2009

IASC Foundation: Training Material for the IFRS for SMEs

Module 10
Accounting Policies,
Estimates and Errors

IASC Foundation: Training Material

for the IFRS for SMEs
including the full text of
Section 10 Accounting Policies, Estimates and Errors
of the International Financial Reporting Standard (IFRS)
for Small and Medium-sized Entities (SMEs)
issued by the International Accounting Standards Board on 9 July 2009
with extensive explanations, self-assessment questions and case studies

International Accounting Standards Committee Foundation

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United Kingdom
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Email:[email protected]
Publications Telephone: +44 (0)20 7332 2730
Publications Fax: +44 (0)20 7332 2749
Publications Email: [email protected]
Web: www.iasb.org

International Accounting Standards Committee Foundation

30 Cannon Street | London EC4M 6XH | United Kingdom
Telephone: +44 (0)20 7246 6410 | Fax: +44 (0)20 7246 6411 | Email: [email protected]
Publications Telephone: +44 (0)20 7332 2730 | Publications Fax: +44 (0)20 7332 2749
Publications Email: [email protected] | Web: www.iasb.org
Copyright 2010 IASCF
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Contents
INTRODUCTION __________________________________________________________
Learning objectives ________________________________________________________
IFRS for SMEs ____________________________________________________________
Introduction to the requirements_______________________________________________

1
1
2
2

REQUIREMENTS AND EXAMPLES ___________________________________________ 4

Scope of this Section _______________________________________________________ 4
Selection and application of accounting policies __________________________________ 4
Consistency of accounting policies ____________________________________________ 7
Changes in accounting policies _______________________________________________ 9
Changes in accounting estimates ____________________________________________ 17
Corrections of prior period errors _____________________________________________ 20
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 26
COMPARISON WITH FULL IFRSs ___________________________________________ 29
TEST YOUR KNOWLEDGE ________________________________________________ 30
APPLY YOUR KNOWLEDGE _______________________________________________
Case study 1 ____________________________________________________________
Answer to case study 1 ____________________________________________________
Case study 2 ____________________________________________________________
Answer to case study 2 ____________________________________________________

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Module 10 Accounting Policies, Estimates and

Errors
This training material has been prepared by IASC Foundation education staff and has
not been approved by the International Accounting Standards Board (IASB). The accounting
requirements applicable to small and medium-sized entities (SMEs) are set out in the
International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB
in July 2009.

INTRODUCTION
This module focuses on the accounting and reporting of accounting policies, estimates and
errors in accordance with Section 10 Accounting Policies, Estimates and Errors of the IFRS for SMEs.
It introduces the learner to the subject, guides the learner through the official text, develops
the learners understanding of the requirements through the use of examples and indicates
significant judgements that are required in applying Section 10. Furthermore, the module
includes questions designed to test the learners knowledge of the requirements and case
studies to develop the learners ability to account for changes in accounting policies, changes
in accounting estimates and the correction of prior period errors in accordance with the
IFRS for SMEs.

Learning objectives
Upon successful completion of this module you should know the financial reporting
requirements for accounting policies, estimates and errors in accordance with the
IFRS for SMEs. Furthermore, through the completion of case studies that simulate aspects of
the real world application of that knowledge, you should have enhanced your ability to
account for accounting policies, estimates and errors in accordance with the IFRS for SMEs.
In particular you should, in the context of the IFRS for SMEs, be able:

to distinguish between the following: a change in accounting estimate, the correction of a

prior period error and a change in accounting policy

to develop an accounting policy for a transaction, other event or condition not specifically
addressed in the IFRS for SMEs

to disclose accounting policies and account for and disclose a change in accounting policy
in financial statements (including demonstrating an understanding of the adjustments
required under retrospective application and prospective application of an accounting
policy)

to account for and disclose a change in accounting estimate in financial statements

to account for and disclose the correction of a prior period error in financial statements

to demonstrate an understanding of the significant judgements that are required in

making estimates and in determining and applying accounting policies.

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IFRS for SMEs
The IFRS for SMEs is intended to apply to the general purpose financial statements of entities
that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs includes mandatory requirements and other material (non-mandatory) that is
published with it.
The material that is not mandatory includes:

a preface, which provides a general introduction to the IFRS for SMEs and explains its
purpose, structure and authority.

implementation guidance that includes illustrative financial statements and a disclosure

checklist.

the Basis for Conclusions, which summarises the IASBs main considerations in reaching
its conclusions in the IFRS for SMEs.

the dissenting opinion of an IASB member who did not agree with the publication of the
IFRS for SMEs.

In the IFRS for SMEs the Glossary is part of the mandatory requirements.
In the IFRS for SMEs there are appendices in Section 21 Provisions and Contingencies, Section 22
Liabilities and Equity and Section 23 Revenue. Those appendices are non-mandatory guidance.

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to
provide information about the entitys financial position, performance and cash flows that is
useful for economic decision-making by a broad range of users who are not in a position to
demand reports tailored to meet their particular information needs. The objective of
Section 10 is to prescribe the criteria for selecting and changing accounting policies, together
with the accounting treatment and disclosure of changes in accounting policies, changes in
accounting estimates and corrections of prior period errors.
Accounting policies are the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.
Once an entity has adopted an accounting policy for a specific type of transaction, other event
or condition, it should change that policy only if the IFRS for SMEs is amended or the entity
concludes that a new policy results in reliable and more relevant information.
Except in circumstances specified in the IFRS for SMEs, all changes in accounting policies and
corrections of prior period errors are accounted for retrospectively. This means that
comparative information in financial statements is restated to reflect transactions and events
in accordance with the new accounting policy as if that policy had always been applied, and
that prior period errors are corrected in the period in which they occurred. Retrospective
application of accounting policies and retrospective restatement of prior period errors
enhances the relevance and reliability of an entitys financial statements by making them
comparable over time and with the financial statements of other entities.
Prior period errors are omissions from, and misstatements in, the entitys financial statements
for one or more prior periods. They arise from a failure to use reliable information that was
available when financial statements for those periods were authorised for issue, provided that
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such information could reasonably be expected to have been obtained and used in the
preparation and presentation of those financial statements. They also arise from the misuse of
such information.
A change in accounting estimate is an adjustment that results from assessing the present
status of, and expected future benefits and obligations associated with, assets and liabilities.
The adjustment may be to the carrying amount of an asset or a liability, or the expense that
reflects the consumption of the asset. Changes in accounting estimates result from new
information or new developments and, accordingly, are not corrections of errors.
Changes in accounting estimates are, except in clearly defined circumstances, applied
prospectively. This means that the effect of a change is included in profit or loss in the period
of the change, if the change affects that period only, and in the period of the change and
future periods if the change affects both.
Disclosure requirements for accounting policies and information about key sources of
estimation uncertainty are set out in Section 8 Notes to the Financial Statements (see
paragraphs 8.58.7). Disclosure requirements for changes in accounting policies are set out in
Section 10.

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REQUIREMENTS AND EXAMPLES

The contents of Section 10 Accounting Policies, Estimates and Errors of the IFRS for SMEs are set out
below and shaded grey. Terms defined in the Glossary of the IFRS for SMEs are also part of the
requirements. They are in bold type the first time they appear in the text of Section 10.
The notes and examples inserted by the IASC Foundation education staff are not shaded.
Other annotations inserted by the IASC Foundation staff are presented within square brackets
in bold italics. The insertions made by the staff do not form part of the IFRS for SMEs and have
not been approved by the IASB.

Scope of this section

10.1

This section provides guidance for selecting and applying the accounting policies used
in preparing financial statements. It also covers changes in accounting estimates
and corrections of errors in prior period financial statements.

Selection and application of accounting policies

10.2

Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.

10.3

If this IFRS specifically addresses a transaction, other event or condition, an entity shall
apply this IFRS. However, the entity need not follow a requirement in this IFRS if the
effect of doing so would not be material.

Notes
Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions of users made on the basis of the financial
statements. Materiality depends on the size and nature of the omission or misstatement
judged in the surrounding circumstances. The size or nature of the item, or a
combination of both, is the determining factor (see paragraph 3.16).
Users are assumed to have a reasonable knowledge of business and economic activities
and accounting and a willingness to study the information with reasonable diligence
(see paragraph 2.4). The providers of risk capital (an important user group) are
concerned with the risk inherent in, and return provided by, their investments.
They need information to help them determine whether they should buy, hold or sell.
Shareholders are also interested in information that enables them to assess the entitys
ability to pay dividends. Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions of such users made on the
basis of the financial statements (see paragraph 2.6).
The definition of material implies that an entity need not provide a specific disclosure
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required by this IFRS if the information is not material. Moreover, an entity need not
apply its accounting policies when the effect of not applying them is immaterial.

Examples IFRS for SMEs addresses a transaction, event or condition

Ex 1

Contrary to the requirements of Section 20 Leases, a manufacturing entity does not

capitalise finance leases that it enters into as a lessee. The entity accounts for all
leases (ie operating leases and finance leases) in accordance with the requirements
of paragraphs 20.15 and 20.16 (ie the requirements for operating leases). The only
finance lease that the entity has ever entered into is for the use of a photocopying
machine with a fair value of CU1,000 (1) at the inception of the lease (in 20X8 the
current reporting period). At the end of the current reporting period, the carrying
amount of the entitys property, plant and equipment exceeds CU90,000,000 and its
liabilities exceed CU40,000,000. For the year ended 31 December 20X8, the entity
reported profit of CU30,000,000.
The effect of not capitalising the finance lease is probably not materialit is highly
unlikely that an error of this magnitude could influence the economic decisions of users
made on the basis of the financial statements. Whilst the effect of the entitys
accounting policy for finance leases is not material, the entity need not capitalise the
finance lease.

Ex 2

Contrary to the requirements of Section 20 Leases an executive jet operator does not
capitalise finance leases that it enters into as a lessee. The entity sole business is
operating two executive jet airplanes, both of which it leases under a finance lease.
The entity accounts for all leases (ie operating leases and finance leases) in
accordance with the requirements of paragraphs 20.15 and 20.16 (ie the
requirements for operating leases).
The effect of not capitalising finance leases could influence the economic decisions of
users made on the basis of the financial statements. Therefore, the entity must adopt an
accounting policy of capitalising finance leases in accordance with the requirements of
Section 20.

Ex 3

The facts are the same as in example 1. However, in this example, the entity also
enters into many other individually immaterial finance leases.
The effect of not capitalising finance leases must be assessed on a collective basisif
when considered collectively, they could influence the economic decisions of users made
on the basis of the financial statements, then the effect is material and the entity must
adopt an accounting policy of capitalising finance leases in accordance with the
requirements of Section 20.
However, if it is highly unlikely that the collective effect of not capitalising the finance
leases could influence the economic decisions of users made on the basis of the financial
statements, then the entity need not follow an accounting policy of capitalising finance
lease.

(1)

In this example, and in all other examples in this module, monetary amounts are denominated in currency units (CU).

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Ex 4

To lease an item of factory equipment, a lessee used the services of an agency to

find a suitable lessor. The lease is a finance lease. The IFRS for SMEs does not
specifically mention agency fees on leases. However, it does discuss initial direct
costs that the lessee incurs.
The entitys home country, which has a conceptual framework that it regards as
similar to the IASBs, requires such agency fees to be recognised as an expense
immediately.
May the entity look to its national accounting standard in developing its accounting policy?
No. The agency fees are a type of initial direct costs of the lessee (incremental costs that
are directly attributable to negotiating and arranging a lease). Paragraph 20.9 requires
any initial direct costs to be added to the amount recognised as an asset. Unless the
effect of following the entity's national standard is immaterial, it conflicts with the
requirements of paragraph 10.3.

10.4

If this IFRS does not specifically address a transaction, other event or condition, an
entitys management shall use its judgement in developing and applying an accounting
policy that results in information that is:
(a) relevant to the economic decision-making needs of users, [Refer: paragraph 2.5] and
(b) reliable [Refer: paragraph 2.7], in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows
of the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and
not merely the legal form; [Refer: paragraph 2.8]
(iii) are neutral, ie free from bias;
(iv) are prudent; [Refer: paragraph 2.9] and
(v) are complete [Refer: paragraph 2.10] in all material [Refer: paragraph 2.3] respects.

10.5

In making the judgement described in paragraph 10.4, management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in this IFRS dealing with similar and related issues,
and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses and the pervasive principles in Section 2 Concepts and
Pervasive Principles.

10.6

In making the judgement described in paragraph 10.4, management may also consider
the requirements and guidance in full IFRSs dealing with similar and related issues.

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Notes
When the IFRS for SMEs does not specifically address a transaction, other event or
condition, an entity must select an accounting policy that results in relevant and
reliable information. In making that judgement, an entity considers, first, the
requirements and guidance in the IFRS for SMEs dealing with similar and related issues
and, second, the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses and the pervasive principles in
Section 2 Concepts and Pervasive Principles. If that does not provide guidance, the entity
may look to the requirements and guidance in full IFRSs, including Interpretations of
IFRSs, dealing with similar and related issues (Refer: Basis for Conclusions
paragraph BC86).

Example developing an accounting policy

Ex 5

On 1 January 20X7, as part of a scheme to provide support for projects to help rural
communities, a non-government development agency announced a plan whereby
during 20X720X9 entities can apply for a grant to set up farming operations in a
specified rural area. Qualifying entities will receive an upfront cash payment of
CU50,000 to set up farming operations in the specified area. Entities must
complete an application form, submit their proposal and provide specified
documents which the development agency will consider before issuing the grant.
The IFRS for SMEs does not specify how to account for a grant from a non-government
development agency. However, it does specify how to account for government grants
(see Section 24 Government Grants). By analogy, grants received from non-government
development agencies should be accounted for in accordance with the requirements of
Section 24 (ie the entity should determine its accounting policy for grants from
non-government development agencies in accordance with the requirements of
Section 24).

Consistency of accounting policies

10.7

An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless this IFRS specifically requires or
permits categorisation of items for which different policies may be appropriate. If this
IFRS requires or permits such categorisation, an appropriate accounting policy shall be
selected and applied consistently to each category.

Examples consistency of accounting policies

Ex 6

An entitys accounting policy is to measure investments in jointly controlled

entities using the fair value model. However, it is unable to determine the fair
value of its investment in one of its jointly controlled entities (JV B). Therefore it
measures its investment in JV B using the cost model.

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The entitys accounting policy is acceptable. Section 15 Investments in Joint Ventures
requires an entity to account for all of its investments in jointly controlled entities using
one of the following: (i) the cost model in paragraph 15.10; (ii) the equity method in
paragraph 15.13; or (iii) the fair value model in paragraph 15.14. An entity that opts to
use the fair value model must measure all of its investments in jointly controlled
entities after initial recognition at fair value. However, the entity should use the cost
model for any investment in a jointly controlled entity for which it is impracticable to
measure fair value reliably without undue cost or effort (see paragraph 15.15).
Ex 7

An entitys accounting policy is to measure investments in associates using the fair

value model. However, it is unable to determine the fair value of its investment in
one of its associates (associate B). Therefore, it measures its investment in associate
B using the cost model.
The entitys accounting policy is acceptable. Section 14 Investments in Associates requires
an entity to account for all of its investments in associates using one of the following: (i)
the cost model in paragraph 14.5; (ii) the equity method in paragraph 14.8; or (iii) the
fair value model in paragraph 14.9. An entity that opts to use the fair value model must
measure all of its investments in associates after initial recognition at fair value.
However, the entity should use the cost model for any investment in an associate for
which it is impracticable to measure fair value reliably without undue cost or effort (see
paragraph 14.10).

Ex 8

An entitys accounting policy is to measure investments in associates using the cost

model. However, because the equity instruments of one of its associates (associate
C) are listed on the national securities exchange, it measures its investment in
associate C using the fair value model. Therefore it measures its investment in
associate B using the cost model.
The entitys accounting policy is acceptable. Section 14 Investments in Associates requires
an entity to account for all of its investments in associates using one of the following:
(i) the cost model in paragraph 14.5; (ii) the equity method in paragraph 14.8; or (iii) the
fair value model in paragraph 14.9. An entity that opts to use the cost model must
measure all of its investments in associates after initial recognition at cost less any
accumulated impairment losses (see paragraph 14.5). However, the entity must use the
fair value model for its investment in an associate for which there is a published price
quotation (see paragraph 14.7).

Ex 9

An entitys accounting policy is to measure its investments in associates using the

fair value model. The entity follows an accounting policy of measuring its
investments in jointly controlled entities using the cost model. None of the entitys
investments are traded in a public securities market.
The entitys accounting policies are acceptable. Its accounting policy for investments in
associates need not be the same as its accounting policy for investments in jointly
controlled entities.

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Changes in accounting policies
10.8

An entity shall change an accounting policy only if the change:

(a) is required by changes to this IFRS, or
(b) results in the financial statements providing reliable and more relevant information
about the effects of transactions, other events or conditions on the entitys financial
position, financial performance or cash flows.

Examples change in accounting policies

Ex 10 An entity that measures its investments in associates after initial recognition using
the cost model changes its accounting policy to adopt the fair value model because
its management believes that measurement at fair value provides more relevant
information.
The entitys change in accounting policy is acceptable. Using the fair value model to
measure investments in associates results in the financial statements providing reliable
and more relevant information about the effects of its investments in associates on the
entitys financial position, financial performance or cash flows.
Ex 11 An entity changes from presenting a classified statement of financial position
(current and non-current assets and current and non-current liabilities shown as
separate classifications) to a liquidity presentation (items presented in order of
liquidity without current/non-current classification) because, in the entitys
particular circumstances, a liquidity presentation provides information that is
reliable and more relevant (see paragraph 4.4). The entity restated its statement of
financial position for the comparable prior period because it regarded the change
to a liquidity presentation as a change in accounting policy.
The entitys treatment is correct. Accounting policies include not only the principles for
recognising and measuring assets, liabilities, income and expenses but also the
principles and practices for presenting them in financial statements. Current/noncurrent versus liquidity presentation is an example. Retrospective restatement is
required.
10.9

The following are not changes in accounting policies:

(a) the application of an accounting policy for transactions, other events or conditions that
differ in substance from those previously occurring.
(b) the application of a new accounting policy for transactions, other events or conditions
that did not occur previously or were not material.
(c) a change to the cost model when a reliable measure of fair value is no longer available
(or vice versa) for an asset that this IFRS would otherwise require or permit to be
measured at fair value.

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Examples not a change in accounting policy
Ex 12 An entity acquired an investment in an associate in the current reporting period
and adopted the cost model to measure the investment in associate after initial
recognition. It had never before held an investment in an associate.
The adoption of the cost model to measure its first investment in an associate does not
constitute a change in accounting policy. The accounting policy is for a transaction in
which the entity had not previously engaged.
Ex 13 An entity acquired an investment in an associate in the current reporting period
and adopted the fair value model to measure its investment in associate after
initial recognition. Before this investment the entity accounted for its sole other
investment in an associate as an item of inventory. Management justified the
treatment of its investment in this associate as inventory because its cost (and
value) was immaterial to the entitys financial statements.
Provided that the original investment in associate was immaterial to the entitys
financial statements, the use of the fair value model for the measurement of all of its
investments in associates is not a change in accounting policy. The accounting policy is
for a transaction that was previously not material. Refer also to paragraph 10.3.
Ex 14 In the current reporting period, when a reliable measure of the fair value of an
entitys only investment property became available, the entity transferred its sole
investment property from property, plant and equipment (where it was accounted
for using the cost-depreciation-impairment model) to investment property
measured using the fair value model.
The transfer of the investment property from property, plant and equipment (using the
cost-depreciation-impairment model) to investment property measured using the fair
value model, is a change in circumstances. It is not a change in accounting policy (see
paragraph 16.8 of Section 16 Investment Property).
Ex 15 In the current reporting period, when an entity began redeveloping its previously
owner-occupied building to rent out to tenants under operating leases, it
transferred the property from property, plant and equipment (where it was
accounted for using the cost-depreciation-impairment model) to investment
property measured using the fair value model.
The transfer of the property from property, plant and equipment (using the
cost-depreciation-impairment model) to investment property measured using the fair
value model, is a change in use of the property. It is not a change in accounting policy.
Ex 16 An entity whose functional currency became hyperinflationary in the current
reporting period applied Section 31 Hyperinflation in preparing and presenting its
financial statements, for the first time, in the current reporting period.
The application of Section 31, for the first time, in preparing and presenting the
financial statements is not a change in accounting policy; it is a change in the entitys
circumstances. The new accounting policy is for a condition that did not occur
previously.
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Note, although the application of Section 31 for the first time is not a change in
accounting policy, the restatement process required by Section 31 (paragraphs 31.3 and
31.4) is similar to the process required for retrospective application of a change in
accounting policy.
10.10 If this IFRS allows a choice of accounting treatment (including the measurement basis) for
a specified transaction or other event or condition and an entity changes its previous
choice, that is a change in accounting policy.

Notes
An entity can change its accounting policy voluntarily only if the change results in the
financial statements providing reliable and more relevant information about the effects
of transactions, other events or conditions on the entitys financial position, financial
performance or cash flows (see paragraph 10.8(b)).

Applying changes in accounting policies

10.11 An entity shall account for changes in accounting policy as follows:
(a) an entity shall account for a change in accounting policy resulting from a change in the
requirements of this IFRS in accordance with the transitional provisions, if any, specified
in that amendment;
(b) when an entity has elected to follow IAS 39 Financial Instruments: Recognition and
Measurement instead of following Section 11 Basic Financial Instruments and Section 12
Other Financial Instruments Issues as permitted by paragraph 11.2, and the requirements
of IAS 39 change, the entity shall account for that change in accounting policy in
accordance with the transitional provisions, if any, specified in the revised IAS 39; and
(c) an entity shall account for all other changes in accounting policy retrospectively (see
paragraph 10.12).

Examples applying changes in accounting policies

Ex 17 In the current reporting period the entity was required to comply with an
amendment to the IFRS for SMEs. The transitional provisions in the amended
IFRS for SMEs required the change in accounting policy to be accounted for as an
adjustment to retained earnings at the beginning of the current reporting period.
The entity calculated that CU80,000 of the CU100,000 decrease in retained earnings
at the beginning of the current reporting period, resulting from the change in
accounting policy, is attributable to years before the comparative reporting period.
Paragraph 10.11(a)(c) does not provide free choices but rather a sequential hierarchy of
how to account for changes in accounting policy. Paragraph 10.11(a) requires the entity
to follow the transitional provisions of the amended IFRS for SMEs (ie the effect of the
change in accounting policy is presented as a restatement of retained earnings at the
beginning of the current reporting perioda decrease of CU100,000 and the comparative
figures are not be restated).

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Ex 18 In compliance with the only option in the IFRS for SMEs to use full IFRSs, an entity
applies the requirements of IAS 39 Financial Instruments: Recognition and Measurement.
In the current reporting period IAS 39 was amended. The transitional provisions
for the amendment required the change in accounting policy to be accounted for as
an adjustment to retained earnings at the beginning of the current reporting
period. The entity calculated that CU80,000 of the CU100,000 decrease in retained
earnings at the beginning of the current reporting period, as a result of the change
in accounting policy, is attributable to years before the comparative reporting
period.
The effect of the change in accounting policy must be presented as a restatement of
retained earnings at the beginning of the current reporting perioda decrease of
CU100,000. In accordance with the transitional provisions specified in the amendment
to IAS 39 the comparative figures must not be restated.
Ex 19 In the current reporting period an entity voluntarily changed an accounting policy.
The cumulative effect of the change in accounting policy on the retained earnings
of the entity was a decrease of CU100,000 at the beginning of the current reporting
period, CU80,000 of which was attributable to years before the comparative
reporting period.
In accordance with paragraph 10.11(c) the effect of the change in accounting policy must
be presented as a restatement of retained earnings at the beginning of the comparative
reporting period (a decrease of CU80,000) and CU20,000 decrease in the profit for the
comparative period. The cumulative effect of these restatements is a decrease of
CU100,000 in retained earnings at the beginning of the current reporting period.

Retrospective application
10.12 When a change in accounting policy is applied retrospectively in accordance with
paragraph 10.11, the entity shall apply the new accounting policy to comparative
information for prior periods to the earliest date for which it is practicable, as if the new
accounting policy had always been applied. When it is impracticable to determine the
individual-period effects of a change in accounting policy on comparative information for
one or more prior periods presented, the entity shall apply the new accounting policy to
the carrying amounts of assets and liabilities as at the beginning of the earliest period for
which retrospective application is practicable, which may be the current period, and shall
make a corresponding adjustment to the opening balance of each affected component of
equity for that period.

Notes
It is impracticable to apply a requirement if the entity cannot apply it after making
every reasonable effort to do so.
Impracticable is a high hurdle. For a particular prior period, it is impracticable to
apply a change in an accounting policy retrospectively if:
(a) the effects of the retrospective application are not determinable;

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(b) the retrospective application requires assumptions about what managements
intention would have been in that period; or
(c) the retrospective application requires significant estimates of amounts and it is
impossible to distinguish objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those
amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were authorised for issue
from other information.

Examples retrospective application

Ex 20 In 20X7, the entity voluntarily changed an accounting policy. In accordance with
paragraph 10.11(c) the entity must account for the change in accounting policy
retrospectively. The cumulative effect of the change in accounting policy is a
decrease of CU100,000 in retained earnings at 1 January 20X7the beginning of the
current reporting period. The entity presents two years of comparative information
and has calculated that the effect of the change in accounting policy is CU25,000
less profit for each of the past four years.
The effect of the change in accounting policy must be presented as a restatement of:
retained earnings at 1 January 20X5reduced by CU50,000; profit for the year ended
31 December 20X5reduced by CU25,000; and profit for the year ended 31 December
20X6reduced by CU25,000. The cumulative effect of these restatements is a CU100,000
downward restatement of retained earnings at 1 January 20X7 (the beginning of the
current reporting period).
Ex 21 The facts are the same as in example 20. However, in this example, because
retrospective application requires significant estimates of amounts and it is not
possible to distinguish objectively information about those estimates, it is
impracticable for the entity to determine the individual period effects of the
change in accounting policy on the prior periods presented.
The effect of the change in accounting policy must be presented as a CU100,000
downward restatement of retained earnings at 1 January 20X7 (the beginning of the
current reporting period). The entity would disclose the information required in
paragraph 10.14(d).
Ex 22 The facts are the same as in example 21. However, in this example, assume that it
is impracticable for the entity to determine the individual period effects of the
change in accounting policy on the periods before 20X6.
The effect of the change in accounting policy must be presented as a restatement of
retained earnings at 1 January 20X6reduced by CU75,000and profit for the year ended
31 December 20X6reduced by CU25,000. The cumulative effect of these restatements is
a CU100,000 downward restatement of retained earnings at 1 January 20X7 (the
beginning of the current reporting period). The entity does not restate the (comparative)

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information presented for the year ended 31 December 20X5 because it is impracticable
to do so.
Ex 23 The facts are the same as in example 21. However, in this example, assume that the
entity would be required to engage an outside valuer to determine the individual
period effects of the change in accounting policy on the prior periods presented.
The entity decides that, because of the cost that would be involved in engaging the
outside valuer, it is impracticable to determine the individual period effects of
changing an accounting policy for one or more prior periods presented. Therefore
it adjusts the opening balance of retained earnings of the period in which the
accounting policy is changed for the entire cumulative effect of the change in
accounting policy.
The cost of engaging an outside valuer does not make restatement of prior periods
impracticable (as that term is defined in the IFRS for SMEs). The prior periods must be
restated.

Disclosure of a change in accounting policy

[Refer also: paragraph 8.5]
10.13 When an amendment to this IFRS has an effect on the current period or any prior period,
or might have an effect on future periods, an entity shall disclose the following:
(a) the nature of the change in accounting policy.
(b) 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.
(c) the amount of the adjustment relating to periods before those presented, to the extent
practicable.
(d) an explanation if it is impracticable to determine the amounts to be disclosed in (b) or
(c) above.
Financial statements of subsequent periods need not repeat these disclosures.

Example disclosure of a change in accounting policy

Ex 24 In 20X2, the entity was required to comply with an amendment to the IFRS for SMEs.
The cumulative effect of the change in accounting policy on the retained earnings
of the entity at the beginning of 20X1 is a CU80,000 decrease. The effect on profit
before tax for 20X1 is a CU25,000 decrease, with a resultant decrease in income tax
expense of CU5,000.

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Extract from SME A statement of income and retained earnings for the year ended
31 December 20X2
Notes

20X2

20X1
Restated

CU

CU

Profit before tax (20X1: previously stated CU185,000)

200,000

160,000

Income tax expense (20X1: previously stated

CU45,000)

(50,000)

(40,000)

Profit for the year (20X1: previously stated

CU140,000)

150,000

120,000

Retained earnings at the beginning of the year

320,000

200,000

- as previously stated
- effect of the change in accounting policy

12

420,000

280,000

(100,000)

(80,000)

470,000

320,000

Retained earnings at the end of the year

SME A
Notes to the financial statements for the year ended 31 December 20X2
Note 12 Change in accounting policy
In 20X2 in accordance with an amendment to Section X of the IFRS for SMEs the entity
changed its accounting policy for . Previously, the entity had . The entity now . This
change in accounting policy has been accounted for retrospectively, and the comparative
information for 20X1 has been restated. The effect of the change is a reduction of
CU20,000 in profit for the year ended 31 December 20X1. Furthermore, opening retained
earnings for 20X1 have been reduced by CU80,000, which is the amount of the
adjustment relating to periods before 20X1.

Note: The effect of the restatement on the statement of financial position (and other
statements) must also be presented.

10.14 When a voluntary change in accounting policy has an effect on the current period or any
prior period, an entity shall disclose the following:
(a) the nature of the change in accounting policy.
(b) the reasons why applying the new accounting policy provides reliable and more
relevant information.
(c) to the extent practicable, the amount of the adjustment for each financial statement
line item affected, shown separately:
(i) for the current period;
(ii) for each prior period presented; and
(iii) in the aggregate for periods before those presented.
(d) an explanation if it is impracticable to determine the amounts to be disclosed in (c)
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above.
Financial statements of subsequent periods need not repeat these disclosures.

Example voluntary change in accounting policy

Ex 25 In 20X2, the entity voluntarily changed its accounting policy for ... from to. The
cumulative effect of the change in accounting policy on the retained earnings of
the entity at the beginning of 20X1 is a CU80,000 decrease. The effect on profit
before tax for the 20X1 is a CU25,000 decrease, with a resultant decrease in income
tax expense of CU5,000.

Extract from statement of income and retained earnings for the year ended 31
December 20X2
Notes

20X2

20X1
Restated

CU

CU

Profit before tax (20X1: previously stated

CU185,000)

200,000

160,000

Income tax expense (20X1: previously stated

CU45,000)

(50,000)

(40,000)

Profit for the year (20X1: previously stated

CU140,000)

150,000

120,000

Retained earnings at the beginning of the year

320,000

200,000

- as previously stated

420,000

280,000

(100,000)

(80,000)

470,000

320,000

- effect of the change in accounting policy

12

Retained earnings at the end of the year

SME A
Notes to the financial statements for the year ended 31 December 20X2
Note 12 Change in accounting policy
In 20X2, the entity voluntarily changed its accounting policy for . Previously, the entity
had . The entity now . Management judges that this policy provides reliable and
more relevant information because . This change in accounting policy has been
accounted for retrospectively, and the comparative information for 20X1 has been
restated. The effect of the change is a reduction of CU20,000 in profit for the year ended
31 December 20X1. Furthermore, opening retained earnings for 20X1 have been reduced
by CU80,000, which is the amount of the adjustment relating to periods before 20X1.

Note: The effect of the restatement on the statement of financial position (and other
statements) must also be presented.

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Changes in accounting estimates

10.15 A change in accounting estimate is 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. Changes in accounting estimates result from new
information or new developments and, accordingly, are not corrections of errors. When it
is difficult to distinguish a change in an accounting policy from a change in an accounting
estimate, the change is treated as a change in an accounting estimate.

Examples change in accounting estimate

Ex 26 An entity provides warranties at the time of sale to purchasers of its products.
On 31 December 20X5 an entity assessed its warranty obligation for products sold
before 31 December 20X5 at CU100,000. Immediately before the 31 December 20X5
annual financial statements were approved for issue the entity discovered a latent
defect in one of its products (ie a defect that was not discoverable by reasonable or
customary inspection). As a result of the discovery the entity revised its estimate of
its warranty obligation at 31 December 20X5 to CU150,000.
This is the determination of an (initial) accounting estimate, not a change in accounting
estimate. At 31 December 20X5 the obligation for the warranty provision must be
measured at CU150,000. The latent defect is a condition that existed at the end of the
reporting period and is therefore taken into account in determining the amount of the
obligation at the end of the reporting period even though the information was
discovered later (see paragraphs 32.132.5).
Ex 27 The facts are the same as in example 26. However, in this example, the latent
defect was discovered when preparing the interim financial report for the sixmonth period ended 30 June 20X6, after the 31 December 20X5 annual financial
statements were approved for issue. In July 20X6 the entity paid CU150,000 to
transfer the obligation to an independent third party.
The additional CU50,000 obligation (not provided for at 31 December 20X5) is a change
in accounting estimate for the year ended 31 December 20X6. The warranty obligation
(provision) was appropriately measured and reported at CU100,000 in the entitys
31 December 20X5 annual financial statements. This estimate was found to be incorrect
in 20X6, after the 20X5 financial statements were approved for issue. The CU50,000 is
recognised as an expense in determining the profit or loss for the six-month period
ended 30 June 20X6 (see paragraph 10.16).
Ex 28 An entity acquired a yacht for CU1,000,000 on 1 January 20X1 and appropriately
assessed its useful life at 30 years from the date of acquisition with a residual value
of CU100,000. The entity decided that the straight-line method is the most
appropriate method on which to depreciate the yacht.
In 20X9 the entity undertook substantial research into the yachting industry. As a
result, at 31 December 20X9 the entity assessed the useful life of the yacht at
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20 years from the date of acquisition with a residual value of nil. It also assessed a
fair value for the yacht as at 31 December 20X9 at CU800,000. It continued to
believe that the straight-line method the most appropriate method of depreciation
for the yacht.
The reassessment of the yachts useful life and its residual value are changes in
accounting estimates. The revised assessments are appropriately made on the basis of
new information that arose from research performed in the current reporting period
20X9. See example 32 for the accounting entries.
Ex 29 The facts are the same as in example 28. However, the research was undertaken by
an independent third party and has been publicly available since late 20X5.
Although the entity believed the research to be valid it chose to ignore the research
findings until 20X9.
The reassessment in 20X9 of the yachts useful life and its residual value are not changes
in accounting estimates. They represent prior period errors in the entitys financial
information since 20X5. The financial statements must be restated to correct the effects
of the errors in the periods to which they relate [if material].
Ex 30 An entity has been depreciating its buildings over a 25-year life, which is what is
allowed by the entitys national tax laws. In the current year, the tax law is
changed to allow depreciation of buildings over 20 years. The entity makes this
change for financial reporting purposes and treats it as a change in accounting
estimate.
Paragraph 17.18 requires an entity to allocate the depreciable amount of an asset on a
systematic basis over its useful life. Unless the useful life of the entitys buildings
actually is 25 years, the entity has not been complying properly with paragraph 17.18,
which requires the depreciable amount to be allocated over the entire period in which
the entity expects to use the asset. Most buildings have useful lives significantly longer
than 25 years. If the entity has not been using the correct useful life, it should treat this
as the correction of an error by a retrospective restatement. Also, it should allocate the
depreciable amount over the useful life, not 25 years or 20 years.
10.16 An entity shall recognise the effect of a change in an accounting estimate, other than a
change to which paragraph 10.17 applies, prospectively by including it in profit or loss in:
(a) the period of the change, if the change affects that period only, or
(b) the period of the change and future periods, if the change affects both.

Examples prospective recognition

Ex 31 At 31 December 20X1 an entity measured one of its trade debtors at CU200,000
(ie CU600,000 gross amount less CU400,000 provision for doubtful debts).
The estimate of the extent of the doubtful debt was appropriately made on the basis
of all of the available information.
On 31 December 20X2 the entity received notification from the liquidator of the
debtor that it would shortly receive CU250,000 in full and final settlement of the
debt.
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The entity must include CU50,000 (CU250,000 at 31 December 20X2 less CU200,000 at 31
December 20X1) change in accounting estimate as an increase in profit for the year
ended 31 December 20X2.
Ex 32 The facts are the same as in example 28.
(An entity acquired a yacht for CU1,000,000 on 1 January 20X1 and appropriately
assessed its useful life at 30 years from the date of acquisition with a residual value
of CU100,000. The entity decided that the straight-line method is the most
appropriate method on which to depreciate the yacht.
In 20X9 the entity undertook substantial research into the yachting industry. As a
result, as at 31 December 20X9 the entity assessed the useful life of the yacht at
20 years from the date of acquisition with a residual value of CU500,000. It also
assessed a fair value for the yacht as at 31 December 20X9 at CU800,000.
It continued to believe that the straight-line method the most appropriate method
of depreciation for the yacht.)
Depreciation of CU21,667 will be deducted in determining profit or loss for the year
ended 31 December 20X9 and for each of the next eleven years remaining useful life of
the yacht (ie the remaining depreciable amount will be recognised as an expense evenly
over the remaining useful life (12 years, including 20X9) calculated as follows
(CU760,000 carrying amount less CU500,000 residual value) 12 years remaining useful
life).
Ex 33 An entity paid a systems developer CU50,000 for an on-line system by which its
customers could place orders. The entity accounted for the cost of the system as a
purchased limited-life intangible asset. The entity estimated that the system would
have a five-year life and amortised the cost accordingly. Unfortunately the system
never worked as anticipated and customer use declined considerably after the first
year because of ongoing system problems resulting in incorrect orders. After two
years the entity replaced the custom-developed system with a generic software
package available in the market. The entity concluded that the entire CU50,000
expenditure was worthless from the beginning and decided to write it off
retrospectively, in the year of acquisition, as a correction of an error.
Treating this as a correction of an error is not appropriate. The amortisation in the first
two years in which the custom-developed system was used was based on an assessment
of future benefits coming from that system. After two years, the assessment of future
benefits changed. A prior period error results from failure to take into account
information that was available at the time. Until the end of the second year, the best
available information was that the system would provide future benefits. Therefore, this
is a change of estimate, not a correction of a prior period error.
10.17 To the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, the entity shall recognise it by adjusting the
carrying amount of the related asset, liability or equity item in the period of the change.

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Disclosure of a change in estimate
[For disclosures about key sources of estimation uncertainty refer to paragraph 8.7]
10.18 An entity shall disclose the nature of any change in an accounting estimate and the effect
of the change on assets, liabilities, income and expense for the current period. If it is
practicable for the entity to estimate the effect of the change in one or more future
periods, the entity shall disclose those estimates.

Examples disclosure of a change in accounting estimate

Ex 34 Consider the information in example 32.
(An entity acquired a yacht for CU1,000,000 on 1 January 20X1 and appropriately
assessed its useful life at 30 years from the date of acquisition with a residual value
of CU100,000. The entity decided that the straight-line method is the most
appropriate method on which to depreciate the yacht.
In 20X9, the entity undertook substantial research into the yachting industry. As a
result, as at 31 December 20X9 the entity assessed the useful life of the yacht at
20 years from the date of acquisition with a residual value of CU500,000. It also
assessed a fair value for the yacht as at 31 December 20X9 at CU800,000.
It continued to believe that the straight-line method the most appropriate method
of depreciation for the yacht.)
SME X
Notes to the financial statements for the year ended 31 December 20X9
Note 3 Operating profit
Change in accounting estimate
At 31 December 20X9, as a result of research undertaken about the yachting industry, the
entity reassessed the useful life of its yacht at 20 years (previously 30 years) from the date
of acquisition; and the residual value of its yacht at CU500,000 (previously CU100,000).
This had the effect of decreasing the depreciation expense for the year ended
31 December 20X9 by CU8,333 (previously CU30,000 per year, now CU21,667 per year).
Depreciation for each of the next 11 years is expected to be similarly affected by these
changes in accounting estimates.
Note: In this example, tax effects have been ignored.

Corrections of prior period errors

10.19 Prior period errors are omissions from, and misstatements in, the entitys financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that::
(a) was available when financial statements for those periods were authorised for issue,
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

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10.20 Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

Examples prior period errors

Ex 35 In 20X4, after the entitys 20X3 financial statements were approved for issue, the
entity discovered that, as a result of a computational error, depreciation expense
for 20X3 was understated by CU10.
The CU10 understatement of depreciation expense in the 20X3 financial statements is a
prior period errorthe misstatement in the entitys 20X3 financial statements arose
from the misuse (mathematical error) of reliable information that was available when
financial statements for those periods were authorised for issue. However, it is probably
not material. If so, it can be ignored.
Ex 36 In 20X4, after the entitys 20X3 financial statements were approved for issue, the
entity discovered that, as a result of a computational error, depreciation expense
for 20X3 was understated by CU36,000.
The CU36,000 understatement of depreciation expense in the 20X3 financial statements
is a prior period errorthe misstatement in the entitys 20X3 financial statements arose
from the misuse (mathematical error) of reliable information that was available when
financial statements for those periods were authorised for issue. See example 39 for
details of the restatement.
Ex 37 In 20X4, after the entitys 31 December 20X3 annual financial statements were
approved for issue, a latent defect in the composition of a new product
manufactured by the entity was discovered (ie a defect that was not discoverable by
reasonable or customary inspection). As a result of the latent defect the entity
incurred CU100,000 unanticipated costs in fulfilling its warranty obligation in
respect of sales made before 31 December 20X3. An additional CU20,000 was
incurred in respect of products sold in 20X4 before the latent defect was detected
and the production process rectifiedCU5,000 of which relates to items of
inventory at 31 December 20X3. The defective inventory was reported at cost
(CU15,000) in the 20X3 financial statements when its selling price less costs to
complete and sell was estimated at CU18,000. The accounting estimates made in
preparing the 31 December 20X3 financial statements were appropriately made
using all reliable information that the entity could reasonably be expected to have
been obtained and taken into account in the preparation and presentation of those
financial statements.
Neither the CU100,000 understatement of the warranty provision nor the CU2,000(2)
overstatement of inventory in the 31 December 20X3 financial statements is a prior
period error. The effects of the latent defect that relate to the entitys financial position
at 31 December 20X3 are changes in accounting estimates (see paragraph 10.13).
In preparing its 31 December 20X3 financial statements the entity made the warranty
provision and inventory valuation appropriately using all reliable information that the
(2)

Inventory is measured at the lower of cost (ie CU 15,000) and fair value less costs to complete and sell (ie CU 13,000

CU18,000 originally estimated less CU5,000 costs to rectify latent defect) (see paragraph 13.4)..

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entity could reasonably be expected to have obtained and taken into account in the
preparation and presentation of those financial statements.
Ex 38 An entity acquired a machine for CU140,000 on 1 January 20X0. It estimated that
the machine would have a 10-year useful life, no residual value, with annual
depreciation of CU14,000. Early in 20X4 (carrying amount of the machine is now
CU84,000) the entity estimates that the machine has a remaining useful life of
10 years (ie measured from 1 January 20X4). The entity concludes that depreciation
in years 20X0 to 20X3 should have been only CU10,000 per year (CU140,000/14
years). To correct the error, the entity restates its financial statements for those
four years and discloses a correction of a prior period error.
If the original estimate of a 10-year useful life was reasonable, this is not a correction of
a prior period error but, rather, a change in accounting estimate that should be
accounted for prospectively starting in 20X4. Financial statements for the prior years
would not be restated. The CU84,000 carrying amount of the asset is depreciated over
the 10 remaining years of useful life, with disclosure of the change in accounting
estimate.
10.21 To the extent practicable, an entity shall correct a material prior period error
retrospectively in the first financial statements authorised for issue after its discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred, or
(b) 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.

Notes
It is impracticable to apply a requirement if the entity cannot apply it after making
every reasonable effort to do so (see Glossary).
Impracticable is a high hurdle. For a particular prior period, it is impracticable to
determine the period-specific effects of an error on the comparative information of one
or more prior periods presented if:
(a) the effects of the retrospective restatement are not determinable;
(b) the retrospective restatement requires assumptions about what managements
intention would have been in that period; or
(c) the retrospective restatement requires significant estimates of amounts and it is
impossible to distinguish objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those
amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were authorised for issue from other information.

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Examples retrospective recognition
Ex 39 The facts are the same as in example 36.
(In 20X4, after the entitys 20X3 financial statements were approved for issue, the
entity discovered that, as a result of a computational error, depreciation expense
for 20X3 was understated by CU36,000.)
The effect of correcting the prior period error must be presented as a restatement of
profit for the year ended 31 December 20X3, reduction of CU36,000, and a CU36,000
downward restatement of retained earnings at 1 January 20X4 (the beginning of the
current reporting period).
Note: in this example, tax effects have been ignored.
Ex 40 In 20X7 the entity discovered a programming error in its costing system that causes
random errors in the costing of the entitys main product. In accordance with
paragraph 10.21(b) the entity must account for the correction of the prior period
error retrospectively, ie retrospective restatement. The cumulative effect of the
error is a decrease of CU100,000 in retained earnings at 1 January 20X7the
beginning of the current reporting period. The entity presents two years of
comparative information and has calculated that the effect of the error is CU25,000
less profit for each of the past four years.
The effect of correcting the prior period error must be presented as a restatement of
retained earnings at 1 January 20X5reduction of CU50,000; profit for the year ended
31 December 20X5reduction of CU25,000; and profit for the year ended
31 December 20X6reduction of CU25,000. The effect of these restatements is a
CU100,000 downward restatement of retained earnings at 1 January 20X7 (the beginning
of the current reporting period).
10.22 When it is impracticable to determine the period-specific effects of an error on
comparative information for one or more prior periods presented, the entity shall restate
the opening balances of assets, liabilities and equity for the earliest period for which
retrospective restatement is practicable (which may be the current period).

Example impracticable to determine period-specific effects

Ex 41 The facts are the same as in example 40.
(In 20X7 the entity discovered a programming error in its costing system that causes
random errors in the costing of the entitys main product. In accordance with
paragraph 10.21(b) the entity must account for the correction of the prior period
error retrospectively (ie retrospective restatement). The cumulative effect of the
error is CU100,000 decrease in retained earnings at 1 January 20X7the beginning
of the current reporting period. The entity presents two years of comparative
information and has calculated that the effect of the error is CU25,000 less profit
for each of the past four years.)
However, in this example, assume that it is impracticable for the entity to
determine the individual period effects of the error on the periods before 20X6.

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The effect of correcting the prior period error must be presented as a restatement of
retained earnings (and inventoriesasset) at 1 January 20X6reduced by CU75,000and
profit for the year ended 31 December 20X6reduced by CU25,000. The effect of these
restatements is a CU100,000 downward restatement of retained earnings (and
inventoriesasset) at 1 January 20X7 (the beginning of the current reporting period).
It is impracticable to restate the (comparative) information presented for the year ended
31 December 20X5. The entity must disclose an explanation of the reasons why it is
impracticable to determine the amounts to be disclosed for the period before 1 January
20X6 (see paragraph 10.23(d)).
Ex 42 The facts are the same as in example 41. However, in this example, assume that it
is impracticable for the entity to determine the individual period effects of the
error on any of the prior periods presented.
The effect of correcting the error must be presented as a downward restatement of
retained earnings at 1 January 20X7 (the beginning of the current reporting period)
because it is impracticable to restate the comparative information. The entity must
disclose an explanation of the reasons why it is impracticable to determine the amounts
to be disclosed for the period before 1 January 20X7 (see paragraph 10.23(d)).

Disclosure of prior period errors

10.23 An entity shall disclose the following about prior period errors:
(a) the nature of the prior period error.
(b) for each prior period presented, to the extent practicable, the amount of the correction
for each financial statement line item affected.
(c) to the extent practicable, the amount of the correction at the beginning of the earliest
prior period presented.
(d) an explanation if it is not practicable to determine the amounts to be disclosed in (b)
or (c) above.
Financial statements of subsequent periods need not repeat these disclosures.

Notes
Disclosure of the correction of a prior period error must be made even when the
disclosure might result in legal action against the entity. For example, an entity that
discovers a prior period error must disclose the correction of that error even if it is
worried that disclosure could result in a lawsuit. Similarly, if the correction of a prior
period error would reveal that the entity violated its borrowing covenants, it must
nevertheless be disclosed.

Example disclosure of prior period errors

Ex 43 In 20X2, after the entitys 20X1 financial statements were approved for issue, the
entity discovered a longstanding computational error in the calculation of
depreciation expense. The cumulative effect of the error on the retained earnings
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of the entity at the beginning of the 20X1 is a CU80,000 overstatement. The error
resulted in profit before tax for the year ended 31 December 20X1 being overstated
by CU25,000, with a resultant CU5,000 overstatement of income tax expense.

Extract from statement of income and retained earnings for the year ended
31 December 20X2
Notes

20X2

20X1
Restated

CU

CU

Profit before tax (20X1: previously stated

CU185,000)

200,000

160,000

Income tax expense (20X1: previously stated

CU45,000)

(50,000)

(40,000)

Profit for the year (20X1: previously stated

CU140,000)

150,000

120,000

Retained earnings at the beginning of the year

320,000

200,000

- as previously stated
- effect of the correction of a prior period error

12

Retained earnings at the end of the year

420,000

280,000

(100,000)

(80,000)

470,000

320,000

SME A
Notes to the financial statements for the year ended 31 December 20X2
Note 12 Correction of prior period error
In 20X2, the entity corrected mathematical mistakes that had resulted in the
understatement of depreciation expense over the past [four] years. The correction of the
error is accounted for retrospectively, and the comparative information for 20X1 has
been restated. The effect of the change is a CU20,000 reduction in profit for the year
ended 31 December 20X1. Furthermore, opening retained earnings for 20X1 have been
reduced by CU80,000, which is the amount of the error relating to periods before 20X1.
Note: The effect of the restatement on the statement of financial position (and other
statements) must also be presented.

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SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS
Applying the requirements of the IFRS for SMEs to transactions and events often requires
judgement. Information about significant judgements and key sources of estimation
uncertainty is useful in assessing an entitys financial position, performance and cash flows.
Consequently, in accordance with paragraph 8.6 an entity must disclose the judgements that
management has made in the process of applying the entitys accounting policies and that
have the most significant effect on the amounts recognised in the financial statements.
Furthermore, in accordance with paragraph 8.7, an entity must disclose information about the
key assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs require disclosure of information about particular
judgements and estimation uncertainties.

Accounting policies
Determining accounting policies
In many cases little difficulty is encountered in determining accounting policies. However, in
some cases significant judgement is required in determining an accounting policy.
In particular, where the IFRS for SMEs does not specifically address a transaction, other event or
condition, management must use its judgement in developing an accounting policy for that
transaction, other event or condition in accordance with paragraphs 10.4 and 10.5 of the
IFRS for SMEs. In making the judgement described in paragraph 10.4, management may
consider, but is not required to do so, the requirements and guidance in full IFRSs dealing
with similar and related issues.
Example
An entity has factored some of its accounts receivable with a bank. In purchasing the
receivables, the bank has assumed all credit risk up to 15 per cent of the amount of the
receivables. The selling entitys experience is that credit losses in its receivables have
historically been less than 10 per cent. In deciding whether to account for the factoring
as a sale of receivables or a collateralised borrowing, the selling entity must use its
judgement to determine whether it has transferred to the bank all of the significant
risks and rewards relating to the receivables (see paragraph 11.33(b)).
Applying accounting policies
In other cases management must make significant judgements in applying its accounting
policies. For example, in certain circumstances, management must make judgements in
determining:

the degree of influence the entity exerts over another, eg significant influence, control etc

whether certain properties are investment property, inventories or property, plant and

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equipment

whether, in substance, particular sales of goods are financing arrangements and therefore
do not give rise to revenue

whether the substance of the relationship between the entity and a special purpose entity
indicates that the special purpose entity is controlled by the entity.

The judgements made in applying accounting policies that have the most significant effect on
the amounts recognised in the financial statements must be disclosed (see paragraph 8.6).
Change of accounting policies
An entity can voluntarily change an accounting policy only if the change results in the
financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entitys financial position, financial
performance or cash flows (see paragraph 10.8(b)). Judgements about the relevance and
reliability of information must be made before voluntarily changing an accounting policy.
When a change in accounting policy is applied retrospectively, an entity might need to judge
whether it is impracticable to determine the individual period effects of changing an
accounting policy for one or more prior periods presented (see paragraph 10.12). However, in
making that judgement, an entity must consider that retrospective application is
impracticable only when the entity cannot apply the requirement after making every
reasonable effort to do so (see the definition of impracticable in the glossary). In effect the
entity must assess what constitutes every reasonable effort.
Judgement might be required to distinguish a change in accounting estimate from a change in
accounting policy. When it is difficult to make that distinction, the change is treated as a
change in an accounting estimate (paragraph 10.15).

Accounting estimates
Accounting estimates
Determining the carrying amounts of some assets and liabilities requires estimation of the
effects of uncertain future events on those assets and liabilities at the end of the reporting
period. For example, in the absence of recently observed market prices, estimates are
necessary to measure the residual value of property, plant and equipment and, when
impairment is indicated, its recoverable amount. Other examples include the effect of
technological obsolescence on inventories and the effect of the future outcome of litigation in
progress on the amount of provisions. An entity must disclose in the notes information about
the key assumptions concerning the future, and other key sources of estimation uncertainty at
the end of the reporting period, that have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities within the next financial year (see
paragraph 8.7).

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Changes in accounting estimates
When significant accounting estimates are applied in determining the carrying amount of an
asset or liability it follows that those estimates will probably require adjustment as new
information becomes available or new developments occur. 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, is a change in accounting estimate (see
paragraph 10.15). Changes in accounting estimates result from new information or new
developments and, accordingly, are not corrections of errors.
Judgement might be required to distinguish a change in accounting estimate from a change in
accounting policy. When it is difficult to make that distinction, the change is treated as a
change in an accounting estimate (see paragraph 10.15).

Correction of material prior period errors

To the extent practicable, an entity corrects a material prior period error retrospectively (see
paragraph 10.21). In certain cases an entity might need to judge whether it is impracticable to
determine the individual period effects of the prior period error on one or more prior periods
presented (see paragraph 10.22). However, in making that judgement, an entity must consider
that retrospective restatement is impracticable only when the entity cannot apply the
requirement after making every reasonable effort to do so (see the definition of impracticable
in the Glossary).

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COMPARISON WITH FULL IFRSs
Full IFRSs (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) and the
IFRS for SMEs (see Section 10 Accounting Policies, Estimates and Errors) as issued at 9 July 2009 share
the same principles for accounting and reporting events after the end of the reporting period.
However, the IFRS for SMEs is drafted in simple language and includes less guidance on how to
apply the principles.

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TEST YOUR KNOWLEDGE
Test your knowledge of the requirements for accounting and reporting accounting policies,
estimates and errors in accordance with the IFRS for SMEs by answering the questions below.
Once you have completed the test check your answers against those set out below this test.
Assume all amounts are material.
Mark the box next to the most correct statement.

Question 1
Prospective application of a change in accounting policy means:
(a) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the financial statements are authorised for issue.
(b) applying the new accounting policy to transactions, other events and conditions
occurring between the date as at which the policy is changed and the date when the
financial statements are authorised for issue.
(c) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed.
(d) applying a new accounting policy to transactions, other events and conditions as if
that policy had always been applied.

Question 2
Retrospective application of a change in accounting policy means:
(a) applying a new accounting policy to transactions, other events and conditions,
identified before the date when the financial statements are authorised for issue, as if
that policy had always been applied.
(b) applying the new accounting policy to transactions, other events and conditions
occurring between the date as at which the policy is changed and the date when the
financial statements are authorised for issue.
(c) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed.
(d) applying a new accounting policy to transactions, other events and conditions as if
that policy had always been applied.

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Question 3
Which of the following statements is true?
(a) The effect of a change in accounting estimate is recognised retrospectively.
(b) To the extent practicable, an entity must correct a prior period error prospectively in
the first financial statements authorised for issue after its discovery.
(c) When an entity discovers an error in its financial statements of a prior period, it must
immediately withdraw those financial statements and reissue them with the error
corrected.
(d) To the extent practicable, an entity must correct a prior period error retrospectively in
the first financial statements authorised for issue after its discovery.

Question 4
On 25 March 20X4 the entity discovered that, as a result of a computational error, depreciation
expense for 20X3 is overstated by CU29,000. The entitys 31 December 20X3 financial
statements were authorised for issue on 1 March 20X4. The entity must:
(a) reissue its 31 December 20X3 financial statements with the correct depreciation
expense.
(b) reduce depreciation for the year ended 31 December 20X4 by CU29,000 (ie prospective
allocationa change in accounting estimate).
(c) restate (correct) the depreciation expense reported for the year ended 31 December
20X3 in the comparative figures of its 20X4 financial statements (ie retrospective
restatement of a prior period error).

Question 5
The facts are the same as in Question 4. However, the entitys 31 December 20X3 financial
statements were authorised for issue on 1 April 20X4. The entity must:
(a) correct its 31 December 20X3 financial statements before issuing them.
(b) reduce depreciation for the year ended 31 December 20X4 by CU29,000 (ie prospective
allocationa change in accounting estimate).
(c) restate (correct) the depreciation expense reported for the year ended 31 December
20X3 in the comparative figures of its 20X4 financial statements (ie retrospective
restatement of a prior period error).

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Question 6
On 20 February 20X5, before an entitys 31 December 20X4 financial statements were
authorised for issue, a court ordered the entity to pay CU120,000 damages in full and final
settlement of a patent infringement lawsuit brought against the entity by one of its
competitors. The patent infringement occurred in 20X3. The amount of damages awarded to
the competitor was significantly higher than the CU10,000CU30,000 that the entity had
justifiably expected to pay throughout the duration of the case. The entity will not contest the
judgement.
In its 31 December 20X3 annual financial statements the entity reported its liability for the
lawsuit at CU20,000this estimate was appropriately made taking account of all available
evidence at the time the financial statements were authorised for issue.
In its 31 December 20X4 financial statements the entity must:
(a) restate the comparative information at 31 December 20X3 (ie retrospective
restatement of a prior period error).
(b) measure the provision at 31 December 20X4 at CU120,000 (comparative information
20X3: CU20,000), ie account prospectively for the change in accounting estimate in its
20X4 financial statements.
(c) measure the provision at 31 December 20X4 at CU20,000 (comparative information
20X3: CU20,000) and record the effect of the higher than expected settlement in profit
or loss for the year ended 31 December 20X5 (ie account prospectively for the change
in accounting estimate in the period that the final settlement amount was
determined).

Question 7
On 20 February 20X5, before an entitys 31 December 20X4 financial statements were
authorised for issue, a court ordered the entity to pay CU120,000 damages in full and final
settlement of a patent infringement lawsuit brought against the entity by one of its
competitors. The patent infringement occurred in 20X3. The amount of damages awarded to
the competitor was consistent with similar cases settled in that jurisdiction since 20X2.
In its 31 December 20X3 annual financial statements the entity reported its liability for the
lawsuit at CU20,000. The entity deliberately understated the amount presented, because it did
not want to make public its true estimate, believing that this would be detrimental to its
defence.
In its 31 December 20X4 financial statements the entity must:
(a) restate the comparative information at 31 December 20X3 (ie retrospective
restatement of a prior period error).
(b) measure the provision at 31 December 20X4 at CU120,000 (comparative information
20X3: CU20,000), ie account prospectively for the change in accounting estimate in its
20X4 financial statements.
(c) measure the provision at 31 December 20X4 at CU20,000 (comparative information
20X3: CU20,000) and record the effect of the higher than expected settlement in profit
or loss for the year ended 31 December 20X5 (ie account prospectively for the change
in accounting estimate in the period that the final settlement amount was
determined).

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Question 8
In 20X5, in accordance with the entitys newly formulated equity remuneration scheme, the
entity issued options to acquire 100 of its own shares to each of its 6,000 employees. This is
the only share-based payment transaction into which the entity has ever entered.
In its 31 December 20X5 annual financial statements, Entity A accounted for the equity-settled
share-based payment transaction in accordance with Section 26 Share-based Payment. Must the
entity account for a change in accounting policy in its 20X5 financial statements?
(a) Yes
(b) No

Question 9
Which of the following statements is true?
(a) Financial statements of subsequent periods need not repeat the disclosures required
for a change in accounting policy and the correction of a prior period error.
(b) Financial statements of subsequent periods must repeat the disclosures required for a
change in accounting policy and the correction of a prior period error.
(c) Financial statements of subsequent periods must repeat the disclosures required for a
change in accounting policy and the correction of a prior period error unless it is
impracticable to identify the period to which they relate.

Question 10
Which of the following is not a change in accounting policy?
(a) In the current reporting period an entity changed the basis on which it measures a
building that is an investment property from the fair value model to the cost model
because fair value can no longer be measured reliably without undue cost or effort on
an ongoing basis.
(b) An entity measures its only investment property at fair value. In the current reporting
period, the entity acquired a second investment property which it measures using the
cost model because the fair value of the second investment property cannot be
measured reliably without undue cost or effort on an ongoing basis. It continues to
account for the first investment property using the fair value model.
(c) In the current reporting period the entity changed the method on which it calculates
depreciation of buildings, classified as property, plant and equipment, from the
reducing balance method to the straight-line method.
(d) All of (a)(c) above.

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Answers
Q1
Q2
Q3
Q4
Q5

(c) see definition in the Glossary

(d) see definition in the Glossary
(d) see paragraph 10.21
(c) see paragraph 10.21(a)
(a) This question is not about the application of Section 10 Accounting Policies, Estimates and
Errorsthe error in the entitys financial statements for the year ended 31 December
20X3 was detected before the financial statements were authorised for issue (ie before
the period relevant to the application of the requirements of Section 10). The question is
about how to account for an event after the end of the reporting period (see paragraph
32.2 and 32.4).
Q6 (b) see paragraphs 10.15 and 10.16
Q7 (a) see paragraphs 10.1910.21
Q8 (b) see paragraph 10.9(b)
Q9 (a) see paragraphs 10.13, 10.19 and 10.23
Q10 (d) see paragraphs 10.9(c) and 10.15

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APPLY YOUR KNOWLEDGE
Apply your knowledge of the requirements for accounting and reporting accounting policies,
estimates and errors in accordance with the IFRS for SMEs by solving the case studies below.
Once you have completed the case studies check your answers against those set out below this
test.

Case study 1
On 1 January 20X1 SME Z paid CU600,000 to acquire a new barge. In the belief that it was
entitled to a refund of purchase taxes on the acquisition of the barge, SME Z claimed, and was
refunded, CU60,000 by the local government. However, in late 20X7 SME Z repaid the refund
when it became apparent that it had made an error in making the claim to the local
government as it had not been entitled to the refund of purchase taxes on acquisition of the
barge.
From the date of acquisition to 31 December 20X6, SME Z had the following assessments:

The useful life of the barge is 15 years from the date of acquisition

The residual value of the barge is nil

The entity will consume the barges future economic benefits evenly over 15 years from
the date of acquisition.

In 20X7, in the light of the development of new barge preservation treatments, the period over
which the barge is expected to be economically usable by one or more users increased from
15 years to 26 years. SME Z now expects to dispose of its barge after using it for 20 years from
the date of acquisition (ie a further 14 years). At 31 December 20X7, SME Z assessed the
residual value of the barge at CU70,000.

Prepare accounting entries to record the barge in the accounting records of SME Z for the
year ended 31 December 20X7.

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Answer to case study 1
31 December 20X7
Dr

Costproperty, plant and equipment

Dr

Cr Cash

CU60,000
CU60,000

To recognise the repayment of the purchase taxes claimed in error.

Dr

Retained earnings at beginning of year

(a)

CU24,000

Cr Accumulated depreciationPPE

CU24,000

To correct recorded depreciation of the barge from 20X1 to 20X6 for the correction of the purchase taxes claimed
in error.

Dr

(c)

Profit or loss (depreciation)

CU20,714

Cr Accumulated depreciationPPE

CU20,714

To recognize depreciation of the barge for the year ended 31 December 20X7

The calculations and explanatory notes below do not form part of the answer to this case study:
(a)
(b)
(c)

(d)

(e)

(b)

CU4,000

6 years (ie 20X1 to 20X6) = CU24,000.

CU60,000 increase in the cost 15 years = CU4,000 additional depreciation per year (20X1 to 20X6).
(d)

[CU360,000 less CU70,000 residual value] 14 years remaining useful life = CU20,714 depreciation for the
year ended 31 December 20X7.
(e)

CU600,000 cost less (CU40,000 depreciation 6 years) accumulated depreciation = CU360,000 corrected
carrying amount at 31 December 20X6.
CU600,000 carrying amount 15 year useful life = CU40,000 corrected depreciation per year (20X1 to 20X6).

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Case study 2
In its financial statements for the year ended 31 December 20X1 SME Y reported CU73,500
revenue (sales), CU53,500 cost of goods sold, CU6,000 income tax expense, CU20,000 retained
earnings at 1 January 20X1 and CU34,000 retained earnings at 31 December 20X1.
In 20X2, after the 20X1 financial statements were approved for issue, SME Y discovered that
some products sold in 20X1 were incorrectly included in inventories at 31 December 20X1 at
their costCU6,500.
In 20X2, SME Y changed its accounting policy for the measurement of investments in
associates after initial recognition from the cost model to the fair value model. It acquired its
only investment in an associate for CU3,000 many years ago. The associates equity is not
traded on a securities exchange (ie a published price quotation is not available). The fair value
of the investment was determined reliably using an appropriate equity valuation model on 31
December 20X2 at CU25,000 (20X1: CU20,000 and 20X0: CU18,000).
At 31 December 20X2, as a result of the invention of improved lubricants, SME Y reassessed the
useful life of Machine A from four years to seven years. Machine A is depreciated on the
straight-line method to a nil residual value. It was acquired for CU6,000 on 1 January 20X0.
Inventories of the type manufactured by Machine A were immaterial at the end of each
reporting period.
SME Ys accounting records for the year ended 31 December 20X2, before accounting for the
change in accounting policy and before accounting for the change in accounting estimate,
record CU104,000 revenue (sales), CU86,500 cost of goods sold (including CU6,500 for the error
in opening inventory and CU1,500 depreciation Machine A) and CU5,250 income tax expense.
SME Y presents financial statements with one year of comparative information.
For simplicity the tax effect of all items of income and expenses should be assumed to be
30 per cent of the gross amount.
Draft an extract showing how the correction of the prior period error, change in
accounting policy and change in accounting estimate could be presented in the
statement of income and retained earnings and disclosed in the notes of SME Y for the
year ended 31 December 20X2.

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Answer to case study 2
Extract from SME Y statement of income and retained earnings for the year ended 31 December 20X2
Notes

20X2

20X1
Restated

CU
Revenue
Cost of goods sold (20X1 as previously stated
CU53,500)
Gross profit
Other incomechange in the fair value of investment
in associate (20X1 as previously stated CU0)
Profit before tax

CU

104,000
(79,100)

73,500
(a)

(60,000)

24,900
5,000

13,500
(b)

29,900

2,000

(8,970)

Profit for the year (20X1 as previously stated

CU14,000)

20,930

10,850

Retained earningsbeginning of the year

41,350

30,500

34,000

- effect of the correction of a prior period error

(4,550)

- effect of a change in accounting policy

11,900

Retained earningsend of the year

62,280

(e)

15,500
(c)

Income tax expense (20X1 as previously stated

CU6,000)

- as previously stated

(d)

(4,650)

(f)

20,000
(g)
(m)

10,500

(l)

41,350

SME Y
Notes to the financial statements for the year ended 31 December 20X2

Note 9 Profit before tax

Change in accounting estimate
In response to the advent of superior lubricants that prolong the life of the machine used to produce the
estimated useful life of the machine was increased from four years to seven years. The effect of the change in the
useful life of the machine is to reduce the depreciation allocation by CU900 in 20X2 and 20X3. The after-tax effect
is an increase in profit for the year of CU630 for each of the two years.
Depreciation expense in 20X4-20X6 is increased by CU600 because of the useful life revision, as under the initial
estimate, the asset would have been fully depreciated at the end of year 20X3. The after-tax effect for these three
years is a decrease in profit for the year of CU420 per year.

Note 11 Correction of prior period error

In 20X2 the entity identified that CU6,500 products that had been sold in 20X1 were in error included in inventory
at 31 December 20X1. The financial statements of 20X1 have been restated to correct this error. The effect of
the restatement is a CU4,550 decrease in profit for the year ended 31 December 20X1 after decreasing income
tax expense by CU1,950. This resulted in a CU4,550 (decrease) restatement of retained earnings at
31 December 20X1.

Note 12 Change in accounting policy

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In 20X2 the entity changed its accounting policy for the measurement of investments in associates after initial
recognition from the cost model to the fair value model. Management judged that this policy provides reliable and
more relevant information because dividend income and changes in fair value are inextricably linked as integral
components of the financial performance of an investment in associate and measurement at fair value is
necessary if that financial performance is to be reported in a more meaningful way. This change in accounting
policy has been accounted for retrospectively. The comparative information has been restated. The effect of the
restatement is CU1,400 increase in profit for the year ended 31 December 20X1 including an increase in income
tax expense of CU600. This, together with the CU10,500 (increase) restatement of retained earnings at 31
December 20X0, resulted in a CU11,900 increase in retained earnings at 31 December 20X1. Furthermore, profit
for the year ended 31 December 20X2 was CU3,500 higher (after deducting CU1,500 tax effect) as a result of
(b)
recording a further CU5,000 increase in the fair value of the investment in an associate in 20X2.
The calculations and explanatory notes below do not form part of the answer to this case study:
(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)
(i)

(j)
(k)
(l)

(m)

(i)

CU86,500 given less CU6,500 correction of error (now recognised as an expense in 20X1) less CU900
effect of the change in accounting estimate.
CU25,000 fair value (20X2) less CU20,000 fair value (20X1) = CU5,000 (ie effect of applying the new
accounting policy (fair value model) in 20X2).
(h)

CU5,250 + CU1,950 + 30% (CU900(i) reduction in depreciation resulting from the change in accounting
estimate) + 30% (CU5,000 increase in the fair value of investment propertychange in accounting policy) =
CU8,970.
CU53,500 as previously stated + CU6,500 (products sold and incorrectly included in closing inventory in
20X1) = CU60,000 (ie the prior period error is corrected retrospectively by restating the comparatives
amounts, in accordance with paragraph 10.20(a)).
CU20,000 fair value (20X1) less CU18,000 fair value (20X0) = CU2,000 (ie effect in 20X1 of the change in
accounting policy for investments in associates from the cost model to the fair value model).
(h)

CU6,000 as previously stated less CU1,950

accounting policy) = CU4,650.

correction of prior period error + 30% (CU2,000 change in

(h)

CU6,500 (products sold and incorrectly included in inventory in 20X1) CU1,950

CU4,550.

(tax overstated in 20X1) =

CU6,500 (products sold and incorrectly included in inventory in 20X1) 30% (income tax rate) = CU1,950
(j)

CU1,500 depreciation (using old estimate, ie CU6,000 cost 4 years) less CU600 using new estimate of
useful life = CU900
(k)

CU3,000

carrying amount 5 years remaining useful life = CU600 depreciation per year

[CU6,000 cost less (CU1,500 depreciation 2 years)] = CU3,000 carrying amount at 31 December 20X1
(CU 18,000 fair value of investment in associates at 31 December 20X0 less CU3,000 carrying amount based
on the cost model at the same date) (1 less 30% income tax rate) = CU10,500 effect of a change in
accounting policy (from cost model to fair value model)
(l)

(e)

CU10,500 + [CU2,000

(1 less 30% income tax rate)] = CU11,900

IASC Foundation: Training Material for the IFRS for SMEs (version 2010-1)

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