600 86 600

Accumulated depreciation (86 600) (86 600)
Income tax expense (P or L) (3) 6 495 6 495

Deferred tax (SFPos) (6 495) (6 495)
(1) 433 000 × 12/48 = 108 250

(2) 433 000 × 20% = 86 600
(3) [(433 000 × 25%) – (433 000 × 20%)] × 30% = 6 495
3. Other information
 VAT can be claimed as an input credit.

 The estimated useful life of each vehicle is five years.
 The tax rate is 30%.
 The company obtained a directive from the South African Revenue Service to
claim wear and tear on the straight-line basis over four years.
 Any corrective action regarding the South African Revenue Service has already
been approved and accepted. Prior years’ assessments will therefore be reopened.
126
 Apart from the temporary differences and non-taxable/non-deductible items

arising from the above information, there are no other such differences.
4. Finance charges per the ISA are recognised on the effective interest method for
accounting and tax purposes. The following figures represent the capital outstanding in
respect of the ISA at 30 June of each year and should be accepted as correct:
Rand
20.1 227 680

20.2 168 280
20.3 93 680
Required
a. Prepare the adjusting journal entries.

b. Prepare the statement of profit or loss and other comprehensive income and statement
of changes in equity (retained earnings only) of Gunter (Pty) Ltd for the year ended
30 June 20.2 so as to comply with the requirements of International Financial
Reporting Standards (IFRS). Only the note regarding the adjustment needs to be
shown. Accounting policy notes are not required.
Critically evaluate the following comments made by Pistol Pete, the financial director of
Sampras Ltd, for the financial year ended 31 December 20.1 with reference to the
requirements of International Financial Reporting Standards (IFRS) and Interpretations of
IFRS:
 ‘We completed our plant last year after five years of construction. Fortunately we were
able to capitalise the borrowing costs incurred. The plant is used in the production of
our new product, a very durable tennis ball which is baked in the sun for two years.
We finance all our activities in a debt–equity ratio of 60% debt to 40% equity. The
finance charges relating to the tennis balls had a negative impact on this year’s profit
or loss, since the tennis balls manufactured during the first year still need one year’s
ageing. No products were sold during the current year.’
 ‘The board of directors decided to revalue the plant every second year at its net
replacement value. Since our other products are manufactured with outdated
machinery, we have decided not to revalue machinery.’
 ‘We have 1 000 of our tennis racquet units on hand at reporting date. The cost price of
the items is R1 000 and the net realisable value is R2 000. A decision was taken at the
previous management meeting to carry these items at net realisable value in the
statement of financial position.’
127
Extra Ltd is a specialised engineering company involved in various projects. During the year
the company decided to change the accounting policy for the valuation of inventory from
the first-in, first-out method to the weighted average method as a result of inventory price
fluctuations over the last few months and because the new method will result in more stable
inventory values. The company's financial year ends on 31 December.
The following is the abridged statement of profit or loss and other comprehensive income of
Extra Ltd for the year ended 31 December (before the change in inventory valuation was
taken into account):
20.8 20.7
Rand Rand

Income tax expense – current (42 000) (44 100)
Dividends paid 10 000 5 000
1. The following information is relevant regarding the change in accounting policy i.r.o.
inventory:
Inventory (closing) 20.8 20.7 20.6

Rand Rand Rand
Weighted average (new method) 110 000 140 000 120 000
First-in, first-out (old method) 90 000 130 000 130 000
The South African Revenue Service will only accept the new inventory valuation
method from 31 December 20.8.
2. Included in profit before tax for 20.8 is the following:

A loss of R6 500 (net of insurance proceeds) resulting from flooding of one of the
plants due to severe rainstorms. The proceeds from the insurance claim amounted to
R13 500.
3. Revenue for 20.8 amounted to R800 000 and R650 000 for 20.7. The gross profit
percentage (before the change in accounting policy) is 50% (20.7 – 60%).
4. Included in profit for 20.7 is a gain of R15 000 relating to the sale of land. The profit
is of a capital nature.
5. Assume that, unless otherwise specified, all income and expenses are taxable and
deductible respectively. The tax rate was 30% for 20.8 and 35% for 20.7 and 20.6.
Ignore capital gains tax.
6. Retained earnings at the beginning of the year amounted to:
128
Rand
20.7 12 000
20.8 103 900
Required
changes in equity (retained earnings only) of Extra Ltd for the year ended 31 December 20.8
so as to comply with the requirements of International Financial Reporting Standards
(IFRS). Only the following notes should be provided:
 Profit before tax
 Income tax expense
 Change in accounting policy
The abridged pro forma statement of profit or loss and other comprehensive income of
Sabre Ltd for the year ended 30 June 20.8 is as follows:
20.8 20.7
Rand Rand
Revenue 800 000 700 000

Cost of sales (650 000) (565 000)
Gross profit 150 000 135 000
Other expenses (30 000) (25 000)
Profit on sale of share investment (not taxable) – 15 000
Dividends received – Sword (Pty) Ltd 9 000 9 000
Income tax expense (current) ? (33 000)
Total comprehensive income for the year ? 101 000
The following issues have not yet been accounted for in the above statement of profit or
loss and other comprehensive income of Sabre Ltd:
1. On 30 June 20.8, after completing the pro forma financial statements, the board of
directors decided to change the accounting policy with respect to the inventory
valuation from the weighted average basis to the first-in, first-out (FIFO) basis as
inventory prices have recently increased significantly. Inventories are valued as
follows using both methods:
Weighted FIFO
average
(old method) (new method)
Rand Rand
30 June 20.8 700 000 800 000

30 June 20.7 600 000 680 000
30 June 20.6 500 000 Cannot be
determined
129
2. The South African Revenue Service is prepared to accept the new valuation of closing
inventory as at 30 June 20.8 for tax purposes.
3. On 30 April 20.8 the company disposed of land realising a capital profit of R14 000.
This amount is not taxable.
4. On 28 February 20.8 the company suffered material flood damage in respect of

inventory to the amount of R100 000. The company was not insured for this type of
risk. This amount is deductible for tax purposes.
5. A batch of sales invoices with a total value of R24 000 was not processed in 20.7 –
this is regarded as material. However, the cost of sales associated with these invoices
was taken into account. The South African Revenue Service re-opened the 20.7
assessment as a result of this error.
6. Dividends paid for the year ended 30 June 20.8 amounted to R30 000 (20.7: R30 000).
7. The ruling tax rate for the last three years was 30%. There are no other temporary or
non-taxable/non-deductible differences apart from those evident from the question.
You may ignore any other form of tax, including capital gains tax.
8. Retained earnings are as follows on the dates indicated:
Rand
30 June 20.6 51 000

30 June 20.7 122 000
Required
changes in equity (retained earnings only) of Sabre Ltd for the year ended 30 June 20.8.
Notes to the statement of profit or loss and other comprehensive income and statement of
changes in equity are also required, excluding accounting policy notes. Your answer must
comply with the requirements of International Financial Reporting Standards (IFRS) in so
far the information allows you to do so. Assume that all amounts are material.
Krazy Krys Ltd is a public company listed on the JSE Ltd. Krazy Krys Ltd imports and sells
eccentric toys such as jumping castles for adults and miniature poker sets for children.
Krazy Krys Ltd leases a low-value asset under a lease agreement with the following terms
(the company elected, in terms of IFRS 16, not to capitalise the contract):
Lease term: 10 years (1 August 20.0 – 31 July 20.10)

Lease payments: First 12 months: R200 per month
1 August 20.1 – 31 July 20.6: R150 per month
1 August 20.6 – 31 July 20.10: R100 per month
All lease payments are payable monthly in arrears and include VAT at 14%.
130
Krazy Krys Ltd accounted for the lease as follows:
Financial year ended 31 December 20.0: Rand

Dr/(Cr)
Lease expense (P or L) 1 000

Bank (1 000)
Lease payments: R200 × 5 months
You may assume an unchanged normal tax rate of 29%. No journal entries relating to
taxation have been processed by Krazy Krys Ltd. All lease instalments were paid timeously.
Assume that all amounts are material.
Required
a. Provide adjusting journal entries (you may ignore current tax implications) for the
financial year ended 31 December 20.0. You may not reverse or re-record any journal
entries that were posted by Krazy Krys Ltd.
b. Provide originating journal entries (you may ignore current tax implications) for the
financial year ended 31 December 20.1.
c. Disclose all relevant notes pertaining to the above-mentioned information for the
financial year ended 31 December 20.1 if it is assumed that the error in 20.0 was never
corrected during 20.0. You may ignore current tax implications. Your answer must
comply with the requirements of International Financial Reporting Standards (IFRS).
 QUESTION IAS 8.14#
Traders Ltd is currently in the process of erecting various plants across the country to
manufacture its products. The costs incurred to erect the plants, which take a substantial
period of time to erect, are financed through loans.
In accordance with Traders Ltd’s accounting policy, borrowing costs on qualifying assets
have always been expensed as incurred. However, the auditors of Traders Ltd recently
informed management that IAS 23 Borrowing costs was revised during the year and that in
future all borrowing costs on qualifying assets must be capitalised against the asset.
The auditors informed management that the effective date of the revised standard is
1 January 20.9. The transitional provisions of the standard state that an entity must capitalise
borrowing costs on all qualifying assets for which the commencement date for capitalisation
is on or after the effective date of the standard.
However, the transitional provisions of the standard do provide that an entity may designate
any date before the standard’s effective date as its own effective date. If an entity designates
an earlier date, the borrowing costs on all qualifying assets for which the commencement
date for capitalisation is on or after the entity’s own effective date, must be capitalised.
The auditor explained that this means that in future only borrowing costs on new qualifying
assets will be capitalised and that no retrospective restatement will occur.
Management informed its auditors that borrowing costs on qualifying plant that will be
erected from 1 January 20.8 will be capitalised.
131
Details in respect of qualifying plant for the years ended 31 December 20.7 and 20.8 are as
follows:
Plant A Plant B
Commencement date for the capitalisation of

borrowing costs 1 July 20.7 1 March 20.8
Completion date of the erection of plant 31 December 20.7 30 November 20.8
Total cost of plant R2 million R3,6 million
Borrowing costs incurred which qualify for

capitalisation R358 500 R450 000
Plant is accounted for in accordance with the cost model and is depreciated straight-line
over the estimated useful life of five years, with no material residual value.
The South African Revenue Service allows pre-production interest as a once-off deduction
as soon as the asset is brought into use. Wear and tear is allowed over a period of three
years, not allocated on a pro-rata basis for parts of the year. Accept a tax rate of 28%.
Required
Prepare the note to the annual financial statements of Traders Ltd for the year ended
31 December 20.8 in accordance with IAS 8.
 QUESTION IAS 8.15@
On 1 July 20.6 Adams Ltd received a grant of R1,5 million from the local government for
the purchase of machinery of R4,5 million, purchased on the same day.
The requirements of the grant stipulate that Adams Ltd must utilise the machinery in the
manufacturing of blankets for the Department of Social Services. From 1 July 20.6,
Adams Ltd must manufacture 5 000 blankets per month for the next five years. At the end of
the five years the machinery will no longer be usable.
A pro-rata amount of the grant must be repaid at the end of each year if the required annual
production is not delivered. This amount will be calculated based on the ratio of the number
of uncompleted blankets to the total number of blankets to be produced over the five-year
period.
Adams Ltd accounts for machinery on the cost model and it is depreciated in accordance
with the production unit method.
The South African Revenue Service allows machinery to be written off over three years and
you must assume that the government grant is taxable. The tax rate for the past few years has
remained unchanged at 28%. Assume that there will be sufficient future taxable income for
the recognition of any deferred tax assets.
132
Adams Ltd manufactured the following number of blankets for the respective years:
Year ended 30 June Number of blankets
20.7 60 000
20.8 60 000
20.9 45 000
On 30 June 20.9 Adams Ltd repaid the required amount to the local government.
You can assume a profit before tax, after taking the above information into account, of
R1 million for each of the respective years.
Required
a. Disclose the matter above in the notes to the statement of profit or loss and other
comprehensive income of Adams Ltd for the year ended 30 June 20.9, in accordance
with the requirements of International Financial Reporting Standards (IFRS), if the
government grant is offset against the carrying amount of the asset. Comparative
amounts are not required.
b. Disclose the matter above in the notes to the statement of profit or loss and other
comprehensive income of Adams Ltd for the year ended 30 June 20.9, in accordance
with the requirements of International Financial Reporting Standards (IFRS), if the
government grant is recognised as deferred income. Comparative amounts are not
required.
133

Accounting Standards A Comprehensive Question Book... - (IAS 8 Accounting Policies Changes in Accounting Estimates and Errors)

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Accounting Standards A Comprehensive Question Book... - (IAS 8 Accounting Policies Changes in Accounting Estimates and Errors)

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IAS 8

Accounting policies, changes in accounting

 QUESTIONS AND SOLUTIONS

IAS 8.1 Evaluation of accounting policy notes: discussion

IAS 8.7 Drafting of accounting policy notes: discussion

IAS 8.12 Change in accounting policy (limited retrospective application) (voluntary)

 QUESTION IAS 8.1

Investment property is accounted for on the fair value model.

Revenue consists of goods invoiced to customers.

Lease agreements are capitalised.

5. Finance charges on instalment credit purchases

 Suggested solution IAS 8.1

5. Finance charges on instalment credit purchases

 QUESTION IAS 8.2

five years as in the past.

Carrying amount of machinery 400 000

Ignore all tax implications.

 Suggested solution IAS 8.2

Carrying amount – 30 June 20.3 400 000

(1) 400 000 × 20% = 80 000

 Current year’s depreciation = R80 000

 Depreciation for 20.6 = R51 200

b. Correcting journal entries

Accumulated depreciation – machinery (SFPos) 80 000

6. Profit before tax

Change in accounting estimate:

 QUESTION IAS 8.3

Machinery at cost 600 000

 Suggested solution IAS 8.3

Straight-line method – new

(1) 600 000 × 20% = 120 000

(4) 307 200/(7 – 3) = 76 800

 Depreciation for current year (20.7) 76 800

Deferred tax (SFPos) (9) 4 301

20.8 (only for illustrative purposes)

Deferred tax (SFPos) (10) 7 741

(9) 15 360 × 28% = 4 301

 QUESTION IAS 8.4

Profit for the year 28 000 18 200

 Suggested solution IAS 8.4

Note 20.8 20.7

1. Income tax expense 20.8 20.7

Tax rate reconciliation % %

Statutory tax rate 30 30

2. Correction of prior period error

Decrease in income tax expense 4 200

Increase in deferred tax liability 3 600

Increase in basic earnings per share xx

Current tax of Aaskamp Ltd after correction 20.8 20.7

Temporary differences after correction 20.8 20.7

Cumulative taxable temporary differences (1) 31 000 14 000

Deferred tax liability (30%) 9 300 3 600

Movement in profit or loss (2) 5 700 3 600

(1) 17 000 + 14 000 = 31 000

Total income tax expense after correction

Current tax 2 550 –

Correcting journal entries

Income tax expense (P or L) 3 600

Current tax as shown previously (20.7) 7 800

 QUESTION IAS 8.5

Share capital (10 000) (10 000)

The following information is available:

Revenue (excluding VAT) R300 000 R200 000