Changes in accounting policy
Robson acquired an IP on 1 Jan x4 and measured it using cost model. On 1 Jan x7, it changed the
accounting policy and use FV model to measure IP.
The acquisition cost of the property was RM 100 mil and the estimated useful life was 50 years.
FV of the IP:
31.12. x4
103 mil
31.12.x5
105 mil
31.12.x6
110
31.12.x7
114
Tax rate 20%
Additional info:
Year x6
Net Profit After Tax
RM 64 mil
Details:
Profit after depreciation on IP of RM 2 mil but before tax was RM 80 mil, tax exp RM 16 mil. RP
brought forward on 1 Jan x6 RM 200mil.
Year x7
Net Profit After Tax
RM 72 mil
Profit Before Tax (not including depreciation on IP of RM 2 mil) excluding changes in FV of IP was
RM90mil.
Tax expenses based on profit of RM 90 mil is RM 18 mil.
Discuss the effect of the change in accounting policy on the FS on 31 Dec x7.
Anwer:
Old policy – cost model
Depreciation for the first 3 years (x1 - x3) is RM 100m/50years= RM 2 million per year.
CV of the IP will reduce by RM 2 mil per year
The effect on the profit for each year is a reduction of profit RM 2 mil before tax, and after tax of RM
1.6 mil (RM 2 - RM 2mil x 20%).
The CV on 31 dec x6 is RM 100m - RM 6m = RM 94m
New Policy- FV model
FV model required the IP to be carried at FV and the changes in the FV to be taken to the IS. The IP is
not depreciated.
On 1 Jan x7, the IP should be measured at FV (RM 110).
The differences between CV and FV = RM 94 vs RM 110 = RM 16m should be recognised in the SOCE.
The Retained Earning B/F will be increased by RM 16 mil, less tax RM 3.2 mil.
SOCI (extract)
X7
x6
Operating profit
90
82 (80+2)
FV changes
4
5 (110 vs 105)
PBT
94
87
Tax
18.8
17.4
PAT
75.2
69.6
Year x6
For comparative purpose, the income statement for x6 will appear as though the changes in
accounting policy was effective in year 6. The operating profit is increased by the reversal of the
depreciation of RM 2m, tax expense will increase by RM 400k (RM2m x 20%).
The FV changes is recognised in the IS and the amount is the differences between the FV on 31 dec
x5 and FV on 31 dec x6. This causes an increase in tax (RM 5 x 20%) = RM 1 mil.
The tax exp of RM 17.4 mil comprises the original tax exp (RM 16mil) plus the tax effect on the
reversal of depreciation (RM 1 mil).
Year x7
FV change recognised is the differences of the FV between 31.12.x6 and 31.12.x7 = RM 4 mil.
Tax increase by RM 4m x 20%= RM 800,000.
SOCE (extract)
RP x7
PR x6
1 Jan b/f
264
200
Change in accounting policy
12.8 (94 vs 110) – tax 20%
7.2 (96 - 105) - tax 20%
Balance
276.8
207.2
Profit for the period
75.2
69.6
352
276.8
Year x6
For comparative purpose, SOCI for x6 will appear as though the changes in accounting policy was
effective in x6.
The cumulative differences between the CA and FV net of tax for period prior to 1 Jan x6 is adjusted
against the RP b/f
Year x7
The cumulative differences between the CA and FV net of tax for period prior to 1 Jan x7 is adjusted
against the RP b/f.
SOFP
IP
X7
x6
116
112
Example- prospective
Excel acquired a piece of land for RM 200mil on 1 Jan x5. The land was classified as IP measured
using cost model.
1 Jan x9, Excel changed its accounting policy to FV model to measure the land. It was able to derive
the FV of the land only from 31 Dec x8 which was RM 290mil. The FV of the land on 31 Dec x9 is RM
313 mil. No tax suffered.
Required- discuss the effect of the changes in accounting policy of the FS on 31 Dec x9.
Answer
It is not possible to apply the new policy from 1 Jan x5 and the earliest date possible is 1 Jan x9.
SOCI (extract)
RP x9
b/f 1 Jan
xxx
changes in accounting policy on IP
90
balance
xxx
in the IS of year x9- the change in the FV of 23 mil will be recognised as income.
Notes: from the start of year x9, the company change its accounting policy from cost model to FV
model as the management have a view that the policy a more reliable and relevant information
based on up-to-date data. So, the policy is applied prospectively because it was not practicable to
determine the FV of the investment before year x9.
Changes in Accounting Estimation
1.
On Jan x1, Rise Bhd acquired a plant costing RM 5 mil. Economic life 10 years, 0 scrap value.
On Jan x5, remaining useful life 2 years, scrap value of RM 500k
Required:
Discuss the accounting treatment in x5.
Depreciation is (5m - 0)/10= 500k per year
X1-x4- the plant should be depreciated at 500k per year. CA of the plant at the end of x4=
5m - (500k x 4) = RM3m
Depreciation for x5 = (RM3m - 500k) / 2 = RM 1,250,000
FS x1 - x4 are not changed.
2.
ACE, in 1 Jan x4, acquired a brand costing RM 20mil. Useful life – indefinite.
1 Jan x7- the company reviewed the economic life – 4 years.
Required:
Discuss the accounting treatment for the brand.
No amortization shall be recognized from Dec x4 to Dec x6 because the brand has an
indefinite useful life
The brand will be amortised over 4 years starting from x7.
The amortisation charge will be = 20/4 = 5 mil per year.
CA at the end of x7= 20mil - 5 mil = 15 mil
The change in the useful life of the brand from indefinite to 4 years is changes in accounting
estimation.
ERROR
On 1 Jan x1, YTK purchased a building costing RM 30 mil. The company decide not to depreciate it in
x1. This was discovered when the FS for x2 were being finalised, tax rate 25%. Retained Earnings b/f
1 Jan x2 RM 45 mil.
Useful life 20 years, scrap value 2 mil.
Answer:
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Building is a depreciable asset, thus it needs to be depreciated.
X2 - material error is found.
The depreciation for x1 need to be provided for.
Depreciation charge for x1 = (30 - 2) / 20 = RM 1.4m
Because the expenses in x1 is understated which caused the Retained Earnings b/f 1 Jan x2
to be overstated, then the Retained Earnings b/f 1 Jan x2 will be reduced by the after-tax
effect = RM 1.4mil – (1.4 x 25%) = RM 1.05 mil
Tax provision need to be adjusted.
The building will be disclosed in x2 as follows:
X2
x1
Building at cost
30,000
30,000
Less: acc dep
2.8 mil
1.4 mil
27,200
28,600.
SOCI
Retained earnings b/f 1 Jan x2 as previously stated
45m
- Depreciation understated
1.05M
Retained earnings b/f 1 Jan x2 after adjustment
43.95