CAF-01 Accounting policies, changes in accounting estimates and errors (IAS-8)
Lecture 1 (IAS-08) Lecture 78 (Overall)
Question-1 (Page 502 in Chapter 9 of Volume 2)
During 2003, 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 capitalized 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 capitalize the costs from years beginning on or after 2004, or before this date, if preferred. This
entity choose to capitalize the borrowing costs from the earliest date possible. The plant is not yet
available for use. The effect of this change is as follows:
2001 2002 2003
Interest expense Rs. Rs. Rs.
Old policy 15,000 17,000 9,000
New policy 0 0 0
The following drafts were produced before adjusting for the change in accounting policy:
Draft statement of comprehensive income 2003 2002
For the year ended 31st December 2003 (Extracts) Rs. Rs.
Profit 455,000 380,000
Draft statement of financial position 2003 2002 2001
For the year ended 31st December 2003 (Extracts) Rs. Rs. Rs.
Assets
Plant 500,000 450,000 300,000
Equity
Retained earnings 955,000 500,000 120,000
The construction of the plant is not yet complete.
Required:
Prepare relevant extracts (including comparative figures) for the year ended 31 December 2003
related to the following:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
(d) Change in Accounting Policy note
(e) Pass the journal entries
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CAF-01 Accounting policies, changes in accounting estimates and errors (IAS-8)
Question-1 (Page 526 in Chapter 9 of Volume 2)
Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery. Following are
the draft extracts of the statement of financial position and the statement of comprehensive income
for the year ended 30 June 2015:
Statement of Financial Position 2015 2014
Rs. m Rs. m
Property, plant and equipment 189 130
Retained earnings 198 108
Statement of profit or loss 2015 2014
Rs. m Rs. m
Profit for the year 90 78
Following additional information has not been taken into account in the preparation of the above
financial statements:
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the machinery account
on 1 October 2013. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2014, WL reviewed the estimated useful life of its plant and revised it from 5 years
to
8 years. The plant was purchased on 1 July 2013 at a cost of Rs. 70 million.
Depreciation is provided under the straight line method.
Required
1. Prepare relevant extracts (including comparative figures) for the year ended 30 June 2015
related to the following:
a) Statement of financial position
b) Statement of profit or loss
c) Statement of changes in equity
2. Prepare the following notes to the financial statements for the year ended 30 June 2015:
a) Change in accounting estimate
b) Correction of error (ICAP Example-10)
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CAF-01 Accounting policies, changes in accounting estimates and errors (IAS-8)
Question-5 (Page 528 in Chapter 9 of Volume 2)
Following information has been extracted from the draft financial statements of Marvellous Limited
(ML) for the year ended 30 June 2017:
2017 2016
Rs. in million
Statement of financial position
Property, plant and equipment 700 612
Retained earnings 275 240
Statement of profit or loss
Profit for the year 65 85
The following matters are under consideration of the management:
(i) It was identified that ML’s had incorrectly charged Rs. 36.75 million as maintenance expense,
incurred on installation of the plant. The plant was available for use on 1 July 2014 and had
been depreciated on straight line basis over a useful life of four years.
(ii) In view of significant change in the expected pattern of economic benefits from an item of the
equipment, it has been decided to change the depreciation method from reducing balance to
straight line. The equipment was purchased on 1 July 2015 at a cost of Rs. 80 million having
estimated useful life of 5 years and residual value of Rs. 16 million. The depreciation at the rate
of 27.5% on reducing balance method is included in the above draft financial statements.
The following balances pertain to ML’s statement of financial position as on 30 June 2015:
Rs. in million
Property, plant and equipment 650
Retained earnings 180
Ignore tax.
Required:
Prepare the extracts (including comparative amounts) of:
1. Statement of financial position of ML as at 30 June 2017.
2. Statement of profit or loss of ML for the year ended 30 June 2017.
3. Statement of changes in equity (retained earnings column) of ML for the year ended 30 June 2017.
4. Prepare the following notes to the financial statements for the year ended 30 June 2017:
a) Correction of error
b) Change in accounting estimate (ICAP Example-7&8)
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CAF-01 Accounting policies, changes in accounting estimates and errors (IAS-8)
Question-2 (Page 514 in Chapter 9 of Volume 2)
For the purpose of preparation of statement of changes in equity for the year ended 31 December
2017, Daffodil Limited (DL) has extracted the following information:
2017 2016 2015
Draft Audited Audited
--------Rs. in million--------
Net profit 650 318 214
Transfer to general reserves 112 - 141
Transfer of incremental depreciation - 49 55
-
Final cash dividend - 7.5%
Additional information:
(i) Details of share issues:
• 25% right shares were issued on 1 May 2016 at Rs. 18 per share.
• A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
• 50 million right shares were issued on 1 July 2017 at Rs. 15 per- share.
• A bonus issue of 15% was made on 1 September 2017 as interim dividend.
(ii) After preparing draft financial statements, it was discovered that depreciation on a plant costing
Rs. 700 million has been charged @ 25% under reducing balance method, from the date of
commencement of manufacturing i.e. 1 July 2014. However-, the plant was available for use on
1 February 2014.
(iii) Share capital and reserves as at 31 December:
2015 2014
-----Rs. in million-----
Ordinary share capital (Rs. 10 each) 1,600 1,600
General reserves 1,850 1,709
Retained earnings 1,430 1,302
Revaluation surplus 49 104
Required:
Prepare DL:s statement of changes in equity for the year ended 31 December 2017 along with
comparative figures. The column for total is not required. (14)
{Spring 2018, Q#1}
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