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Subject: FINANCIAL OPERATION
Subject Code: F1
Level: Operation
Lecture No.: 21
Title of the Lecture:
Accounting
policies
Topic: Financial Accounting and Reporting.
Professor Sheikh Ziaul Islam FCMA
Professor, Accounting
Azam Khan Govt. Commerce College,
Khulna.
Email : sheikhziaulislamfcma@gmail.com
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Content
IAS-8
Accounting policies
Selection, Change
Objectives of developing Accounting policies
Causes of changes in Accounting policies
Changes in Accounting estimates and Error
Corrections of prior period errors.
Mathematical problem
IAS-8
IAS 8 was issued in December 1993 by the IASC, the
predecessor to the IASB. It was reissued in December 2003 by
the IASB.
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Accounting policies
Accounting policies are the specific
principles, bases, conventions, rules
and practices applied by an entity in
preparing and presenting financial
statements.
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Selection of Accounting policiesconsideration
Precise and Accurate Presentation.
Conservatism
Profit Maximization
Income Smoothing.
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Selecting and applying an accounting policy
Guide to Selecting and Applying Accounting Policies—IAS 8
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Prominent Accounting Policies
Accounting conventions followed
Valuation of fixed assets
Depreciation and inventory policies
Valuation of investments
Translation of foreign currency items
Costs incurred for research and development
Historical or current cost accounting
Treatment of leases
Treatment of goodwill
Recognition of profits on long-term contracts
Treatment of Contingent Liabilities
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Characteristics of an Accounting Policy
Relevant
Reliable
Faithful
Having economic substance
Neutral
Prudent
Complete
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Changes in accounting policies
An entity is permitted to change an accounting policy
only if the change:
•is required by a standard or interpretation; or
•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.
[IAS 8.14]
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Disclosures
Disclosures relating to changes in accounting policy caused by a new standard
or interpretation include: [IAS 8.28]
•the title of the standard or interpretation causing the change
•the nature of the change in accounting policy
•a description of the transitional provisions, including those 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:
• for each financial statement line item affected, and
• for basic and diluted earnings per share (only if the entity is
applying IAS 33)
•the amount of the adjustment relating to periods before those
presented, to the extent practicable
•if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
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Retrospective application means adjusting 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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Disclosures relating to voluntary changes in accounting
policy include: [IAS 8.29]
•the nature of the change in accounting policy
•the reasons why applying the new accounting policy provides
reliable and more relevant information
•for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
• for each financial statement line item affected, and
• for basic and diluted earnings per share (only if the entity is
applying IAS 33)
•the amount of the adjustment relating to periods before those
presented, to the extent practicable
•if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
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Change in accounting estimate
It is an adjustment to the carrying amount of an asset or liability, or
related expense, resulting from reassessing the expected future
benefits and obligations associated with that asset or liability.
To some extent is based on management’s judgment.
For example judgments on :
bad debts
inventory obsolesce
fair value of assets and
liabilities
life of non-current asset
depreciation pattern i.e straight line or reducing.
Change in accounting estimate results from “New information or
New development“.
change in accounting estimate does not mean Error has been
made.
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Disclosures relating to changes in accounting
estimates
•the nature and amount of a change in an accounting
estimate that has an effect in the current period or is
expected to have an effect in future periods
•if the amount of the effect in future periods is not
disclosed because estimating it is impracticable, an
entity shall disclose that fact. [IAS 8.39-40]
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Errors
The general principle in IAS 8 is that an entity must
correct all material prior period errors retrospectively in
the first set of financial statements authorised for issue
after their discovery by: [IAS 8.42]
•restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
•if the error occurred before the earliest prior period
presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period
presented.
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Disclosures relating to prior period errors
include: [IAS 8.49]
•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
•for basic and diluted earnings per share (only if the entity is
applying IAS 33)
•the amount of the correction at the beginning of the earliest prior
period presented
•if retrospective restatement is impracticable, an explanation and
description of how the error has been corrected.
Financial statements of subsequent periods need not repeat these
disclosures.
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Mathematical problem1
During 2019 Bowie Ltd changed its accounting policy with respect to the treatment of
borrowing costs that are directly attributable to the construction of a hydro-electric power
station, which is in the course of construction for use by Bowie.
In previous periods, Bowie had expensed such costs, in accordance with the allowed treatment in
IAS 23 Borrowing Costs. IAS 23 now states Bowie must now capitalize these costs.
Bowie had borrowing costs in 2018 amounting to Tk. 2,600 and Tk. 5,200 in periods prior to
2018.
Bowie’s accounting records for 2019 and 2018 show:
2019
2018
Tk.
Tk.
Profit from operations
30,000
18,000
Finance cost
(2,600)
Profit before tax
30,000
15,400
Income tax
(9,000)
(4,620)
Profit for the period
21,000
10,780
In 2018 opening retained earnings were Tk. 20,000 and closing retained earnings were Tk.
30,780. The income tax rate is 30%.
Required:
Show how the change in accounting policy will be recorded in the financial statements for the
Solution:
Income statement (extract)
Operating profit
Finance cost
PBT
Income tax
Profit for the period
Statement of changes in equity (extract)
Retained earnings b/d
Restatement due to change in
accounting policy on interest costs
(5,200+2,600)×70%
Profit for the period
Retained earnings c/d
2019
Tk.
30,000
30,000
9,000
21,000
2018
Tk.
18,000
18,000
5,400
12,600
2019
30,780
2018
20,000
5,460
36,240
21,000
57,240
(5,200×70%) 3,640
23,640
12600
36,240
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Mathematical problem2
Wimbledon Ltd has always valued its. inventories on the FIFO basis using a manual system.
During 2019 the company purchased a computerized system and discovered that most industry
equivalent companies use a weighted average cost method. The incomes statements prior to the
adjustments are:
2019
2018
Tk.
Tk.
Revenue
500
400
Cost of sales
200
160
Gross profit
300
240
Administration expenses
120
100
Distribution costs
50
30
Profit from operations
130
110
The retained earnings balance as at the beginning of 2018 was Tk. 600,000.
The impact on inventory due to the change in policy was determined as:
Inventory as at 31 December 2017: an increase of Tk. 20,000.
Inventory as at 31 December 2018: an increase of Tk. 30,000.
Inventory as at 31 December 2019: an increase of Tk. 40,000.
Required
Show how the change in accounting policy will be recorded in the financial statements for the
year 2019. Comparatives should also be prepared. Assume that the adjustments have no effect on
taxation charges.
(W1) Cost of sales adjustment
Original accounts
Opening inventory adjustment
Closing inventory adjustment
Adjusted accounts
2019
Tk. 000
200
30
(40)
190
2018
Tk. 000
160
20
(30)
150
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Solution: Income statement
Revenue
Cost of sales (W1)
Gross profit
Administration expenses
Distribution costs
Profit from operations
2019
Tk. 000
500
190
310
120
50
140
2018
Tk. 000
400
150
250
100
30
120
Statement of changes in equity (extract)
Retained earnings b/f
Restatement due to change
accounting policy
* (20+10)
Profit for the period
Retained earnings c/f
2019
Tk. 000
710
*30
740
140
880
2018
Tk. 000
600
20
620
120
740
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Mathematical problem3
During 2019 Howie Ltd discovered that certain products that had been sold during
2019 were incorrectly included in inventory at 31 December 2018 at Tk. 2,500.
Howie’s accounting records show the following results for2019
and 2018
2019
2018
Tk. 000
Tk. 000
Revenue
52,100
48,300
Cost of sales
(33,500)
30,200
Profit before tax
18,600
18,100
Income tax expense
(4,600)
(4,300)
Profit for the year
14,000
13,800
In 2018 opening retained earnings was Tk. 11,200 and closing retained earnings was
Tk. 25,000. Assume the adjustment has no effect on the tax charge.
Required:
Show how the correction of the error will be recorded in the financial statements for the
year ended 31 December 2019. Comparatives should also be prepared.
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Solution:
Income statement
Revenue
Cost of sales
Profit before tax
Income taxes
Profit for the period
2019
Tk. 000
52,100
31,000
21,100
4,600
16,500
2018
Tk. 000
48,300
32,700
15,600
4,300
11,300
2019
Tk. 000
25,000
(2,500)
22,500
16,500
39,000
2018
Tk. 000
11,200
11,200
11,300
22,500
Statement of changes in equity (extract)
Retained earnings b/d (as previously reported)
Correction of error
Retained earnings b/d
Profit for the period (as above)
Retained earnings c/d
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Thanks
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