•
UNSW Business School
ACCT2542 Corporate Financial Reporting & Analysis
Lecture 1 – Video 6 ‘Accounting
Policies and Other Disclosures’
Topic - Reporting & Disclosure
Dr Diane Mayorga
Video 6’s
Learning
Outcomes
• Describe how changes to accounting
policies are disclosed in general
purpose financial statements.
• Describe how changes in accounting
estimates are accounted for and
disclosed in general purpose financial
statements.
• Describe the concept of materiality
and how material items are identified
• Explain how to account for events
occurring after balance sheet date in
the financial statements
Learning
Outcome
• Describe how changes to
accounting policies are
disclosed in general purpose
financial statements.
AASB 108
Accounting
Policies,
Changes in
Accounting
Estimates and
Errors
provides
principles in
relation to:
• Selecting accounting
policies (a hierarchy is
provided)
• Particularly
important when no
relevant accounting
standard in place
• Choice should
provide information
that is relevant and
reliable.
• Changing accounting
policies
Accounting
Policies
• Comparability requires consistent
application of accounting policies over
time.
• Accounting policies generally
disclosed in Notes 1 or 2
• Accounting policies can only be
changed when:
• Required by an accounting
standard
• The voluntary change provides
reliable and more relevant
information about the effects of
transactions, other events or
conditions of the entity’s
financial position, financial
performance or cash flows
• It is important to distinguish (but not
easy to) changes in accounting policy
from changes in accounting estimates
Adoption of a
new or revised
accounting
standard:
If a change in an accounting policy is
made as a result of the adoption of a
new or revised accounting standard,
AASB 108 details the information
that the entity is required to
disclose.
Required disclosures:
Voluntary
changes in
accounting
policies:
• The nature of the change
• The reasons applying the new
accounting policy results in
reliable and more relevant
information
• The amount of adjustment for
current/prior periods to each
financial statement line item
affects and to EPS
• The amount of adjustment
relating to prior periods
• If retrospective application is
impracticable, an explanation why
Importantly, voluntary changes in
accounting policies are applied
RETROSPECTIVELY. If not, explain
why, but there are few, if any
instances, that justify NOT applying
the change in accounting policy
retrospectively
Learning
Outcomes
• Describe how changes in
accounting estimates are
accounted for and disclosed
in general purpose financial
statements.
Accounting
Estimates
• The use of reasonable estimates is an
essential part of the preparation of
financial statements and does not
undermine their reliability.
• In business, many estimates are
made of accounting information
because of the uncertainty of future
events.
•
Accounting estimates often change as
new information arises. Such changes
require prospective application
• Disclosure of the nature and amount of
the change that affected financial position
or performance is required
Accounting
Estimates
Example
• Part way through its useful life, a
depreciable PPE asset is reassessed due
to technological developments
o Shorter useful life and lower
residual value
• Depreciation expense
o Recognised in prior periods is not
changed
o The remaining depreciable
amount of the asset is written off
over its remaining (shorter) useful
life
• Disclosures are provided regarding the
impact of the changes
Accounting
Policy or
Accounting
Estimate?
• Kobo Ltd records PP&E at historical
cost of acquisition less depreciation.
• Kobo Ltd changed the discount rate
used to calculate the present value of
employee benefits.
• Kobo Ltd determines that it will
calculate its warranty provision using
past experience of products returned
for repair under warranty.
• Kobo Ltd’s current year’s warranty
provision is calculated by providing for
1% of current year sales, based on last
year’s warranty claimed amounting to
1% of sales.
Learning
Outcome
• Describe the concept of
materiality and how
material items are
identified
• Materiality is based on qualitative as
well as quantitative factors.
Materiality
• Materiality is also entity-specific —
what is material to one entity may not
be material to another.
• Standard setters have not provided
quantitative thresholds.
Learning
Outcomes
• Explain how to account for
events occurring after
balance sheet date in the
financial statements
AASB 110
Events
after the
Reporting
Period
• AASB 110 defines an event after
reporting date as those events, both
favourable and unfavourable, that
occur between the date the directors’
declaration is signed and the day the
financial statements are authorised
for use.
• Such events are classified into two
types:
• Adjusting events
• Non-adjusting events
Adjusting
Events
• Those that provide evidence of
conditions that existed at the end
of the reporting period. Examples:
• Settlement of a lawsuit which
had been in process at
reporting date
• Bankruptcy of a major
customer
• AASB 110 requires
• An adjustment to the financial
statements before their
publication for the financial
effect of the event
• This could involve recognising
an amount, adjusting a
balance, reclassification of an
item or a change in a disclosure
NonAdjusting
Events
• Those that are indicative of events
that arose after the end of the
reporting period. Examples:
• An uninsured flood that
destroys the company’s
manufacturing plant
• A major business combination
• Generally such events relate to
future operations / results
• AASB 110 requires note disclosures
regarding the nature of the event
and an estimate of its financial
effect (if possible). There is a
materiality test for non-adjusting
events.
Events
Occurring
after the
end of the
reporting
date
• If an event after the reporting date
leads management to determine that
the entity will liquidate or cease trading,
intentionally or otherwise, paragraph 14
of AASB 110 prohibits the entity from
preparing its accounts on a going
concern basis.
• Accordingly, the financial statements
would need to be redrafted using
liquidation values for the entity’s net
assets as these values would be
deemed more relevant to the
circumstances of the entity and the
needs of the user.
Want to
learn
more…
• Go to assigned reading
Chapter 18 in Loftus et al.
2020 pages 676 to 687 and
pages 690 to 695
• Attend the online Week 1
lecture to practice these
concepts
Next Video
Accounting for
Income Tax