PPT FINANCIAL REPORTING

IAS 8: Accounting policies, changes in Accounting

estimates and errors
IAS 8 prescribes the criteria for selecting accounting policy and accounting treatment for

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PRACTICAL QUESTIONS ON IAS 8-ACCOUNTING POLICIES

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1. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance on
the use of accounting policies and accounting estimates.

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Required:

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Explain the basis on which the management of an entity must select its accounting policies and
distinguish, with an example, between changes in accounting policies and changes in accounting

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estimates.

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2. The aim of IAS 8- Accounting Policies, Changes in Accounting Estimates and Errors is to
enhance compatibility of the entity’s financial statements to previous periods and to the
financial statements of other entities.
Required: Explain the terms, “accounting polices and accounting estimates”.
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3. In an in-house training for newly recruited trainee accountants in your organisation, a

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disagreement arose on the distinction between change in accounting policies and change in
accounting estimates. Consequent upon the above the finance director requested you as the
head of accounting department to make a presentation on the subject matter.
Required: Write a memo addressed to the finance director distinguishing changes in
accounting policies and changes in accounting estimates, highlighting also the accounting
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treatment of the changes in accounting estimates.

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4. Statement of accounting standards in Nigeria have been replaced by IFRS, however, some of
these local standards relating to industry specific rules which are not found in IFRS are
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expected to be applied by companies in the industries as far as they do not conflict with IFRS
Required;
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Examine the above statement and identify those SAS that are still applicable after adoption of IFRS
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(5marks)

5. Jiksy prepare account to 31 December annually. Below is the draft financial statement for the year ended 31st December 2015;
=N= =N=
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Revenue 50,000

cost of sales

Opening inventory 20,000

Purchases 10,000

less closing inventories (18,000) (12,000)

Gross Profit 38,000

Less expenses (12,500)

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Profit for the year 25,500

i. The company regularly use FIFO to value inventory but in 2015, the valuation method was change to Average cost
method so as to fall in line with industry practice.
ii. If average inventory was used to value inventory at 31 December 2014, the closing inventory would have been
=N=15,000.

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iii. The retained earnings at 31st December 2015 is =N=41,500 while at 31 December 2014 was =N=16,000

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Required ;

Prepare a redrafted statement of profit/loss for the year ended 31 December 2015 Statement of retained earnings for 31

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December 2015

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6. During the 2007 Folarin discovered that certain item had been included in inventory at 31
December 2006 value at =N=4.2m,which has in fact been sold before the year [Link]

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following figures for 2006 (as reported ) ,and 2007 (draft) are available ;
2006 2007 (draft)
=N='000 FE =N='000
Sales 47,400.00 67,200.00
cost of sales (34,570.00) (55,800.00)
profit before tax 12,830.00 11,400.00
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Tax (3,880.00) (3,400.00)
Net profit 8,950.00 8,000.00
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Reserves at 1 January 2006 were =N=13m .The cost of sales for 2007 include the =N=4.2m
error in opening inventory .The income tax rate was 30% for 2006 and 2007.
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Required;
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Show the statement of profit or loss and comprehensive income for 2007 ,with the 2006
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comparative and retained earnings.

7. A company began trading on January 2011, preparing accounts to 31 December each year.
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As at 31 December 2013, the company adopted a new accounting policy with regard to the
measurement of inventories. If the new policy had been applied in previous years, the
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company’s inventory at 31 December 2011 would have been =N=150,000 higher than the
amount originally calculated. Similarly, the inventory at 31 December 2012 would have been
=N=400,000 higher than the amount originally calculated.
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An extract from the draft statement of comprehensive income for the year to 31 December
2013(before accounting retrospectively for the change in accounting policy) is as follow:

2013 2012
Profit before taxation 2,600 1,900
Taxation 780 570
Profit after taxation 1,820 1,330
Retained earnings were originally reported to be =N=840,000 on 31 December 2011. No dividends
were paid in 2011, 2012 or 2013. It may be assumed that the company’s taxation expense is always
equal to 30% of its profit before tax.
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i. Prepare an extract from the company’s statement of comprehensive income for the year to
31 December 2013 showing restated comparative figure for 2012.
ii. Calculate the company retained earnings at 31 December [Link] calculate the retained
earnings figures which will be shown in the restated statements of financial position as at 31
December 2011 and 2012.

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8. Extract from Bamola Ltd financial statement to 31st December 2014 is given below.

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Machinery at cost 500,000
Date of acquisition 1st Jan 2011
Accumulated depreciation 200,000
Depreciation policy 10% pa straight line

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Estimated useful life 10 years
On 1st Jan 2014, repair was done on the Machinery which resulted in revision of useful life to 4 years

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The draft financial statement as at 31st December 2014 and the comparative figures are as detailed
blow;
2014 2013

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=N= =N=
Sales 450,000 390,000
cost of sales FE 80,000 71,000
Gross profit 370,000 319,000
Expenses;
Depreciation expense 50,000 50,000
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other expense 100,000 63,000
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Profit before tax 220,000 206,000

taxation 28,000 15,000
Profit after tax 192,000 191,000
The retained earnings as at 31 December 2014 is =N=580,000 and as at 31 December 2013 was
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=N=388,000.
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Required
Prepare a redrafted statement of profit or loss account for the year ended 31 December 2014
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and a comparative information for December 2013

Revised retained earnings as at at 31st December 2014
Tax is 30%
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9. During the year to 31 December 20X8 the following events occurred in relation to The
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Saddleback Company.
i. A counting error relating to the inventory at 31 December 20X7 was discovered. This
required a reduction in the carrying amount of inventory at that date of =N=28,000.
ii. The provision for uncollectible receivables at 31 December 20X7 was =N=30,000.
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During 20X8 =N=50,000 was written off the 31 December 20X7 receivables.

Required;

According to IAS8 Accounting policies, changes in accounting estimates and errors, what adjustment
is required to restate Saddleback's retained earnings at 31 December 20X7?

10. Product development costs are a material cost for many companies. They are either written
off as an expense or capitalised as an asset.
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(a) Discuss the conceptual issues involved and the definition of an asset that may be applied
in determining whether development expenditure should be treated as an expense or an
asset.
(b) Oluchenco 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 2012 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 Oluchenco

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=N=
Year ended 30 September 2009 300

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Year ended 30 September 2010 240
Year ended 30 September 2011 800
Year ended 30 September 2012 400

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All capitalised development expenditure is deemed to have a four year life. Assume
amortisation commences at the beginning of the accounting period following capitalisation.

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Oluchenco had no development expenditure before that for the year ended 30 September
2009.
Required:

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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 statement of financial position
(including comparative figures), and statement of changes in equity of Oluchenco in respect
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of the development expenditure for the year ended 30 September 2012.
Note: ignore taxation.
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11. The directors of Tolani are disappointed by the draft profit for the year ended 30 September
2010. The company’s assistant accountant has suggested two areas where she believes the
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reported profit may be improved:

I. A major item of plant that cost =N=20 million to purchase and install on 1 October 2007 is
being depreciated on a straight-line basis over a five-year period (assuming no residual
value). The plant is wearing well and at the beginning of the current year (1 October 2009)
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the production manager believed that the plant was likely to last eight years in total (i.e. from
the date of its purchase). The assistant accountant has calculated that, based on an eight-
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year life (and no residual value) the accumulated depreciation of the plant at 30 September
2010 would be =N=7·5 million (=N=20 million/8 years x 3). In the financial statements for the
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year ended 30 September 2009, the accumulated depreciation was =N=$8 million (N=20
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million/5 years x 2). Therefore, by adopting an eight-year life, Tolani can avoid a depreciation
charge in the current year and instead credit =N=0·5 million (=N=8 million – $7·5 million) to
the income statement in the current year to improve the reported profit.
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II. Most of Tolani’s competitors value their inventory using the average cost (AVCO) basis,
whereas Tolani uses the first in fi rst out (FIFO) basis. The value of Tolani’s inventory at 30
September 2010 (on the FIFO basis) is =N=20 million, however on the AVCO basis it would be
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valued at =N=18 million. By adopting the same method (AVCO) as its competitors, the
assistant accountant says the company would improve its profit for the year ended 30
September 2010 by =N=2 million. Tolani’s inventory at 30 September 2009 was reported as
=N=15 million, however on the AVCO basis it would have been reported as =N=13·4 million.

Required:

Comment on the acceptability of the assistant accountant’s suggestions and quantify how they would
affect the financial statements if they were implemented under IFRS. Ignore taxation.

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12. In reviewing an Temtee draft financial statements for the year ended 31 December 2007,
management decided that market conditions were such that the provision for inventory
obsolescence at 31 December 2007 should be increased by =N=30,000. If the same basis of
calculating inventory obsolescence had been applied at 31 December 2006, the provision
would have been =N=18,000 higher than the amount recognised in the statement of financial
position.

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Required

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According to IAS 8 Accounting policies, changes in accounting estimates and errors, what adjustments
should be made to the draft profit for the year ended 31 December 2007 and the profit for the year

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ended 31 December 2006 presented as a comparative figure in the 2007 financial statements?

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13. Due to the complexity of IFRS, judgment are often used at the time of transition which have
resulted in prior year adjustment and change in estimate being disclosed in the financial
statement .The selection of accounting policy and estimation techniques is intended to aid

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comparability and consistency in financial statement .However ,,IFRS also placed particular
emphasis on the need to take into account qualitative characteristics and use of professional
judgment when preparing financial statement .Although ,IFRS may appear prescriptive ,the
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achievement of all the objectives for a set of financial statement will rely on the skill of the
preparer .Entities should follow the requirement of IAS 8 when selecting policies or changing
estimate and correcting errors.
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However, the application of IAS 8 is additionally often dependent upon the application of materiality
analysis ot identify issues and guide reporting .Entities also often consider the acceptability of the use
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of hindsight in their reporting .

Required;

i. Discuss how judgments and materiality play significant part in the selection of an entity
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accounting policies
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ii. Discuss the circumstances where an entity may change it accounting policies, setting out how
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a change of accounting policy is applied and the difficulties faced by entitles where a change
in accounting policies is made
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iii. Discuss why the current treatment of prior periods error could lead to earning management
by companies, together with any further argument against the current treatment.
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