Click to add text
1
LECTURER’ DETAILS
NAME: Dr. ANDREW SIMASIKU( MSc, ACCA, PGCHE, PhD)
Email: asimasiku@nust.na
Phone: 061-207-2931
Office : Room 320 Office Building
Consultation is by appointment
2
TESTS AND EXAM DATES
SEE COURSE OUTLINE
3
COURSE OUTLINE IN BRIEF
1. Accounting policies, estimates and errors (IAS 8)
2. Employee benefits (IAS 19)
3. Earnings per share (IAS 33)
4. Foreign exchange (IAS 21)
5 . Leases
(IFRS 16)
4
PRESCRIBED READING
Stain bank, L, Oakes, D & Razak,M
1.A student’s guide to international financial
reporting (9th edition)
2. Gripping GAAP : Your Guide to International
Financial Reporting Standards 2019 edition.
5
Recommended Reading:
 Vorster Q., Koornhof C., Oberholster J., Koppeschaar Z.
(Latest). Descriptive Accounting IFRS focus. LexisNexis,
Butterworths
 Pretorius, Venter, Von Well, Wingard. (Latest) GAAP
Handbook. LexisNexis, Butterworths
 Elliot B., and Elliot J. (Latest). Financial Accounting and
reporting. Harlow Pearson Education Ltd
 The South African Institute of Chartered Accountants.
(Latest). International Financial Reporting Standards
(IFRS) volumes 1 & 2. (Latest). LexisNexis, Butterworths
 Wood F., and Sangster A. (Latest) Business Accounting 2.
Prentice Hall
6
BRIDGE IN
7
LEARNING OBJECTIVES
LEARNERS SHOULD BE ABLE TO
1. Understand the concept of accounting policies
2. Know how to adjust for accounting policies, estimates and
errors
3.
Calculate and determine the
prior and current errors
8
What is an accounting policy?
What is an accounting estimate? Examples of accounting
estimates
9
TOPIC 1. ACCOUNTING POLICIES, CHANGES
IN ACCOUNTING ESTIMATES & ERRORS – IAS 8
Coverage:
 Overview of IAS 8
 Accounting policies
 Changes in accounting estimates
 Errors
 Summary
10
IAS 8 OVERVIEW : INTRODUCTION
IAS 8 Shows us
1. ACCOUNTING POLICIES
 How to select them
 How to change them
2. ACCOUNTING ESTIMATES
 How to change them
3. ERRORS
 How to correct them
11
ACCOUNTING POLICIES Accounting policies are defined as
the specific principles , bases ,
conventions, rules and practices applied
by an entity in preparing and presenting
financial statements.
12
CHOOSING AND APPLYING ACCOUNTING
POLICIES
 Find the relevant IFRS and apply the policies
contained therein.
 If the IFRS contains guidance that is INTEGRAL
(compulsory ) any requirements contained in the
guidance must be applied . Eg ISA 2 Inventories
must be recorded at the lower of cost or NRV.
 Some IFRS gives you a choice of accounting
policies .e.g PPE may be measured using the
cost model or the revaluation model.
13
DEVELOPING YOUR OWN ACCOUNTING
POLICY
When developing your own accounting policy ensure
the information presented will be:
1. Relevant
2. Reliable

Faith representation

Substance over form

Neutral

Prudent

Complete
3. Professional judgement
4. Consistency
14
DISCLOSURE OF ACCOUNTING
POLICIES
IAS 1 Presentation of financial statements
requires that the notes to the financial statements
must include a summary of significant accounting
policies
The summary of significant accounting policies
must include
 Measurement bases e.g historical cost, current
cost, NRV or fair value or recoverable amount
 Other accounting policies used that are
considered relevant.
 Judgements made by management must also be
disclosed.

15
CHANGES IN ACCOUNTING POLICIES
To achieve comparability
and reliability of
information, from one year to the next, the
accounting policies adopted by an organisation
are RARELY CHANGED. However Accounting
policies are subject to change.

A change in accounting policy is either
•
COMPULSORY - If required by an IFRS Or
•
VOLUNTARY - If it provides information that is
reliable and more relevant.
16
HOW TO ADJUST FOR A CHANGE IN
ACCOUNTING POLICY
 The general guidance in IAS 8 requires that a change in
accounting policy :
 Be applied Retrospectively unless its
impracticable(impossible) to do so .
Retrospective application is defined as applying a new
accounting policy as if the policy had always been applied.(
i.e both the current year and prior year figures change)
 ALL prior periods that are disclosed as comparatives in
annual reports and other reports must be restated based
on the new policy.
 ALL prior periods that are not given as comparative must
also be adjusted through the opening balance of the
retained earnings .
17
PROSPECTIVE APPLICATION
 IAS 8 States that ….
Where
its
impracticable
to
calculate
the
adjustments for the prior period then a Prospective
application of the accounting policy must be
applied.
 Prospective application means the current and
future years figures are impacted ( Not prior
years)
18
EXAMPLE. CHANGE IN ACCOUNTING POLICY
During 2015, a revised IFRS on borrowing costs (IAS 23)was
published. The company had previously been expensing
borrowing costs as a period cost , but the revised IFRS required
that all borrowing costs be capitalised to the related asset
 The borrowing costs were all incurred on construction of a plant
 The revised IFRS provided transitional provisions that allowed
the company to capitalise costs from years beginning on or after
2017 or before the date, if preferred
 This entity chose to capitalise the borrowing cost from the
earliest date possible
 The construction of the plant is not yet complete and not yet
available for use
 The effect of this change on the interest expense is as follows
2015
2016
2017
Old policy
N$15 000
N$ 17000
N$ 9 000
New policy
0
0
0
There are no components of other comprehensive income
19
Tax related information.
 The tax rate was 30% throughout all the affected
years
 The interest incurred each year was correctly
claimed as a deduction in that year in terms of the
relevant country’s tax legislation
 The tax authorities have indicated that they will
not re-open the tax assessments
Required:
Prepare the necessary adjusting journals for the year
ended 31 December 2017.
20
SOLUTION
If it was possible we would have passed the
following journals in each of the prior affected
years:
2015
Dr
Plant ( A)
Interest expense ( E)
Cr
15 000
15 000
Capitalise interest that was previously expensed
21
Dr
Tax expense (E)
Deferred tax (L)
4 500
4 500
Tax increase due to increase in plant cost
22
2016
Dr
Plant
(A)
Cr
17 000
Interest expense (E)
17000
Capitalise interest that was previously
expensed
23
Dr
Tax expense
Deferred tax
Cr
5 100
5100
Tax increases due to increase in plant cost
24
2017
Plant (A)
Interest expense
Dr
9000
Cr
9000
Capitalise interest that was
previously expensed
25
Dr
Tax expense ( E) 2 700
Deferred tax (L)
Cr
2 700
Tax increases due to increase in
plant cost
26
SOLUTION CONTINUED
Now since the 2015 and 2016 income and expense
accounts have already been closed off ( Transferred
to retained earnings)
The following are the Journal entries
Dr
Plant ( 15 000 + 17 000)
32 000
Retained earnings (15 000 + 17 000- 4500-5100)
Deferred tax
Cr
22400
9 600
Capitalise interest that was previously expensed in 2015 and
2016
27
Alternative Journals
Dr Plant
32 000
Cr Retained earnings
Dr retained earnings
Cr Deferred tax
32 000
9600
9600
28
SOLUTION CONTINUED
2017
Dr
Plant
9000
Interest expense
Cr
9000
Capitalise interest that was previously expensed
Tax expense
Deferred tax
2 700
2 700
Tax increase due to increase in plant cost
29
DISCLOSURE OF A CHANGE IN ACCOUNTING
POLICY
Disclose the following when there is a change in accounting policy
when the change resulted from the initial application of an IFRS:

The title of the standard or interpretation

The nature of the change

The extra year of comparatives in the statement of financial position

The amount of the adjustment made to each item
In the financial statements for each period presented

The amounts of the adjustments made to periods before the periods
that are presented

If the prior period/s is not restated the entity must disclose the reason
why it was impracticable to restate and a description as to how
and from what date the new policy has been applied

If transitional provisions were provided

The fact that the change has been made in accordance with
transitional provisions

A description of the these provisions

And the possible effect of these provisions on future periods
30
WHEN THE CHANGE IN ACCOUNTING POLICY IS VOLUNTARY ,
DISCLOSE THE FOLLOWING
 The reason why the new policy results in reliable
and more relevant information
 The nature of the change
 An extra year of comparatives in the SOFP
 The amount of the adjustment made to each line
item in the financial statements for the periods
presented
 The amount of the adjustment made to prior
periods before the periods that are presented
 If a prior period is not restated the entity must
disclose the reason why it was impracticable to
restate and a description as to how and from what
date the new policy has been applied
31
WHERE A NEW STANDARD OR INTERPRETATION HAS BEEN
ISSUED BUT WHICH HAS NOT YET AND DOES NOT YET
NEED TO BE APPLIED
DISCLOSE THE FOLLOWING:
 THE FACT AND THE EFFECT OF THE FUTURE CHANGE IN
ACCOUNTNG POLICY ON ITS FINANCIAL STATEMENTS,
WHERE THIS IS KNOWN OR IS REASONABLY ESTIMABLE.
32
CHANGES IN ACCOUNTING ESTIMATES
Overview
A Change in estimate is defined as
 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.
33
Examples of estimates include estimate of:
 Bad debts
 Inventory obsolescence
 Fair value of financial assets or liabilities
 Useful lives of assets
 Warranty provisions
34
Sometimes its difficult to distinguish
between a change in estimates and a
change in accounting policy ……..
IAS 8 rules that the change should
rather be treated as a change in
estimate.
35
HOW TO ADJUST FOR A CHANGE IN
ACCOUNTING ESTIMATES
A Change in accounting estimate
 Is applied PROSPECTIVELY . This means
it will affect the figures in the current
and future periods but will NEVER affect
the prior year figures.
36
Certain changes in estimates will only affect the
current year:
 E.g. Allowance for credit losses
Other s will affect both current and future periods n
 E.g Changing the estimated remaining useful
life of an asset
37
1.The effect of the change in accounting
estimate shall be included in the same
statement
of
comprehensive
income
classification as was used previously for the
estimate.
2. if
a change in accounting estimates
affects assets and liabilities or equity it
should be recognised by adjusting the
carrying
amount of the related asset,
liability or equity item in the period of
change.
38
METHODS
Two methods of adjusting for estimates
are:
1. Reallocation method.
2. The cumulative catch up method.
Note: The
amounts of the change in
estimate and the related disclosure will
differ depending on what method is used
39
RE-ALLOCATION METHOD
This method spreads the effect of the change in
estimate over the current reporting period and all
affected future periods . For example the opening
carrying amount
of plant ( calculated in
accordance with the previous estimates is
simply reallocated over the remaining revised
estimated useful life.
40
1. REALLOCATION METHOD
Advantage
 No adjustment is made in the current year for the
effect of change on prior years and this ensure
that current years profits are not distorted
Disadvantage
 No effort is made to update the balances in the
statement of financial position for the latest
estimates.
41
CUMULATIVE CATCH -UP METHOD
Catch up all effects in the current reporting
period. The Adjustment made in the current year
actually includes the effect of the change on prior
years.
42
CUMULATIVE CATCH -UP METHOD
Advantage
 Ensures that the current year’s balances in
the SOFP are the latest estimates (Best
estimates)
Disadvantage
 It distorts the current years profits since the
change in estimate adjusted includes the
effects on prior year balances(i.e change in
estimate adjustments are always
made
prospectively , even when the cumulative
catch up method is used.
43
EXAMPLE:
Plant purchased on 1 January 2011 at the cost of
N$100 000 is depreciated on the straight line
method to nil residual values.
During 2016 the company revised estimate of
useful life of the plant from 10 years to 8 years.
Required:
Calculate the depreciation to be expensed by the
company in 2 016 , 2017, and 2018 using the:
 Cumulative catch-up method
 Reallocation method
44
CUMULATIVE CATCH UP METHOD
W1
Acc dep on new estimates
100000/8 x 5 years =
Acc dep on old estimates
100000/10 x 5 years =
catch up of prior years dep =
Depreciation for 2016 usage
Expensed during 2016
62500
=
(50000)
12 500
12 500
25 000
Expensed during each of 2017 and 2018
100 000/8 years = 12 500
45
W2. Reallocation method.( Evenly spread)
Carrying amount at 1/1/2016
100 000/ 10 years =
50 000
Expensed during 2016,2017and 2018
50 000/ 3 years remaining life = 16,667
46
2016
2017
2018
Cumulative
25000
12500
12500
Reallocation
16 667 16667
16667
47
DISCLOSURES
 The nature of the change in estimates
 The amount of the change in estimates
that has an effect in the current period
 The amount of the effect of the change in
estimates on future reporting periods
 However if estimation of the amount is
impracticable then this fact shall be
disclosed.
48
TEST YOUR UNDERSTANDING
Question from Gripping GAAP Example 3. Page
1195.
49
SOLUTION TO TUTORIAL QUESTION 1.
Using the reallocation method we do not consider the effect of the change in estimate on
prior years –instead , we simply start with our opening carrying amount in the year of the
change and reallocate it over the remaining useful life.

There is a change in estimated useful life:
- The original estimate was that there were 3 remaining years ( 5 years – 2 years ) Where as
the revised estimate is that there are only 2 remaining years ( 4 years to 2 years)
Reallocation method.
Cost
500 000
Accumulated depreciation( end of 2015 )
200 000
Carrying amount
300 000
Remaining useful life = 2 years
there fore depreciation will be 150 000 per year till Dec 2016
Note that the carrying amount at 31 December 2014 was N$ 300000
By the end of the year 2016, the carrying amount must be reduced to N$ 150 000
This mean that the depreciation for N$150 000 must be Journalised in 2016(300000-150000
50
Solution continued……..
i) Depreciation journals in 2016: Depreciation had not yet been
processed
Dr
Cr
Depreciation Expense
150 000
Machinery accumulated dep
150 000
Depreciation on machinery using UL
of 4 Years
ii) Depreciation journals in 2016: Depreciation had already been
processed
Depreciation
100 000
Machinery – Accumulated dep
100 000
Depreciation
Machinery Accumulated dep
50 000
50 000
Change in estimated depreciation on machinery
51
USING THE CUMULATIVE CATCH UP

Using the cumulative catch up method we calculate the effect of the change in
estimate on prior years although we process this as an adjustment in the current
year. in other words we perform a retrospective calculation but we adjust for it
prospectively.(This means we do not adjust prior year figures) Thus we calculate
the depreciation that should have been processed based on the original cost
and the revised useful life.

There is a change in estimated useful life from 5 Years to 4 years
52
WORKINGS
Accumulated depreciation on new estimate
500 000/ 4 years x 2 =
250000
Accumulated depreciation on old estimate
500 000/5 years x 2 =
200 000
Catch up on prior years
50 000
Expected for 2016
500 000/4
Total depreciation in 2016
125 000
175 000
53
Solution continued………….
1. Depreciation journals in 2016: Depreciation had not yet been processed:
Dr
Depreciation ( E)
Cr
175 000
Machinery – Accumulated dep
175 000
Depreciation on machinery using TUL of 4 years
2. Depreciation journals in 2016: Depreciation has already been processed.
Depreciation (E)
100 000
Machinery – Accumulated dep
100 000
Depreciation in machinery using TUL of 5 years
Depreciation ( E)
75 000
Machinery – Accumulated dep
75000
Change in estimated depreciation on machinery
54
Solution to C
Disclosure of a change in estimate : reallocation
Company Name
Notes to the financial statements (Extracts)
for the year ended 31 December 2015
Profit before tax
Depreciation
2016
2015
N$
N$
150 000
100 000

Original estimate
100 000
100 000

Change in estimate
50 000
0

The estimated economic useful life of machinery was changed from 5
years to 4 years the (increase) /decrease in profits caused by the change
is as follows:
Current years profits
50 000
Future profits
(50 000)
55
SOLUTION TO TUTORIAL 2 – RE-ALLOCATION
Depreciation – based on previous estimate = 500 000/5 = 100 000
Depreciation on new estimate = 300000 - 90 000
=
70 000
3
Change in estimate
(30 000)
56
RE-ALLOCATION METHOD
Before the depreciation journal is posted
Dr
Depreciation
Cr
70 000
Machinery accumulated dep
70 000
Depreciation of machinery using TUL of 5 years
and RV of 90 000
57
If the journal has already been processed
Dr
Depreciation
100 000
Machinery accumulated dep
Machinery accumulated dep
Depreciation
Cr
100 000
30 000
30 000
Change in estimated depreciation on machinery
58
DISCLOSURES
Company name:
Notes to the financial statements (extracts)
for the year ended 31 Dec 2016
Profit before tax
2016
2015
x
x
Profit before tax is stated after taking the following into account
Depreciation
70 000
100 000
Original estimate
100 000
100 000
Change in estimate
(30 000)
0
Change in estimate:
The residual value of machinery was changed from Nil to N$ 90 000
The (increase )/Decrease in profits caused by the change is as follows
current years profits
(30 000)
Future profits
(60 000)
59
CUMULATIVE -CATCH UP METHOD
Accumulated dep OLD estimate
500 000 – O
X 2 years
=
200 000
5
Accumulated dep NEW estimate
500 000 – 90 000 x 2 years =
164 000
5
Catch up dep ( 200 000-164000)
(36 000)
Depreciation for current year
(500000- 90 000
=
82 000
5
Total depreciation for current year = 46 000
Effect of the change in estimate is therefore (100 000- 46 000 = 54 000
60
JOURNALS
Assuming depreciation had not yet been
passed
Dr
Depreciation
Machinery accum
Cr
46 000
46000
Depreciation on machinery assuming a
TUL of 5 years and RV of 90 000
61
Assuming depreciation had been processed
Depreciation
Machinery : accumulated
Dr
100 000
Cr
100000
Depreciation on machinery using TUL of 5 years
Machinery : accumulated dep 54 000
Depreciation
54 000
Change in estimated depreciation
62
CORRECTION OF ERRORS
There are essentially three categories of errors
1. Current period errors
2. Prior period errors that are IMMATERIAL
3. Prior period errors that are MATERIAL
63
CURRENT PERIOD ERRORS
Are errors that happen in the current
year and are discovered in the current
year.
1. These are corrected by processing a
journal in the current year.
2. No disclosure is required regarding this
correction.
64
PRIOR PERIOD ERRORS
Prior period errors are defined as omissions from
, &misstatements in the entity’s financial
statements for one or more periods arising from
a failure to use ,or misuse of information that
was available when those prior period financial
statements were authorised for and could
reasonably be expected to have been obtained
and taken into account in the preparation and
presentation of those financial statements
65
EXAMPLES
 Mathematical mistakes
 Mistakes in applying accounting policies
 Fraud
 Misinterpretation of facts
66
IMMATERIAL PRIOR PERIOD ERRORS
 Immaterial prior period errors are not corrected in terms of
IAS 8. However its important to correct all errors immaterial
or not but disclosure of the immaterial prior period errors is
not required.
 Thus IAS 8 only applies to material prior period errors.
67
EXAMPLE: CORRECTION OF ERRORS IN THE
CURRENT PERIOD
A vehicle was purchased for N$ 100 000 on 1 January 2017.
its 2017 depreciation ( Current years depreciation) of
N$ 10000 was erroneously debited to the vehicles cost
account. The error is discovered in 2017. The tax authorities
granted wear and tear of N$ 4 000 in 2017 based on the
correct cost. The income tax rate is 30%
Required:
Journalise the correction of this error
68
SOLUTION
Adjusting journal
Depreciation
Vehicles: Cost
Dr
10 000
Cr
10 000
Correction of journal dated ……2017
Deferred taxation : income tax
3 000
Income tax expense
3 000
Tax effect of reduced profits (10 000x 30%)
Note:
Since the tax
authority disregard
the accountant’s
depreciation when calculating taxable profits the incorrect
depreciation would not have affected the current tax payable
and a tax adjustment will therefore be a deferred tax adjustment
instead. See proof
69
Proof 1. current tax calculation
Incorrect
Correct
200 000
200 000
0
10000
before tax
200000
190000
Add back depreciation
0
10000
Less wear and tear
(4000)
(4000)
Taxable profits
196000
196000
current income tax @ 30%
58800
58 800
Profit before depreciation (assumed)
Less depreciation
Profit
difference
The above calculation proves that the error did not affect current tax
70
IMMATERIAL ERRORS THAT OCCURRED IN A
PRIOR PERIOD/S
If in the current period you find an error that
was made in a prior period but which is
IMMATERIAL
 It should be corrected in the current period
 No disclosure would be required.
71
EXAMPLE:
A Vehicle was purchased for N$ 100 000 on 1 January 2016

In 2016, depreciation on the vehicle of N$ 10 000 was
recorded instead of N$ 25 000 but this was only discovered
during 2017 after the 2016 financial statements had been
published.

The error is considered immaterial

The tax authorities granted wear and tear allowance of N$
4000( correct) in 2016.

The income tax rate is 30%
Required:
Journalise the correction of this error.
72
SOLUTION
The essence is that the adjustment is not made in 2016 , its made
in the current year: 2017
Dr
Depreciation (25 -10)
Cr
15 000
Vehicles: Accumulated dep
15000
Correction of journal dated …….2016
Deferred taxation (15 000 X 0.3)
Income tax expense
4500
4500
Tax effects of reduced profits
Comment - The tax authorities ignore the accountants depreciation
when calculating taxable profits: The incorrect depreciation
thus has no effect on current tax payable and the tax adjustment
will therefore be a deferred tax adjustment instead
73
PROOF: CURRENT TAX CALCULATION
incorrect
correct
Profit before dep
200 000
200 000
Less depreciation
(10000)
(25 000)
Profit before tax
190 000
175 000
Add back dep
10000
25000
Less wear and tear
(4000)
(4000)
Taxable profits
196 000
196000
Current income tax @ 30% 58 800
58800
Note : Disclosure
No disclosure of this correction would be made in either year since the amounts
are immaterial
74
MATERIAL ERRORS THAT OCCURRED IN PRIOR
PERIODS
If, in current period , discovery is made of
a MATERIAL ERROR that has occurred in
PRIOR periods
 Corrections
should
be made to the
particular
period/s
in
which
the
error/errors were made
 Full disclosure of the error and the
effects of the corrections would be
required.
75
SUCH DISCOVERY IS SERIOUS BECAUSE
 WE HAVE TO LET USERS KNOW THAT WE
MADE A MISTAKE AND THE FINANCIALS
THEY HAVE ARE WRONG.
 OUR
CURRENT YEAR’S
FINANCIAL
STATEMENTS MUST ALSO SHOW RESTATED
COMPARATIVES( Retrospective corrections)
 AND
PROVIDE
NOTE
DISCLOSURES
ALERTING USERS ABOUT THE ERROR.
76
Correcting a material error is done
retrospectively in the same way we
account for change in accounting policy
and the difference is only in the way we
disclose the facts.
77
EXAMPLE - CORRECTION OF MATERIAL ERROR
Valentino Limited purchased a specialised machine
on 1 /01/2015 for N$ 1000 000. Valentino Limited
provides for
depreciation
on the
diminishing
balance method at 20%
The following
relates
to the
error made by
Valentinos Limited
 It processed depreciation of N$ 200 000 in both
2015 and 2016( 2 years) and N$ 120 000 in 2017
 The error was only picked up in 2017 after the
current period’s entries had been processed
 The income tax rate is30% and has not been
changed for many years
 The tax authorities allow the annual deduction of
20% of the cost of the asset
Required :
Provide the correcting journal entries for the current
year ended 31 December 2017
78
SOLUTION
Workings: Corrections required
2015
Dep- processed
2016
2017
200 000
200 000
120 000
200 000
160 000
128 000
0
(40 000)
8000
Correct dep
2013
1000000 X 0.2 =
2014
1000000- 200000 x0.2
2015
1000000- 360 000 x 0.2
Correction required
(Decrease) /increase in dep
79
JOURNALS
01/01/2017
Dr
Cr
Machines: Accum dep
40 000
Deferred taxation ( 40000 X0.3)
Retained earnings ( Balancing fig)
12 000
28 000
Correction of errors made in the previous year
31/12/2017
Depreciation
Accumulated dep
Deferred taxation
Tax expense
8 000
8000
2400
2400
Correction of error made in the current year(2017)
80
comment:
We adjust retained earnings for the error made in
the 2016 depreciation expense and to the resultant
error in 2016 tax expense because these accounts
have already been closed off to retained earnings
Since the error
involved depreciation and
depreciation does not affect the calculation of
taxable profits and current income tax, the knock –
on error to tax expense would have been a
deferred tax error
81
PRIOR PERIOD ADJUSTMENTS(RETROSPECTIVE
ADJUSTMENTS)

It is not possible to adjust the income
and expense
account of prior year
directly since these accounts
have
already been
closed off
to retained
earnings. Thus when we adjust a prior
year income or expense account,
we
must
process
the
adjustment
to
RETAINED EARNINGS instead.
82
The adjustment of an income or expense account
generally means that the tax income or expense in that
year will also need to be adjusted.
 if the income or expense is not taken into account in the
calculation of taxable profits/current tax ( e.g.
Depreciation) then the journal processing the resulting tax
adjustment would be a DEFERRED TAX Journal and not
a current tax journal.
 However if the income or expense is taken into account
in calculation of taxable profit/current tax( eg sales
revenue, then the effect of the tax would generally be a
CURRENT TAX journal.
 However of the tax authorities DO NOT reopen the
affected prior years tax assessment but decide that our
change to the prior income or expense will be processed
in a current or future years tax assessment, then our
resulting tax adjustment will be a DEFERRED TAX
Journal.

83
DISCLOSURES
 The nature of the prior period errors
 The extra year of comparatives in the SOFP
 The amount of the adjustment made to each line
item in the financial statements for the periods
presented
 The amounts of the adjustments made to all
periods before the periods that are presented.
 If prior period/s is not restated, the entity must
disclose:
- The reasons why it impracticable to restate
- a description as to how and from what date the
figures have been corrected.
84
E N D
85