Financial Reporting

IAS - 8: Accounting Policies –

Changes in Accounting Estimates and Errors

October 06, 2024

Agenda
Overview of the Legal Framework for Financial Statements
in Pakistan & International Standard
01 02 03
Assessment of Last Lesson IAS 8: Accounting Policies, Changes IAS 8: Original Text
in Accounting Estimates & Errors
IAS 7: Statement of Cash Flow Key concepts of IAS 8 Skim Through Original Text of IAS 8
- Class Quiz & Assignment − Definition, In alignment with FS of Indus Motor
− Principle Company Limited (IMCL)
− Reporting Disclosure

04 05 06
IAS 8: Practice Assessment & Assignment Q&A
Practice Questions Assessment of Class Assignment On
- Understanding of policies, estimates Cash Flows
& errors,
- Practice: Accounting policy, Assignment:
- Practice: Estimates, and − IAS 7
- Practice: Errors − 4th Schedule wrt Cash Flow
− Financial Statement of IMCL
 Class Assessment
IAS 7: Statement of Cash Flow
Duration: 30 minutes
Marks: 20 mark
IAS-7: Statement of Cash Flow (Effective: January 01, 1994)
Components
Operating activities Investing activities Financing activities
Main revenue producing activities of the entity and other activities Activities that relate to the acquisition and disposal of Activities that cause changes to contributed equity and
that are not investing or financing activities (including taxes long-term assets and other investments that are not borrowings of an entity
paid/received, unless clearly attributable to investing or financing included in cash equivalents.
activities).

Received or paid interest and dividends are disclosed separately and can be classified as operating, investing or financing, based on their nature and as long as they are
consistently treated from period to period.

Reporting CASH FLOWS from Operating Activities DEFINITION: Cash & Cash Equivalents

Cash flows from operating activities can be reported using − Short term (where the original maturity is 3 months or less, irrespective of maturity timing post
the direct or indirect method. balance date)
− Highly liquid investments
− Readily convertible to known amounts of cash
− Subject to insignificant risk of changes in value
Direct Method In-direct Method Consideration to note
− Non-cash investing and financing activities must be disclosed − Disclose the components of cash and cash equivalents
− Cash received from The net cash flow from operating separately and provide a reconciliation back to the statement of
customers activities is determined by − Cash flows must be reported gross. Set-off is only permitted in financial position amount if required.
− Cash paid to suppliers adjusting profit or loss for the very limited cases and additional disclosures are required − Disclose information about supplier finance arrangements
− Cash paid to employees effects of: (refer to IAS 7.24 for examples relating to term deposits and for users to assess the effects on the entity’s liabilities,
− Cash paid for operating − Changes during the period in loans) cashflows, and on entity’s exposure to liquidity risk.
− Foreign exchange transactions should be recorded at the rate − Non-cash investing and financing transactions are not
expenses inventories and operating at the date of the cash flow included in the statement of cash flows and should be
− Interest paid receivables and payables − Acquisition and disposal of subsidiaries are investment disclosed elsewhere in the financial statements.
− Taxes paid − Non-cash items such as activities and specific additional disclosures are required − Disclose changes in liabilities arising from financing
− Dividends paid depreciation, provisions, − Where the equity method is used for joint ventures and activities, distinguishing between changes from:
associates, the statement of cash flows should only show cash − financing cash flows;
− Net cash from operating deferred taxes, unrealized flows between the investor and investee − obtaining or losing control of subsidiaries and
activities foreign currency gains and − Disclose cash not available for use by the group other businesses;
losses, and undistributed profits − Assets and liabilities denominated in a foreign currency − the effect of changes in foreign exchange;
of associates generally include an element of unrealized exchange − fair value movements; and
difference at the reporting date − other changes.
− All other items for which the
− Cash payments made by lessees for the reduction of
cash effects are investing or lease liability are financing activities
financing cash flows
 IAS-8: Accounting Policies, Changes in Accounting Estimates and Errors
(Effective: January 01, 2005)

ACCOUNTING POLICIES ACCOUNTING ESTIMATES ERRORS

Accounting policies are the specific principles, bases, conventions, rules and Accounting estimates are monetary amounts in financial Prior period errors are omissions from, and misstatements in, an
practices applied by an entity in preparing and presenting financial statements statements that are subject to measurement uncertainty entity’s financial statement for one or more prior periods arising
from failure to use/misuse of reliable information that:
− Was available when the financial statements for that period
Selection and application of accounting Only change a policy if: Change in accounting estimate were issued
policies: − Standard/interpretation requires it, An entity may need to change an accounting estimate if − Could have been reasonably expected to be taken into account
− If a standard or interpretation deals or changes occur in the circumstances on which the accounting in those financial statements.
with a transaction, use that standard or − Change will provide more relevant estimate was based or as a result of − Errors include:
interpretation and reliable information − new information, • Mathematical mistakes
− If no standard or interpretation deals − new developments or • Mistakes in applying accounting policies
with a transaction, judgment should be Principle − more experience • Oversights and misinterpretation of facts
applied. The following sources should − If change is due to new • Fraud
be referred to, to make the judgement: standard / interpretation,
• Requirements and guidance in other
standards/interpretations dealing apply transitional provisions. Principle
with similar issues − If no transitional provisions, Recognise the change prospectively in profit or loss in:
• Definitions, recognition criteria in apply retrospectively. − Period of change, if it only affects that period; or Principle
the framework − Period of change and future periods (if applicable) − Correct all errors retrospectively
• May use other GAAP that use a If impractical to determine − Restate the comparative amounts for prior periods in which
similar conceptual framework Disclosure
period-specific effects or error occurred or if the error occurred before that date restate
and/or may consult other industry − Nature and amount of change that has an opening balance of asse
cumulative effects of the
practice / accounting literature that effect in the current period (or expected to
change, then retrospectively If impractical to determine period-specific effects of the error (or
is not in conflict with standards / have in future)
interpretations apply to the earliest period cumulative effects of the error), restate opening balances (restate
− Fact that the effect of future periods is not
that is practicable.. comparative information) for earliest period practicable.
Consistency of accounting policies: Policies disclosed because of impracticality
should be consistent for similar Disclosure
transactions, events or conditions. − Nature of the prior period error
− For each prior period presented, if practicable, disclose the
Disclosure correction to:
− The title of the standard / interpretation that caused the change  Each line item affected
− Nature of the change in policy  Earnings per share (EPS).
− Description of the transitional provisions − Amount of the correction at the beginning of earliest period
presented
− For the current period and each prior period presented, the amount of the − If retrospective application is impracticable, explain and
Original Text IAS:8 adjustment to: describe how the error was corrected
 Each line item affected − Subsequent periods need not to repeat these disclosures
 Earnings per share.
− Amount of the adjustment relating to prior periods not presented
Adobe Acrobat − If retrospective application is impracticable, explain and describe how the
Document change in policy was applied
− Subsequent periods need not repeat these disclosures.
Identify below are
(A) Changes in Accounting Policies,
(B) Accounting Estimates or
(C) Errors
While preparing financial statements of Bilal Limited (BL), you noted the following points:
a) BL changed its accounting for land and buildings from cost model to revaluation model.
b) The useful life of plant was revised downwards following impairment loss.
c) The depreciation method for depreciating furniture was changed from straight line
method to reducing balance method.
d) The cost formula used for valuation of inventories was changed from FIFO to weighted
average.
e) It was discovered that last year company’s inventory sheets were under-casted.
f) It was discovered that actual NRV of inventory was much lower than expected .
Identify below are
(A) Changes in Accounting Policies,
(B) Accounting Estimates or
(C) Errors
While preparing financial statements of Bilal Limited (BL), you noted the following points:
a) BL changed its accounting for land and buildings from cost model to revaluation model. [Change
in Accounting Policy]
b) The useful life of plant was revised downwards following impairment loss. [Change in
Accounting Estimate]
c) The depreciation method for depreciating furniture was changed from straight line method to
reducing balance method. [Change in Accounting Estimate]
d) The cost formula used for valuation of inventories was changed from FIFO to weighted average.
[Change in Accounting Policy]
e) It was discovered that last year company’s inventory sheets were under-casted. [Prior Period
Error]
f) It was discovered that actual NRV of inventory was much lower than expected. [Change in
Accounting Estimate]
 IAS-8: Changes in Accounting Policy
G Ltd adopted IFRSs from the beginning of year 2012.
G Ltd, therefore changed its accounting policy for the treatment of borrowing costs that are directly attributable to the acquisition of a hydroelectric power station under
construction for use by G Ltd. In previous periods, G Ltd had charged such costs as an expense. G Ltd has now decided to capitalize these costs, rather than treating them
as an expense effective adoption of IAS 23: Capitalization of Borrowing Cost.
G Ltd expensed borrowing costs directly related to construction of qualifying asset incurred of $2,600 during 2011 and $5,000 in 2010 and $4,000 in 2009. G Limited
accounting records for 2012 show profit before tax of $27,000 (after deducting $3,000 borrowing costs relating to qualifying assets). The income tax is $8,100. G Ltd has not
yet recognized any depreciation on the power station because it is not yet in use.
In 2011, G Limited reported:
Particulars Amount ($)
Profit before interest & tax 20,600
Interest Expense (all on qualifying assets) (2,600)
Profit before tax 18,000
Tax (5,400)
Profit 12,600

Year 2011 reported retained earnings was $20,000 and closing retained earnings was $32,600. G Ltd.’s tax rate was 30% for 2012, 2011 and prior periods. G Ltd had
$10,000 of share capital throughout, and no other components of equity except for retained earnings.
Required: Relevant extracts of financial statements.
IAS-8: Changes in Accounting Policy
G Ltd – Statement of profit or loss and other comprehensive income (extracts)
Particulars 2012 2011
Profit before interest & tax (27k + 3k = 30k) 30,000 20,600
Interest - -
Profit before Tax 30,000 20,600
Tax @ 30% (9,000) (6,180)
Profit After Tax 21,000 14,420

G Ltd – Statement of Changes in equity

Particulars Share Capital Restated Retained Earnings Total
Balance as on January 1, 2011 (previously reported) 10,000 20,000 30,000
Change in accounting policy (net of tax @ 30%) - 6,300 6,300
Balance as on January 1, 2011 (Restated) 10,000 26,300 36,300
Profit for the year ended 2011 - 14,420 14,420
Balance as on December 31, 2011 10,000 40,720 50,720
Profit for the year ended December 31,2012 - 21,000 21,000
Balance as on December 31, 2012 10,000 61,720 71,720
 IAS-8: Changes in Accounting Estimate
1. Ibmeed Textile Limited (ITL) purchased a plant on January 01, 2011, for $ 1,120,000.

2. At this date the useful life of the asset was estimated at 10 years after which it can be sold for $ 120,000.

3. However, during 2013 ITL estimates the remaining useful life of this plant as 6 years and expects to fetch residual value of $ 170,000.

4. ITL uses straight line method for depreciating such plants.

Required: Calculate the amount of depreciation from year 2011 to 2018.

Per year depreciation $ Year 1 and 2 ($ 1,120,000 – 120,000) / 10 years $ 100,000

Year 3 to 8 (($ 1,120,000 – (100,000 x 2 years dep.)) – 170,000) / 6 years $ 125,000

 IAS-8: Errors
During 2012, Beta Co discovered that some products that had been sold during 2011, were incorrectly included in inventory on 31 December 2011 at $6,500.
Beta’s accounting records for 2012 show sales of $104,000; cost of goods sold of $86,500 (including $6,500 for the error in opening inventory); and Income taxes of $5,250.
In 2011, Beta reported:
Particulars Amount ($)
Sales 73,500
Cost of goods sold (53,500)
Profit before income tax 20,000
Income Tax (6,0000)
Profit 14,000

Year 2011 reported retained earnings was $20,000 and closing retained earnings was $34,000.
Beta’s income tax rate was 30% for 2012 and 2011.
It had no other income or expenses.
Beta had $5,000 of share capital throughout, and on other components of equity except for retained earnings.

Required: Relevant extracts of financial statements.

IAS-8: Errors
Beta & Co – Statement of profit or loss and other comprehensive income (extracts)
Particulars 2012 2011 (restated)
Sales 104,000 73,500
Cost of Goods Sold (80,000) (60,000)
Profit before Tax 24,000 13,500
Tax @ 30% (7,200) (4,050)
Profit After Tax 16,800 9,450

Beta & Co – Statement of Changes in equity

Particulars Share Capital Restated Retained Earnings Total
Balance as on January 1, 2011 5,000 20,000 25,000
Profit for the year ended December 31, 2011 - 9,450 9,450
Balance as on December 31, 2011 5,000 29,450 34,450
Profit for the year ended 2012 - 16,800 16,800
Balance as on December 31, 2012 5,000 46,250 51,250
Examples of Reported Errors
There are many examples of where errors can have a very significant effect on the financial
statements of a business like:
• Uber (taxi services in the UK): Between 2015 and 2017, the company had taken its 25%
commission from the total income of its drivers rather than after tax and other fees had been
deducted. The effect on profit of refunding those drivers reduced the company profit by $45–50
million.
• Valeant Pharmaceuticals: This multinational company based in Canada over added is revenue by
$58 million in 2015– 16, and although this amount was a small proportion to its turnover, it was
sufficient to result in an investigation by the 389 390 accounting authorities who concluded that this
had been happening for a number of years. Share prices fell by 86% in 2016 and the company was
later taken over by Bausch Health Companies Inc.
• Tesco (the largest UK supermarket): In 2017, a series of inaccurate reporting involving inventory
valuation, amounts paid to suppliers and turnover resulted in profits being over added by £250
million. This resulted in three directors standing trial for fraud and a total of over £200 million
having to be paid in compensation to investors or fines. On 22 September 2017, when the news of
the problem was made public, the fall in share prices exceeded a total value of £2 billion
Q&A Session