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Unformatted text preview: Unit 8 Unit
Accounting Policies, Changes in Accounting Accounting Estimates and Errors (HKAS 8) (HKAS And Events After the Reporting Events Period (HKAS 10) Period HKAS 8 Accounting Policies, Changes in HKAS Accounting Estimates and Errors Accounting HKAS 8 Selection and application of accounting policies Changes in accounting policies Changes in accounting estimates Corrections of prior period errors To enhance reliability, relevance and To comparability of financial statements comparability
2 Objectives Accounting Policies Specific principles, bases, conventions, rules and Specific practices applied by an entity in preparing and presenting financial statements. presenting e.g. the selection of straight line method or reducing e.g. balance method in the calculation of depreciation. balance e.g. the selection of FIFO or weighted average cost e.g. formula in measuring inventories. formula An entity should select and apply its accounting An policies consistently for similar transactions, other events and conditions. events
3 Selection and Application of Selection Accounting Policies Accounting When there is specific accounting standard When applies to a transaction, an event or a condition, the accounting policy to be adopted to the transaction, event or condition should be disclosed in the notes to the financial statements and applied throughout the whole accounting process so as to ensure: accounting A true and fair view of the financial statements (ref. true HKAS 1) HKAS
4 Selection and Application of Selection Accounting Policies Accounting Where there is no specific accounting standard Where to follow, management should use its judgement in developing and applying an accounting policy that results in information that is: that Relevant to the economic decision-making needs Relevant of users; and of Reliable in that financial statements
5 Selection and Application of Selection Accounting Policies Accounting
In making the judgements, management In should should refer to: Requirements and guidance in standards and Requirements interpretations interpretations The definitions, recognition criteria and The measurement concepts for assets, liabilities, income and expenses set out in the Framework for the Preparation and Presentation of Financial Statements. 6 Change of Accounting Policy An entity should change an accounting policy under the following An circumstances: circumstances: Initial application of a standard or an interpretation Changes in accounting policy voluntarily to ensure reliable and Changes more relevant information about the effects of transactions are reflected in the financial statements reflected For applying changes in accounting policies: An entity should account for the change according to the specific An transitional provision that is included in the accounting standard. transitional When there is no such specific transitional provision or the When change of the accounting policy is on voluntary basis by the entity, then the entity need to account for the change restrospectively. restrospectively 7 7 Retrospective Application To apply a new accounting policy to To transactions, other events and conditions as if that policy had always been applied. that Should adjust the opening balance of the Should affected item presented as well as comparative information information Adjustment is usually made in retained Adjustment earnings earnings
8 Prospective Application To apply a new accounting policy to To transactions, other events and conditions occurring after the date as at which the policy is changed i.e the change in accounting policy is only applied for current and future periods. is HKAS 8 allows prospective adjustment if it is HKAS impracticable to determine the cumulative effect of the change of accounting policy. effect
9 Disclosures of Changes in Disclosures Accounting Policies Accounting Initial application of a standard or Initial interpretation interpretation Voluntary changes Future impact of a new standard or Future interpretation interpretation
10 10 Changes in Accounting Estimates The preparation of financial statements requires the The frequent use of estimates , and changes in accounting estimates in subsequent periods will be inevitable as a result of new information, more experience or new development. development. Examples of accounting estimates Examples doubtful debts, inventory obsolescence, assets doubtful useful lives, and warranty obligations, etc. useful
11 11 Changes in Accounting Estimates The change of estimate should be accounted for prospectively, The by including it in the profit and loss account in: by the period of change, if the change affects that period only; the and the period of change and future periods, if the change the affects both affects Comparative figures are not restated The entity should also disclose the nature and amount of the The change, as well as the effect of the change on the accounts of current and future periods current
12 12 Changes in Accounting Estimates Example: On 1 Jan 2003, an asset was purchased for $100,000, On straight line depreciation of 20% per annum (i.e. $20,000) was charged. $20,000) On 31 Dec 2005, following a review of this asset, it On was determined that its remaining useful life should be 7 years. be Financial statement for the year ended 31 December Financial 2005 is prepared. What should be the amount of depreciation charge for the year ? depreciation
13 13 Changes in Accounting Estimates Answer: The depreciation charge for the year of 2005 The should be: should NBV as at 1 Jan 2005 Remaining useful life at 1 Jan 2005 Depreciation charge for 2005 $ 60,000 8 years $ 7,500 14 14 Accounting for Prior Period Errors Accounting Prior period errors Prior omissions from, and misstatements in financial omissions statements for one or more prior periods, arising from a failure to use, or misuse of, reliable information information these errors are not discovered until a subsequent these period period can be in respect of recognition, measurement, can presentation or disclosure of elements of financial statement statement
15 15 Accounting for Prior Period Errors Accounting Retrospective restatement HKAS 8 requires correcting the recognition, HKAS measurement and disclosure of amounts of elements of financial statement as if a prior period error had never occurred. error
Restating the comparative amounts for the prior period Restating presented in which the error occurred; or presented If the error occurred before the earliest prior period If presented, restating the opening balance of assets, liabilities and equity for the earliest prior period presented presented 16 16 Accounting for Prior Period Errors Accounting Example: You are the newly appointed auditor for GH Ltd. for the year ended 31 December 20X7. It was discovered that the company’s revenue recognition policy had enabled premature profit to be recognised for the last eight years in order to inflate the profit figure. GH Ltd. presents five years’ financial statements. In this case, the GH Ltd. should restate the opening balances of assets, liabilities and equity for the earliest period presented and the adjustments thereafter. Accounting for Prior Period Errors Accounting Where it is impracticable to determine the cumulative effect of Where an error for all prior periods, prospective correction is allowed. an Disclosure:
The nature of the prior period error For the prior period presented, the amount of correction for For each affected item in the financial statements each The amount of correction at the beginning of the earliest prior The period presented period Give explanation if retrospective restatement is impracticable
18 18 Comprehensive example on respective restatement of prior period errors from the Guidance on Implementing HKAS 8 Reference AFA: Chapter 5 – pp.76-86 HKAS 8 20 20 Events After the Reporting Period Events HKAS 10 What are events after the reporting period (i.e. events What after the balance sheet date) ? after What are “adjusting events after the reporting What period” ? period” What are “non-adjusting events after the reporting What period” ? period” Accounting treatments of adjusting and non-adjusting Accounting events ? events Dividends Going concern 21 21 Disclosure Events After the Reporting Period Events HKAS 10 Definition Events after the reporting period are those events, Events both favorable and unfavorable, that occur between the balance sheet date and the date when the financial statements are authorised for issue. The date when the financial statements are The authorised for issue would normally refer to the date on which the board of directors / management authorise the issue of the financial statements. 22 22 Adjusting Events After the Adjusting Reporting period Reporting Adjusting events are events, both favorable and Adjusting unfavorable, that provide additional evidence of conditions or information that existed at the balance sheet date. A company should adjust the amounts recognised in its company financial statements to reflect adjusting events after the balance sheet date. balance Reasons: As these additional events existed at balance sheet date, As in other words, that means they relate to the financial year under review, therefore they should be reflected in the financial statement. the
23 23 Adjusting Events After the Adjusting Reporting period Reporting Examples The bankruptcy of a customer which occurs The after the balance sheet date. after The sale of inventories at below cost after the The balance sheet date. balance The discovery of fraud or errors that show that The the financial statements were incorrect. the
24 24 Non-adjusting Events After the Non-adjusting Reporting Period Reporting Non-adjusting events are those indicative of Non-adjusting conditions that arose after the balance sheet date. ( i.e. conditions belong to next accounting period) An enterprise should not adjust the financial An statement to reflect non-adjusting events after the balance sheet date. However, they should be disclosed in the notes to financial statements if the events are material. events
25 25 Non-adjusting Events After the Non-adjusting Reporting Period Reporting Examples: Decline in market value of investments between the balance sheet date and the date when the financial statements are authorised for issue, but the fall in market value does not relate to the condition of the investments at the balance sheet date, but reflects circumstances that have arisen in the following period. E.g. Civil war broke out in country B after company A’s financial year end date. The incidence results in substantial decline in the value of company A ‘s investment in country B. 26 26 Non-adjusting Events After the Non-adjusting Reporting Period Reporting Other examples: A major business combination after the balance sheet date Announcing a plan to discontinue an operation, disposing Announcing of assets or settling liabilities of Destruction of a major production plant by a fire after the Destruction balance sheet date balance Announcing, or commencing the implementation of a Announcing, major restructuring major Major share transaction Changes in tax rates or tax law Entering into significant commitment Commencing major litigation 27 27 Events After the Reporting Period Events HKAS 10
Events after the balance sheet date Events
B/S date F/S are authorised for issue Adjusting events after the balance sheet date Non-adjusting events after the balance sheet date Require adjustments Financial statements If relevant, disclosure in financial statements
28 28 Dividends If dividends to shareholders are proposed or declared If after the balance sheet date, an enterprise should not recognise those dividends as a liability at the balance sheet date. This is because they do not meet the criteria of a present obligation in HKAS 37. e.g. if company AB declare final dividend for e.g. financial year of 31.12.2005 on 20.2.2006, then company AB should not recognise the proposed dividend as a liability in the financial statement of 31.12.2005. In accordance with HKAS 1, an entity is required to disclose such dividends in the notes. required
29 29 Going Concern An enterprise should not prepare its financial An statements on a going concern basis if management determines after the balance sheet date either that it intends to liquidate the enterprise or to cease trading, or that it has no realistic alternative but to do so. Under this condition, a fundamental change in the Under basis of accounting is required. i.e. from going concern basis to liquidation basis (break up basis). concern Also the company needs to disclose that the financial Also statements are not prepared on a going concern basis.
30 30 Going Concern Example of converting valuation of assets and Example liabilities from going concern to liquidation basis (break-up basis) basis Fixed asset: from NBV to net realisation value Liabilities: from historical cost to settlement value Liabilities: (actual amount you need to pay to settle the liabilities e.g. changes in foreign currency rate etc.) liabilities
31 31 Disclosure Date of authorization for issue: An enterprise should disclose: the date when the financial statements were the authorized for issue; and authorized who gave that authorization. who It is important for the users to know when the It financial statements were authorised for issue, as the financial statements do not reflect events after this date. this
32 32 Disclosure Non-adjusting events after the balance sheet date: Where non-adjusting events after the balance sheet Where date are of such importance that non-disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions, an enterprise should disclose the decisions an following information for each category of nonfollowing adjusting events:
The nature of the event; and An estimate of its financial effect, or a statement that An such an estimate cannot be made. such 33 33 Example Between the balance sheet date and the date on which Between the accounts are authorized for issue, the accountant discovered the followings that are not yet reflected in the financial statement: the Situation 1: $1m was stolen from the company’s bank Situation account before the financial year end account Situation 2: Another $1m was stolen from the company’s Situation bank account after the financial year end bank How should the above items be dealt with in financial How statements? statements? Show journal entries where adjustments are required.
34 34 Example Example Situation 1: an adjusting event Provision for loss in theft (P/L) Bank $1m $1m Situation 2: a non-adjusting event Disclose the event in the notes to financial statements. Readings AFA: Chapter 5, pp.86-89 Reference: HKAS 10 36 36 ...
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