Download Chapter 3 HKSSAP 2 Net Profit or Loss for the Period, Fundamental

Chapter 5 HKAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors
1.
1.1
1.2
1.3
Objectives
Define and identify accounting policies, change in accounting estimates, prior period
errors, retrospective application, retrospective restatement and prospective application.
Distinguish between changes in accounting estimates and changes in accounting
policies.
Describe the treatments for accounting errors and changes in accounting policy.
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2.
Definitions
2.1
Definitions
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
(會計政策，是指企業在編制和呈報財務報表時所採用的具體原則、基礎、
慣例、規則和實務。)
A change in accounting estimates (會計估計變更) 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 and, accordingly, are not corrections of errors.
(會計估計變更，是指由于資産和負債的當前狀况及預期經濟利益和義務
發生了變化，從而對資産或負債的賬面價值或者資産的定期消耗金額進
行調整。企業據以進行估計的基礎發生了變化，或者由于取得新信息、
積累更多經驗以及後來的發展變化，可能需要對會計估計進行修訂。)
Prior period errors (前期差錯更正) are omissions from, and misstatements
(錯報) in, the entity’s financial statements for one or more prior periods arising
from a failure to use, or misuse of, reliable information that:
(i) was available when financial statements for those periods were
authorised for issue; and
(ii) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
Retrospective application (追溯應用法) is applying a new accounting policy
to transactions, other events and conditions as if that policy had always been
applied.
(追溯應用法導致對各事項和交易採用新的會計政策，並如同過去一直在
使用那樣。因此，新會計政策應從這些專案的初始日開始應用。)
Retrospective restatement ( 追 溯 重 述 ) is correcting the recognition,
measurement and disclosure of amounts of elements of financial statements as
if a prior period error had never occurred.
Impracticable (不可行的) – Applying a requirement is impracticable when
the entity cannot apply it after making every reasonable effort to do so. For a
particular prior period, it is impracticable to apply a change in an accounting
policy retrospectively or to make a retrospective restatement to correct an error.
Prospective application (未來應用法) of a change in accounting policy and
of recognising the effect of a change in an accounting estimate, respectively,
are:
(i) applying the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed; and
(ii) recognising the effect of the change in the accounting estimate in the
current and future periods affected by the change.
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3.
Accounting Policies
(A)
Selection and Application of Accounting Policies
3.1
When an Accounting Standard or an Interpretation specifically applies to a transaction,
other event or condition, the accounting policy or policies applied to that item should
be determined by applying the Accounting Standard or Interpretation and
considering any relevant Implementation Guidance for the Accounting Standard or
Interpretation.
3.2
If there is no specific Accounting Standard or an Interpretation to follow,
management should use its judgement in developing and applying an accounting
policy that results in information that is:
(a)
relevant to the economic decision-making needs of users; and
(b)
reliable in that the financial statements:
(i)
(ii)
(iii)
(iv)
(v)
represent faithfully the financial position, financial performance and
cash flows of the entity;
reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
are neutral, that is, free from bias;
are prudent; and
are complete in all material respects.
3.3
In making the judgement, management should refer to, and consider the applicability of,
the following sources in descending order:
(a)
the requirements and guidance in Accounting Standards and Interpretations
dealing with similar and related issues; and
(b)
the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
(B)
Consistency of Accounting Policies
3.4
An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless a Standard or an Interpretation
specifically requires or permits categorisation of items for which different policies may
be appropriate. If a Standard or an Interpretation requires or permits such categorisation,
an appropriate accounting policy shall be selected and applied consistently to each
category.
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(C)
3.5
Changes in Accounting Policies
Changes in Accounting Policies
An entity shall change an accounting policy only if the change:
(a) is required by a Standard or an Interpretation; or
(b) results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions on the
entity’s financial position, financial performance or cash flows.
(c) This includes the recognition, presentation and measurement basis to be
applied to assets, liabilities, gains, losses and changes to shareholders funds.
The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring; (本期發
生的交易或者事項與以前相比具有本質差別而采用新的會計政策。) and
(b) the application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial. (對初次發生的或
不重要的交易或者事項采用新的會計政策。)
3.6
In the case of tangible non-current assets, if a policy of revaluation is adopted for the
first time then this is treated, not as a change of accounting policy under HKAS 8, but
as a revaluation under HKAS 16 Property, plant and equipment.
(D)
Applying Changes in Accounting Policies
3.7
For applying changes in accounting policies, HKAS 8 provides the following:
(a)
an entity shall account for a change in accounting policy resulting from the
initial application of a Standard or an Interpretation in accordance with the
specific transitional provisions, if any, in that Standard or Interpretation; and
(b)
when an entity changes an accounting policy upon initial application of a
Standard or an Interpretation that does not include specific transitional
provisions applying to that change, or changes an accounting policy voluntarily,
it shall apply the change retrospectively.
3.8
Key Point
When a change in accounting policy is applied retrospectively, the entity shall
adjust the opening balance of each affected component of equity for the earliest
prior period presented and the other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied.
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3.9
3.10
3.11
3.12
When retrospective application is required, a change in accounting policy shall be
applied retrospectively except to the extent that it is impracticable to determine either
the period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific effects of changing an
accounting policy on comparative information for one or more prior periods presented,
the entity shall apply the new accounting policy to the carrying amounts of assets and
liabilities as at the beginning of the earliest period for which retrospective application is
practicable, which may be the current period, and shall make a corresponding
adjustment to the opening balance of each affected component of equity for that period.
When it is impracticable to determine the cumulative effect, at the beginning of the
current period, of applying a new accounting policy to all prior periods, the entity shall
adjust the comparative information to apply the new accounting policy prospectively
from the earliest date practicable.
When it is impracticable for an entity to apply a new accounting policy retrospectively,
because it cannot determine the cumulative effect of applying the policy to all prior
periods, the entity applies the new policy prospectively from the start of the earliest
period practicable. It therefore disregards the portion of the cumulative adjustment to
assets, liabilities and equity arising before that date.
3.13
Example 1
An entity has previously charged interest incurred in connection with the construction
of tangible non-current assets to the statement of comprehensive income. Following
the revision of HKAS 23 during June 2007, and in accordance with the revised
requirements of that standard, it now capitalizes this interest.
Since the change in recognition and presentation of interest incurred in connection
with the construction of asset is required by the revised HKAS 23. Therefore it is a
change in accounting policy.
3.14
Exercise 1
On 1 January 2005, Gamma Co changed its accounting policy for the treatment of
borrowing costs that are directly attributable to the acquisition of a hydro-electric
power station under construction for use by Gamma. In previous periods, Gamma had
capitalized such costs. Gamma has now decided to treat these costs as an expense,
rather than capitalize them. Management judges that the new policy is preferable
because it results in a more transparent treatment of finance costs and is consistent with
local industry practice, making Gamma’s financial statements more comparable.
(1)
(2)
(3)
Gamma capitalized borrowing costs incurred of $2,600 during 2004 and $5,200
in periods before 2004.
Gamma’s accounting records for 2005 show profit before interest and income
taxes of $30,000; interest expense of $3,000 (which relates only to 2005); and
income taxes of $8,100.
Gamma has not yet recognised any depreciation on the power station because it is
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(4)
not yet in use.
In 2004, Gamma reported:
$
18,000
18,000
(5,400)
12,600
Profit before interest and tax
Interest expense
Profit before tax
Income taxes
Profit for the year
(5)
(6)
2004 beginning retained earnings was $20,000 and ending retained earnings was
$32,600.
Gamma’s tax rate was 30% for 2005, 2004 and prior periods.
Required:
Prepare extract to the income statements and statements of changes in equity for 2005
and 2004, showing the cumulative effect of the change in accounting policy.
(Disclosure notes are required.)
Solution:
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4.
4.1
Changes in accounting estimates
Key Point
As a result of the uncertainties inherent in business activities, many items in financial
statements cannot be measured with precision but can only be estimated.
Estimation involves judgements based on the latest available, reliable information.
For example, estimates may be required of:
(a) bad debts;
(b) inventory obsolescence;
(c) the fair value of financial assets or financial liabilities;
(d) the useful lives of, or expected pattern of consumption of the future economic
benefits embodied in, depreciable assets; and
(e) warranty obligations.
4.2
4.3
4.4
4.5
4.6
Changes in accounting estimates will be inevitable as a result of new information,
more experience or subsequent developments. The revision of an estimate, by its
nature, does not relate to prior periods and is not the correction of an error.
Applying changes in accounting estimates, the effect of the change should be
recognised by including in profit or loss in:
(a)
the period of change, if the change affects that period only; and
(b)
the period of the change and future periods, if the change affects both.
For example, the effect of a change in estimate of the useful life of a depreciable asset
affects the depreciation expense in the current period and in each period during the
remaining useful life of the asset. Thus, the effect of the change relating to the current
period should be included in the depreciation expense in the current period’s income
statement. The effect, if any, on future periods is recognised in those future periods. A
change in an accounting estimate applies the change to transactions, other events and
conditions from the date of the change in estimate, and hence the financial statements of
the prior period presented as comparative figures are not restated.
Where a change in an accounting estimate gives rise to changes in assets and liabilities,
or relates to an item of equity, HKAS 8 provides that it should be recognised by
adjusting the carrying amount of the related asset, liability or equity item in the period
of the change.
If the change in an accounting estimate has an effect in the current period or is expected
to have an effect in future periods, an entity should disclosure the nature and amount of
the change, except for the disclosure of the effect on future periods when it is
impracticable to estimate that effect. If the amount of the effect in future periods is not
disclosed because estimating it is impracticable, that fact should be disclosed.
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4.7
Exercise 2
Which of the following is a change in accounting policy as opposed to a change in
estimation technique?
(a)
(b)
(c)
An entity has previously depreciated vehicles using the reducing balance method
at 40% pa. It now uses the straight line method over a period of five years.
An entity has previously shown certain overheads within cost of sales. It now
shows those overheads within administrative expenses.
An entity has previously measured inventory at weighted average cost. It now
measures inventory using the FIFO method.
Solution:
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5.
Prior Period Errors
5.1
Errors discovered during a current period which relate to a prior period may arise
through:
(a)
Mathematical mistakes
(b)
Mistakes in the application of accounting policies
(c)
Misinterpretation of facts
(d)
Oversights
(e)
Fraud
5.2
The correction of material errors that relates to prior periods should be accounted for
“retrospectively”, in the first set of financial statements authorized for issue after their
discover by:
(a)
restating the comparative amounts for the prior period(s) presented in which
the error occurred; or
(b)
5.3
if the error occurred before the earliest prior period(s) presented, restating
the opening balance of assets, liabilities and equity for the earliest prior period
presented.
The following disclosures are required:
(a)
(b)
the nature of the prior period error;
for each prior period presented, to the extent practicable, the amount of the
correction for each financial statement line item affected; and if HKAS 33
“Earnings per Share” applies to the entity, for basic and diluted earnings per
share;
5.4
(c)
the amount of the correction at the beginning of the earliest prior period
presented; and
(d)
if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how
and from when the error has been corrected.
Example 2
(a)
During 2005, XYZ Ltd. discovered that certain products that had been sold
during 2004 were incorrectly included in inventory at 31 December 2004 at
$6,500.
(b)
XYZ Ltd.’s accounting records for 2005 show sales of $104,000, cost of goods
sold of $86,500 (including $6,500 for error in opening inventory), and taxation
of $5,250.
(c)
In 2004, XYZ Ltd. reported:
$
73,500
Sales
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Cost of goods sold
Profit from ordinary activities before taxation
Taxation
Net profit
(d)
(e)
(53,500)
20,000
(6,000)
14,000
2004 opening retained earnings was $20,000 and closing retained earnings was
$34,000.
XYZ Ltd. profit tax rate 30% for 2005 and 2004.
Required:
Prepare extract to the income statements and statements of changes in equity for 2005
and 2004, showing the cumulative effect of the change in accounting policy.
(Disclosure notes are required.)
Solution:
XYZ Ltd.
Extract from the Income Statement
Sales
Cost of goods sold
Profit from ordinary activities before taxation
Taxation
Net profit
2005
$
104,000
(80,000)
24,000
(7,200)
16,800
2004
$
73,500
(60,000)
13,500
(4,050)
9,450
2005
$
34,000
2004
$
(restated)
20,000
(4,550)
29,450
16,800
46,250
20,000
9,450
29,450
XYZ Ltd.
Statement of Changes in Equity
Opening retained earnings as previously reported
Correction of fundamental error (net of taxation of
$1,950)
Opening retained earnings as restated
Net profit
Closing retained earnings
Extract from notes to the financial statements
1.
Certain products that had been sold in 2004 were incorrectly included in
inventory at 31 December 2004 for $6,500. The financial statements of 2004
have been restated to correct this error.
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5.5
Exercise 3
During 2007 a company discovered that certain items of research expenditure had been
incorrectly capitalized as development expenditure at 31 December 2006. The amount
of expenditure capitalized was $4 million. This research expenditure should have been
included in cost of sales. The original figures reported for year ending 31 December
2006 and the figures for the current year 2007 are given below:
Sales
Cost of sales
Gross profit
Distribution and administrative expenses
Tax
Net profit
2007
$000
60,000
(40,000)
20,000
(4,000)
(1,000)
15,000
2006
$000
50,000
(32,000)
18,000
(3,000)
(1,000)
14,000
The opening retained earnings at 1 January 2006 were $50 million. The adjustment has
no effect on the tax for the year.
Required:
Show the 2007 statement of comprehensive income and statement of changes in equity
with comparative figures and the retained profits for each year.
Solution:
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6.
Disclosure
6.1
When initial application of a Standard or an Interpretation has an effect on the current
period or any prior period, would have such an effect except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future periods, an
entity shall disclose:
(a)
the title of the Standard or Interpretation;
(b)
when applicable, that the change in accounting policy is made in accordance
with its transitional provisions;
(c)
the nature of the change in accounting policy;
(d)
when applicable, a description of the transitional provisions;
(e)
(f)
(g)
(h)
6.2
when applicable, the transitional provisions that might have an effect on future
periods;
for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
(i)
for each financial statement line item affected; and
(ii)
if HKAS 33 “Earnings per Share” applies to the entity, for basic and
diluted earnings per share;
the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
if retrospective application is impracticable for a particular prior period, or for
periods before those presented, the circumstances that led to the existence of that
condition and a description of how and from when the change in accounting
policy has been applied.
When a voluntary change in accounting policy has an effect on the current period or any
prior period, would have an effect on that period except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future periods, an
entity shall disclose:
(a)
the nature of the change in accounting policy;
(b)
the reasons why applying the new accounting policy provides reliable and more
(c)
(d)
(e)
relevant information;
for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
(i)
for each financial statement line item affected; and
(ii)
if HKAS 33 applies to the entity, for basic and diluted earnings per share;
the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
if retrospective application is impracticable for a particular prior period, or for
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periods before those presented, the circumstances that led to the existence of that
6.3
condition and a description of how and from when the change in accounting
policy has been applied.
When an entity has not applied a new Standard or Interpretation that has been issued but
is not yet effective, the entity shall disclose:
(a)
this fact; and
(b)
known or reasonably estimable information relevant to assessing the possible
impact that application of the new Standard or Interpretation will have on the
entity’s financial statements in the period of initial application.
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Examination Style Questions
Question 1
(a)
Set out below is a draft statement of retained profit for Thame Ltd for the year ended 31 March
2010 and the comparative figures for the year ended 31 March 2009.
Statement of retained profit
Retained profit for the year
Retained profit at the beginning of the year
Retained profit at the end of the year
2010
$000
400
500
900
2009
$000
350
150
500
Two errors have just been discovered which consist of unreported profit that had been omitted
from the above statement of retained profit. In the year ended 31 March 2008 there was an
unreported profit before tax of $80,000 (tax $40,000) and in the year ended 31 March 2009 an
unreported profit before tax of $100,000 (tax $45,000).
You are required to amend the above statement of retained profit in order to account for these two
fundamental errors.
(b)
(6 marks)
State, with reasons, whether you consider the following events, which are all material, should be
accounted for as prior period adjustments:
(i)
A company changes its accounting policies in order to comply with a new Hong Kong
Accounting Standard.
(ii)
An error in the valuation of the closing inventories in the financial statements issued two
years previously has been discovered.
(iii) The directors of a company engaged in a construction contract which had previously
regarded it in the financial statements as a profitable contract and hence profit recognized
(in accordance with HKAS 11 “Construction Contracts”) are now of the opinion that there
will be a loss on the contract as a whole.
(iv)
A computer, which was purchased three years ago for $100,000, was being depreciated at
15% per annum on the straight line basis, has been sold for $15,000.
(v)
A company has leased premises for five years and the terms of the lease state that the tenant
is responsible for all the repairs during the lease. The lease has expired and the landlord has
requested a sum of $1 million for repairs necessary to restore the property to its former
condition. The company has agreed to pay this sum because it has failed to repair the
property during the lease periods.
(10 marks)
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Question 2
HKAS 8 distinguishes between accounting policies and estimation techniques and the accounting for
changes in each is very different.
Required:
(a)
Distinguish between accounting policies and estimation techniques, as defined by HKAS 8 and
state the differences in accounting for a change in accounting policy and a change in an estimation
technique.
(b)
For items (i) to (v) below, state in each case whether the proposed changes represent changes in
accounting policies or estimation techniques, giving brief reasons.
(i)
Depreciation of vehicles
(1)
An entity has previously depreciated vehicles using the reducing balance method at
40% per year. It now proposes to depreciate vehicles using the straight-line method
over five years, since it believes this better reflects the pattern of consumption of
economic benefits.
(2)
As in (1), an entity has previously depreciated vehicles using the reducing balance
method at 40% per year and now proposes to depreciate vehicles using the
straight-line method over five years. In addition, it has previously recorded the
depreciation charge within cost of sales, but now proposes to include it within
administrative expenses.
(ii)
Classification of overheads
An entity has previously shown certain overheads within cost of sales. It now proposes to
show those overheads within administrative expenses.
(iii) Indirect overheads recorded in the value of stock
A manufacturing entity has three indirect cost centres (A, B and C). It has previously
assessed that the indirect costs attributable to production are 30% of A and 40% of B.
Having reassessed the nature of those cost centres’ activities, it now assesses that the
indirect costs attributable to production are 25% of A, 40% of B and 10% of C.
(iv) Capitalised finance costs
An entity has previously charged to profit and loss account interest incurred in connection
with the construction of tangible fixed assets. It now proposes to capitalize such interest, as
permitted by HKAS 16 “Property, Plant and Equipment”, since it believes this better
reflects the cost of constructing those assets.
(v)
Provisions
An entity has previously measured a particular provision on an undiscounted basis, in
accordance with HKAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, as
the effect of discounting was not material.
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However, this year it has revised upwards its estimates of future cash flows associated with
the provision and, as a result, the effect of discounting is now material. HKAS 37 therefore
requires it to report the provision at the discounted amount.
Question 3
(a)
Describe the circumstances in which an entity may change its accounting policies and how a
change should be applied.
(b)
(5 marks)
The terms under which Partway sells its holidays are that a 10% deposit is required on booking
and the balance of the holiday must be paid six weeks before the travel date. In previous years
Partway has recognised revenue (and profit) from the sale of its holidays at the date the holiday
is actually taken. From the beginning of November 2005, Partway has made it a condition of
booking that all customers must have holiday cancellation insurance and as a result it is unlikely
that the outstanding balance of any holidays will be unpaid due to cancellation. In preparing its
financial statements to 31 October 2006, the directors are proposing to change to recognising
revenue (and related estimated costs) at the date when a booking is made. The directors also feel
that this change will help to negate the adverse effect of comparison with last year's results (year
ended 31 October 2005) which were better than the current year's.
Required:
Comment on whether Partway's proposal to change the timing of its recognition of its revenue is
acceptable and whether this would be a change of accounting policy.
(6 marks)
(ACCA 2.5(HKG) Financial Reporting December 2006 Q5(b))
Question 4
Derringdo sells carpets from several retail outlets. In previous years the company has
undertaken responsibility for fitting the carpets in customers’ premises. Customers pay for the
carpets at the time they are ordered. The average length of time from a customer ordering a
carpet to its fitting is 14 days. In previous years, Derringdo had not recognised a sale in income
until the carpet had been successfully fitted as the rectification costs of any fitting error would
be expensive. From 1 April 2002 Derringdo changed its method of trading by sub-contracting
the fitting to approved contractors. Under this policy the sub-contractors are paid by Derringdo
and they (the subcontractors) are liable for any errors made in the fitting. Because of this
Derringdo is proposing to recognise sales when customers order and pay for the goods, rather
than when they have been fitted. Details of the relevant sales figures are:
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Sales made in retail outlets for the year to 31 March 2003
Sales value of carpets fitted in the 14 days to 14 April 2002
Sales value of carpets fitted in the 14 days to 13 April 2003
$000
23,000
1,200
1,600
Note: the sales value of carpets fitted in the 14 days to 14 April 2002 are not included in the
annual sales figure of $23 million, but those for the 14 days to 14 April 2003 are included.
Required:
Discuss whether the above represents a change of accounting policy, and, based on your
discussion, calculate the amount that you would include in sales revenue for carpets in the year
to 31 March 2003.
(5 marks)
(ACCA 2.5(HKG) Financial Reporting June 2003 Q3(d))
Question 5
You are the financial controller of Delta. Your assistant is preparing the first draft of the
financial statements for the year ended 31 March 2011. He has a reasonable general accounting
knowledge but is not familiar with the detailed requirements of all relevant financial reporting
standards. There is one issue on which he requires your advice and he has sent you a
memorandum as shown below:
On 1 April 2008 we bought a large machine for $5 million. We originally estimated a useful
economic life of 5 years with no residual value. This estimate was used in previous years and
the carrying value of the asset in the financial statements last year was $3 million. At 1 April
2010 we looked at these estimates again and now we think the original estimate was
overoptimistic. The machine is unlikely to generate economic benefits for us after 31 March
2012 but on that date we could expect a scrap value of $200,000. We haven’t charged enough
depreciation in 2008/09 and 2009/10 but I’m not sure how to reflect this – should I change my
brought forward figures?
(5 marks)
(ACCA Diploma in IFR Pilot Paper Q2)
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