Chapter 7 Notes — Part 1 ‘Sub-topics ‘Accounting Policies, Changes in Estimate, Errors and Events after the Reporting Perigg g _ Notes- Part2 Related Party Disclosures and Operas Segments : . tandards (Notes Part 1): cial Statements Changes in Estimates and Errors Related s PAS 1 Presentation of Fina PAS 8 Accounting Policies, PAS 10 Events after the Reporting Period ‘Learning Objectives 1. State the relationship of the notes with the other compor of a complete set of financial statemenis. 2. Define the following and give examples: (1) Change i accounting policy, (2) Change in accounting estimate, and Error. 3. Differentiate between the accounting treatments of following: change in accounting policy, change in accounti ' ease correction of prior period error. f oanree ee the reporting period, oe ccounting requirements for events afte \8 Period. Notes The note in ime en to the financial statements) provides inform isan integral pact gh eed in the other financial statem other finaneig, rt of a complete set of financial statements , al statements are intended to be read in con” Scanned with CamScannerNotes — Part 2 Mee ith the notes. Accordingly, information i . gjatements shall be cross-referenced to themes ner nancial PAS 1 requires an entity to present the notes in a systematic manner. Notes are normally structured as follows: 4, General information on the Teporting entity, This includes the domicile and legal form of the entity, its country of incorporation and the address of its registered office (or principal place of business, if different from the registered office) and a description of the nature of the entity’s operations and its principal activities. 2, Statement of compliance with the PFRSs and . Basis of preparation of financial statements, 3. Summary of significant accounting policies. This includes narrative descriptions of the line items in the other financial statements, their recognition criteria, measurement bases, derecognition, transitional provisions, and other relevant information. ~ 4. Disaggregation (breakdowns) of the line items in the other financial statements and other supporting information. 5. Other disclosures required by PFRSs, such as (the list is not exhaustive): s 7 a. Contingent liabilities and unrecognized contractual commitments. : ; oe b. Non-financial disclosures, e.g., the entity’s financial risk management objectives and policies. a Events after the reporting date, if material. = Changes in accounting policies and accounting estimates and corrections of prior period errors. Related party disclosure. Judgments and estimations. - Capital management. : | ' Dividends declared after the reporting period Dae the financial statements were authorized for issue, Telated amount per share. pr ramp Scanned with CamScanner328 ter i. The amount of any cumulative preference dividends recognized. Not not required by PFRSs but the man, isclosures 6. Other di the understanding of the deems relevant to statements. ebement financiay Notes are prepared ina necessarily detailed manner. Ny; “often than not, they are voluminous and occupy a bulk Portion o the financial statements. For that reason (and to save trees 3) only excerpts of notes to the financial statements are Provided. below, sufficient to give you an idea on how the concepts discussed above are presented in the notes. e Accounting policies. Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.” (PAS 8.5) When selecting and applying accounting policies, ‘an entity shall refer to the hierarchy guidance summarized below. & Hierarchy of reporting standards 1. PFRSs 2. Judgment ‘When making the judgment: : > management shall consider the following: a. Requirements in other PFRSs dealing wl transactions b. Conceptual Framework > . management may consider the following: ing bodies a. Pronouncements issued by other standard-setting b. Other accounting literature and industry practices ith similar on, a ction transa' 6 PA PRRSS PA ____ The foregoing means that, to account for a entity refers to the PERSs first (which consist of the and Interpretations); in the absence of a PFRS that spec at deals with that transaction, management uses its je aa in developing and applying an accounting policy Scanned with CamScannertl 329 by 5 ig relevant and reliable.In making the : aa eee iste reliable ig the judgment, a a or consi ders the applicability of the references listed poe prrss are accompanied by guidance to assist entities in ying elt requirements. A guidance states whether it is an er art of the PFRSs. A guidance that is an integral part of OER jgmandatory- es in Accounting Policies hang i : Fis § requires the consistent selection and application of counting policies. 3 PAS 8 permits a change in accounting policy only if the | change: |, istequired by a PFRS; or p, results in reliable and more relevant information. A change in accounting policy usually results from a change in’ measurement basis. Examples of changes in accounting policies: | & Change from FIFO to the Weighted Average cost formula for |. inventories, b Change from the cost model to the fair value model of measuring investment property. | © Change from the cost model to | Measuring property, plant, and assets, the revaluation model of quipment and intangible ancial assets. 4 Change i ing ge in business model for classifying fin from long-term Change in the method of recognizing revenue : “onstruction contracts. Change to a new policy resulting from new PERS, : wenee in financial reporting framework, ‘°t SMEs to full PERSs. bow | Scanned with CamScanner the requirement ofa such as from PERS500 ee ae ot changes in accounting policies: ccounting policy for transaction, that differ in substance from. other Ose The following are n a. the application of an a‘ events oF conditions reviously occurring . . P jcation of a new accounting policy for transact, b._ the applicati a ; ents OF conditions that did not occur previoush other ev! ely ora immaterial (PAS 8.16) anges in Accounting Policies Accounting for Ch Changes in accounting policies are accounted for using the following order of priority: 4, Transitional provision ina PFRS, if any. 2. Retrospective application, in the absence of a transitiona] provision. 3. Prospective application, impracticable. if retrospective application . jg For example, if an entity changes an accounting policy, it shall refer first to any specific transitional provision of the PFRS that specifically deals with that accounting policy. If there is no transitional provision, the entity shall. account for the change using retrospective application. If, however, retrospective application is impracticable, the entity is allowed to account for the change using prospective application. Retrospective Application ; Retrospective application means adjusting the opening balance “oll each affected component of equity (eg., retained earnings) for the earliest prior period presented and the other compare amounts disclosed for each prior period presented 45 if the ™ accounting policy had always been applied.” (PAS8%) oie! For example, if an entity changes its accounting Fil from the Average to the FIFO cost formula, all previow® nt at statements presented in comparative with 7 Seo financial statements are restated to apply FIFO. It is “ always been applied. Scanned with CamScanner331 ifretrospective application is impracticable for all periods sed, the entity shall apply'the new accounting policy as at ve regia of the earliest period for which retrospective ti yn is practicable, which may be the current Period. If pl spective application is still impracticable as at the beginning in current period, the entity is allowed to apply the neve d “counting Policy prospectively from the earliest date practicable, x > Impracticable means it cannot be done after making every reasonable effort to do so, A retrospective treatment is impracticable if the prior iod effects cannot be determined or if it requires significant estimates and assumptions to have been made when the prior period financial statements were prepared and these are impossible to determine in the current period. Illustration: Change of cost formulas During 20x1, ABC Co. decided to change from the Average cost formula for inventory valuation to the FIFO cost formula. Inventory balances under each method are as follows: ‘ Average HIFO January 1 1,000,000 1,200,000 December 31 2,000,000 2,100,000 Income tax rate is 30%. Reirement: What is the net cumulative effect of the accounting ‘hange in ABC’s opening retained earnings balance? _ yyy _ Solution; Average inventory ~ January 1 1,000,000 IFO inventory ~ January 1 1,200,000 Cumulative effect gross of tax (increase) 200,000 Multiply by: (100% - Tax rate of 30%) at _ 70% ‘imulative efect ~ net of tax (increase) aoe kK | Scanned with CamScannereee fs: e that the cumulative effect is computeg a Observ' beginning balances of inventory. Jon. | Inventory 2M ee Retained € a Deferred tax liability (20K x 30%)* : iS Income Taxes requires the recognition of current or deferred taxes - tments to the opening balance of retained earnings resultin, auc in accounting policy that is applied retrospectively or of an error. : 8 from ¢ ther the correction Voluntary change in accounting policy An entity may adopt a pronouncement of other standard-setting body (e.g. U.S. GAAP issued by the FASB) in the absence of a_ PFRS that specifically applies to’a transaction. If later on the other standard-setting body amends the adopted pronouncement and the entity decides to adopt the amended version, such event is calleda voluntary change in accounting policy.” 7 A voluntary change in accounting policy is accounted for by retrospective application. An early application of a PFRS is not a voluntary change in accounting policy. Change in reporting entity SFAS No. 154 (US GAAP) issued by the FASB defines a changeit teporting enti that, i 'y as “a change that results in financial statemen ae in effect, are those of a different reporting entity. A change conse tS eatity. is limited mainly to (1) presen olidated or combined financial statements in place of fin?” Statements of indivi iti ; i Pian individual entities, (2) changing specific 8 ida! financial st ae the Stoup of entities for which conse ‘i included Ay “ments are presented, and (3) changing Combined financial statements.” it?! Und statements.” vy is acc for by Coa SFAS 154, change in reporting entity of iz en spective application. The financial state™ Scanned with CamScanner333 jods presented are restated to show financial information jor peri i he on new reporting entity. [aN mentions only #0 accounting changes ~ (1) change al |r dng policy and (2) change in accounting estimate. Change | | account aa ificalh ee : i |jnreporting entity is not specifically mentioned in the PERSs. o Accordingly, a business combination (PERS 3 Busines | Combinations) or an event resulting to loss of control by a parent over is subsidiary (PFRS 10 Consolidated Financial Statements) | hange in reporting enti is not a Changes in Accounting Estimates Many items in the financial statements cannot be measured with precision but only through estimation because of uncertainties inherent in business activities. The use of teasonable estimates therefore is necessary in order to provide relevant information, Estimates are an essential part of financial reporting and do not undermine the reliability of financial reports. For example, the following necessarily requires estimation: a. net realizable value of inventories; b. depreciation; © bad debts; 4. fair value of financial assets or financial liabilities; and © provisions, Estimates involve judgments based on latest available information, Consequently, estimates need to be revised when ere is @ change in circumstances such that new information or mote experience is obtained, : A change in accounting estimate is “an adjustment of the | trying amount of an asset or a liability, or the amount of the | Petiodic 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 Scanned with CamScanner==) 334 Chapter 7 ingly, are not corrections of errors” id, accordingly, ! developments and, 85) Change In Accounting Poll vs. Change in Accounti al I ng Estimate from a] > Normally resus t= > Normally results ; = > oa ¢ in measurement basis changes on how the expected : 8 FIFO to Weighted inflows or outflows 4 a ¢, Cost to Fair value, economic _ benefits a te.) * realized from assets 2 incurred on liabilities, If a change is difficult to distinguish between these two, the change is treated as a change in an accounting estim ate. Examples of changes in accounting estimates; a, Change in depreciation or amortization method b. Change in estimated useful life or ‘residual value of a_ depreciable asset Change in the required balance of allowance for uncollectible accounts or impairment losses Change in estimated warranty Provisions obligations and other Accounting for Changes in Accounting Estimates ; Changes in accounting estimates are accounted for by prospective application. Prospective application means recognizing the effects of the change in Profit or loss, either in: a. the period of change; or b. the period of change and future periods, Under retained Prospective a aine, earnings and {] restated, he if both are affected. of PPlication, the beginning pala Previous financial statements af Scanned with CamScannerLe 335 jow the following accounting procedy, x tes wh i awe “ ee counting estimates: et accounting (sce Determine the carrying amount of the asset as at th st” jeginning of the period of change, c a. If the entity presents only annual financ and the change occurs during, the arma amount is computed as at the beginning of the pie period (e.g, January 1, if the entity uses the calender year period). b.__ Ifthe entity presents interim financial statements and the change occurs during a particular interim period, the carrying amount is compiited as at the beginning of that interim Period (eg, April 1, if the entity prepares quarterly interim reports and uses the calendar year period and the change occurs during the 2* quarter), Si: Depreciate the computed carrying amount in Sip #1 taking into account any changes in depreciation method, useful life, or residual value. lustration 1: Change in depreciation method, estimated useful life and residual value On January 1, 20x1, ABC Co. acquired equipment for P1,000,000. The equipment will be depreciated using the straight-line method ver 20 years, The estimated residual value is P100,000. 'n2)s, following a reassessment of the realization of the expected “onomic benefits from the equipment, ABC Co. changed its ‘predation method to. sum-of-the-years digits (SYD). The "maining useful life of the asset is estimated to be 4 years and the "sidual value is changed to P50,000. ‘i . i 6? Retuirement: Compute for the depreciation expense in 20x Solution: Scanned with CamScanner ADec. 31, 20x6 | i 6 ey i f the equipment Step 1: The carrying amount of the equip: a8 Of date of dag is computed as follows: Historical cost 1,000,009 Residual value (a ) Depreciable amount ; So Divide by: Estimated useful life (EUL) <7 ‘Annual depreciation expense based on straight line method Historical cost 1,000,000 Accumulated depreciation (45,000 x 5 years) (225,000 Carrying amount - January 1, 20x6 (225.000) Step 2: The carrying amount of the equipmerit is depreciated over its remaining useful life taking into consideration the changes. Carrying amount - January 1, 20x6 775,000 Residual value 50,000) Revised depreciable amount 725,000 Multiply by: SYD rate* 4/10 Depreciation expense for 20x6 290,000 * SYD denominator based on revised remaining life = 4 x (@+1y2}=10 ae solution: [((1,000,000 - 100,000) x 15/20 + 100,000) 50,000) x 4/10 290,000 The entry to record the effect of the change in estimate in 20x6 in Profit or loss is as follows St Depreciation expense 290,000 Accumulated depreciation = 1 4 | / illustration 2 Change in Provisions ‘Cember 3; : Provisions,” 20¥L, ABC Company recognized the followi"8 Scanned with CamScanner397 notes Part Warranty expense : "Ts0000 (| Tstimated warranty obligation tie itigati 100,000 (| Probable loss on litigation” ; re Estimated liability on pending Fee litigation 20x2, ABC incurred 65,000 in discharging its warranty soigation and settled the pending lawsuit for P90,000. Requirement: Provide the entries made in 20x2, Solution: Actual warranty cost 65,000 Balance in estimated warranty obligation (50,000) ‘Additional warranty expense recognized in 20x2 15,000 Actual cost of litigation 90,000 Balance in estimated liability on pending litigation (100,000) Gain on settlement of litigation recognized in 20x2 (10,000) The pertinent entries are as follows: 2x2 Warranty expense 15,000 Estimated warranty obligation 50,000 Cash in bank 65,000 2 | Estimated liability in pending litigation | 100,000 Gain on settlement of litigation 10,000 Cash in bank : 90,000 Observe that in both illustrations above, the effects of the changes in accounting estimates are recognized in profit or loss in Period of change (in case of change in provision) or in the io of change and in future periods (in case of change in useful © Tesidual value, or depreciation method). No adjustments are bac’ tthe previously recognized expenses or to the beginning lance of retained earnings. Ras Scanned with CamScannereT Errors Errors include misapplication of accounting Police, mathematical mistakes, oversights or misinterpretations of fui fraud. ‘ - oe aBinancial statements do not comply with PERS. if A : the contain’ either material errors or immaterial errors add intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.” (Pass ¢) Material errors are those that cause the financial statements to be misstated. Intentional errors are fraud. In the case of fraud, it does not matter whether the error is material or immaterial, Fraudulent financial reporting does not comply with PFRSs, Errors can be errors of commission or errors of omission, An error of conmission is doing something wrong while an error of omission is not doing something that should have been done, The types of errors according to the period of occurrence are as follows: a. Current period errors — are errors in the current period that were discovered either during the current period or after the current period but before the financial statements were authorized for issue. These are corrected simply by correcting entries, Prior period errors — are errors in one or more prior periods that were only discovered either during the current period or after the current period but before the financial statements wet autKorized for issueseThese are corrected by retrospectite restatement, Retrospective Restatement Retrospective restatement means: ® restating the comparative amounts for the prior pesodé) ‘ ected in which the error occurred; or ch ne Ot Occurred before the earliest prior period eee | for ree Opening balances of assets, liabilities and" test prior period presented. (PAS 8.42) | “4 Scanned with CamScannerrective restatement et cing @ Ptior period ; a as if the error had nl rover ocourred. accounting Policy had lied, : Policy as if the always been ay Just like retrospective application, fatement shall be made as far back as Practic wr acticable to determine the cumulative effect of a at the beginning of the current period, the en‘ tpcorect the error prospectively from the earliest d; Tetrospective able. If it is a prior period tity is allowed late practicable, lustration 1: Current period error On January 10, 20x2, prior to autthorization of ABC Cos December 31, 20x1 financial statements for issue, the accountant of ABC Co. received a bill for an advertisement made in the month of December 20x1 amounting to P400,000. This expense was not accrued as of December 31, 20x1. Requirement: Prepare the correcting entries assuming (a) books are sill open and (b) books are already closed. Ignore income taxes, the correcting entry if the books are still open is as follows: De.31, | Advertising expense : 400,000 2011 Advertising payable 400,000 | © the follows: Jen, 2012 correcting entry if the books are already closed is as Retained earnings 400,000 wo 400,000 Advertising payable > "Books sill open” means that closing entries haven ea, in Made. Accordingly, nominal accounts can still be us Correcting entries, * "Books closed” means that closing entries have oe teed ade. Consequently, nominal accounts camof be ud Scanned with CamScanner& Shapting | We cting entries are made by Use anymore. Instead, correcting Of rey accounts only. accounting systems Prohibit tho 4. Son canes when the books are already a comection 0 aca internal control which minimizes qn) Tes hte 2 ae mnges to records once they are closed, Gp ued esas the books are already closed, the am, i ecvrising expense to be presented in the pean Statement of still be the correct amount of 400,000. The adjustment shay a made directly to the income statement for Presentation Purpos Continuation: If income tax is hot ignored, the entry if the books are already closed is as follows: (assume an income tax rate of 30%) ) Jan. 10, | Retained earnings (400,000 x 70%) 280,000. 2032 | Income tax Payable* (400,000 x 30%) 120,000 Advertising payable 400,000 *PAS 12 Income Taxes Tequires the reco; adjustments to the opening balance of gnition of current or deferred taxes on inaccounting policy that is applied ret retained earnings resulting from either a change Tospectively or the correction of an error. A llustration 2: Prior period error On January 15, 20%3 while finalizing its 20x2 financial statements, ABC Co, discovered that depreciation expense recognized in 20x is overstated by P400,000, ; the Requirement: Ignoring income tax, what is the entry to correct Prior period error? Answer; Accumulated depreciation Retained earning ing the Prior period errors are corrected by ae int | beginning balance of retained earnings for the eat ud Scanned with CamScanner341 ted. The effect of a correction of Pe 1 from profit or loss for the Perio ot cise Prior petiod error is din Which the error is. a a the 20x1 financial statement; rative to the 20x2 financial statem, Sens are restated to correct * stat depreciation. ‘S are Presented as, ents, the 20x1 financial the overstatement in Types of errors Itis nearly impossible to make a complete list of the errors made in accounting. Even right now, as you are reading this book, someone, somewhere, might be committing an entirely new Nonetheless, we will make a broa errors into the following: 1. Errors in principle ~ these arise’ from lack of knowledge of accounting standards or Procedures, misuse of- available Clerical and. similar errors — these include’ mathematical mistakes, oversights or misinterpretations of facts. Examples: & Transplacement error — committed when the number of digits in an amount is incorrectly increased or decreased, $8» 2 P1000 amount is recorded as P100 or P10,000. ; he Tansposition error is committed when digits in an amount we interchanged, e.g, a P15,652 amount is tecorded as 715,65 or P15,265, "7Ors of omission — for example, the accountant forgot to Tecord a tr; ction. Errors of iimbaion ~ for example, the accountant recorded a transacti i artially. : smpenaing eo erapik a P500 vee a '¢ sales ‘account is compensated by a P500 overstatem Scanned with CamScanner342 Chapters { in utilities expense account — the erroneous cred compensated by the erroneous debit. This error wit a is revealed by the trial balance. be f. Accounting system error — for examy ple, there ig a "bug in the computer program. 7 g- Counterbalancing and Non-counterbalancing errors _ discussion below. : Errors may affect the statement of financial Position on} the income statement only, or both, % Errors affecting the statement of financial Position on} (errors in real accounts) and errors affecting the income Statement only (errors in nominal accounts) are corrected throu, teclassification entries from the wrong account(s) to the appropriate account(s). For example, if advertising expense is incorrectly recorded as travel expense, the Correcting entry would bea debit to advertising expense and a credit to travel expense, Errors affecting both the stat fement of financial position and the income statement are either: a. Counterbalancing errors, or b. Non-counterbalancing errors, Counterbalancing errors ted, Counterbalancing errors are errors which, if remained vuncorre ‘ are automatically corrected or offset in the next accounting re i Their effect on the financial statements: automatically ™ (c S ‘Ounterbalance) in the next accounting period. es profit! For example, if a counterbalancing error covet Year 1 to be Overstated, the profit in Year 2 will Pe 4 Year 3 “4 the error remains. uncorrected. However, the profit teal be unaffected because the effect of the error pao 12 a far 2. The statement of financial position in Year? erroneous but the statement of financial position Succeeding period: S will be unaffected. Scanned with CamScannerYeord Year 2 Year 3 overstatement | understatement Tone erroneous none ay xamples of counterbalancing errors include errors relating to the jdlowing: 1, Inventory 2, Purchases 3, Sales 4, Prepayments and Unearned items 3, Accruals for income and expenses Non-counterbalancing errors i Nowcounterbalancing errors are errors which, if remained corrected, are-not automatically corrected or offset in the next accounting period. Generally, a non-counterbalancing error affects the profit or loss only in the period the error was committed. The profit or less in subsequent periods where the error remains ‘uncorrected, ‘ae unaffected. On the other hand, the staterhent of financial Position, remains erroneous until the non-counterbalancing error 'Sdiscovered and corrected. For example, if a non-counterbalancing error causes the Profitin Year 1 to be overstated, the profit in Year 2 will.be correct v.unalfected. However, the statements of financial position in Yeus 1 and 2 where the non-counterbalancing error remains Meorrected will be erroneous. Paples ofnon-counterbalancing errors: sstatement in depreciation +f "roneous capitalization of cost that should be expens 3, Cultight 2 Non-capitalization of capitalizable cost Scanned with CamScanner|_ overstatement erroneous Rel jationships between accounts In @ periodic inventory system, petween accounts can provi on profit or loss. of counterbalanciNS errors Fading inventory: Profit_- Direct relationshi > iP ns if ending inventory is is understated, ” Profit the following relatio, shi ide guidance in determini: ing the ef fects Direct relationship mea} jgalso understated. ‘The following other relationshi relationship shown above: ps, are derived fmt » ee inventory + Cost of goods sold- Inverse : ginning inventory & Purchases : Cost if relational relationship of goods sold - Die » Beginning inventor P & restinso ry Purchases : Profit - — Inverse Inverse relationshi, ‘ip means if an Sud account ing i lerstated, the related account {e-g2 auding mene erstated, (eg. cost of goods sold) is The relationshi: shi the periodic invento ips shown above are applicable only undet goods sold isa redid aa because under this system co (temined theough : amount afte dedveting “ending inwetor” ne The spree ahaa count) from “total goods avaiable FY le perpetual invento; relationships are not applicable unde! goods sold is Weaied gan because under this syste™ ending inventory, independently of the physical count Relationshi shi f uated its ant acu also be derived for prepay accrual for income and expenses: cost df Scanned with CamScannera pt L 345 eB ‘asset-telated account: Profit - Direct relationship related account pertains to prepayments pe nce, prepaid rent, etc.) and accrual for income wot nterest receivable, et). i (eg, prepaid (eg. accrued les: = prepaid asset : i prepaid insurance is understated, profit is also understated. This jsbecause the understatement of prepaid insurance is caused by the overstatement of insurance expense, i.e,, the unexpired portion of prepaid insurance is erroneously expensed. If expense is | wersated, profit is understated, Error on accrued income Ifinterest receivable is understated, interest income earned must nothave been accrued, thereby, causing profit to be understated. If income is understated, profit is also understated. The relationship below is derived for the relationship shown above: > Liability-related account : Profit - Inverse relationship ‘Luability-related account” pertains to unearned items (eg, teamed rent, advances from customer, deferred income, etc.) and accrual for expenses (e.g, accrued expense, accrued salaries Payable, interest payable, etc.). Examples: TOT on unearned income ei ‘neared rent is overstated, profit is sindessatad, Te A “cause the overstatement of unearned rent is caused y eee “cognition of rent income for the eared portion o! ceived in advance, Be : a Scanned with CamScanner-ror on accrued expense ff ne payable is understated, salaries expense must : been accrued, thereby, causing expense to be understated = profit to be overstated. ot hay, /Slustration 1: Counterbalancing & Non-counterbalancing errors ABC Co. reported profits, of P1,000,000 and P2,000,000 in 20x1 and 20x2, respectively. In 20x3, the following prior period errors were discovered: a. The inventory on December 31, 20x1 was understated by 50,000. j b. Equipment with an acquisition cost’ of 300,000 was erroneously charged as expense in 20x1. The equipment has an estimated useful life of 5 years with no residual value, ABC: Co. provides full year depreciation in the year of acquisition, The unadjusted balances of retained earnings are P2,200,000 and P4,200,000 as of December 31, 20x1 and 20x2, respectively. Requirements: a How much are the correct profits in 20x1 and 202, respectively? b. How much are the correct retained earnings in 20x1 and 20x, respectively? Solutions: | Requirement (a): Correct profits 2 : 20x1 20 Reads paige Corrections - (over) understatement* : ® etter of Dec. 31, 20x1 inventory 30000 | 6048) pitalizable (2) Depres le ets charged as expense 300,000 5 &xpense not i 08 Net adjustment to profit STecognized (cn. (210) Correct profits oma 1,890! “An understatement i : " ce © Sowrcted by addition; while an overstatement is core Scanned with CamScannerwe iotice that the effect of the error on the invent, counterbalanced (Ley automatically reversed) in the ys diatelY following year (i.e., 20x2) while the effect of the Ce “ ° equipment did not counter-balanced in the immediately iling petod: pogrom (W): Correct retained earnings 20x1 20x2 Tradusted retained earnings 2,200,000 4,200,000 (a) Understatement of Dec. 31, 20x1 ‘ory in 20x1 inventory 50,000 No effect (bd) Capitalizable costs charged as expense 300,000 300,000 (02) Cumulative depreciation expenses not recognized (60,000) _(120,000) Neteffect of errors on retained earnin: 290,000 180,000 Correct retained earnings 2,490,000 __ 4,380,000 . kNotes: © Theertor in the 20x1 inventory has no effect on the December 31, 20x2 retained earnings because its effect has already counter-balanced. © The 20x2 year-end retained earnings is affected only by the non-counter balancing error (i.e., error in equipment). Altemative solution #1: The correct retained earnings may also be computed as follows: 20x1 202 Unadjusted retained earnings 2,200,000 4,200,000 adjustment to 20x1 profit (se above) 290,000 290,000 Net adjustment to 20x2 profit (ce above) =_ (110,000 bo pee Scanned with CamScannerAlternative solution #2: Unadjusted retained earnings Net effect of errors on retained earnings: 20x1: 290,000* : 290,000 i ; 20x2: (110,000) + 290,000* ne Adjusted retained earnings 2,490,000 tae *Amounts represent the net effect of errors in profit '5 (Gefer to previous solution). Alternative solution #3: : The correct retained earnings may also be computed as follows; Retained earnin; 2,200,000 Unadj. R/E Dec. 31, 20x1 290,000 Net adjustment to 20x1 profit 2,490,000 Correct RIE Dec. 31, 20v1 1,890,000 Correct profit in 20x2 4,380,000 Correct RIE Dee, 31, 20x2 “Illustration 2: Counterbalancing & Non-counterbalancing errors ABC Co, reported profits of P400,000 and 600,000 in 20x1 and 20x2, respectively, In 20x3, the following prior period errors were discovered: 2. Prepaid supplies in 20x1 were overstated by P20,000. >. Accrued salaties payable in 20x1 were understated by P40 000 © Repairs and Maintenance expenses in 20x1 amounting !9 100,000 were €rroneously capitalized and being degre over a period of 4 years, The unadj and 2.200 0 as ot Palances of retained earnings are P1,600000 Requirements, eT 31, 20x1 and 20x2, respectively- a. How Much 02, 7 are "4 » d "espectivelyy the correct profits iri 20x1 an Scanned with CamScanner— 349 auch are the correct retained earnings in 201 and 20x2, yw i ropectve? solutions: jrement (a): Correct pro) its 20x1 20x2 Tradjusted profits 400,000 600,000 Corections~ (over) understatement: (@) Overstatement of 20x1 prepaid assets (20,000) 20,000 (0) Understatement of 20x1 accrued salaries (40,000) 40,000 (c1) Expenses erroneously capitalized (100,000) - (c2) Depreciation recognized on repair costs 000,000 4) 25,000 25,000 ‘Net adjustment to profit (135,000) 85,000 Correct profits = 265,000 __ 685,000 Requirement (b): Correct retained earnings 20x1 20x2 Unadjusted retained earnings 1,600,000 2,200,000 (a) Overstatement of 20x1 prepaid assets (20,000) No effect (b) Understatement of 20x1 accrued salaries (40,000) . No effect (c1) Expenses erroneously capitalized (100,000) (100,000) (c2) Cumulative depreciation recognized on repair costs 25,000 50,000 Net effect of errors to retained earnings (135,000) (50,000) Lorrect profits 1,465,000 __2;150,000 } 20x1 20x2 Unadjusted retained earnings 1,600,000 2,200,000 Net adjustment to 20x1 profit (see above) (135,000) (135,000) | Net adjustment to 20x2 profit (see above) - 85,000 {Correct retained earnings 1,465,000 _ 2,150,000 Scanned with CamScanner350 . SN ~~ Si = q Justration 3: Comprehensive ‘ABC Co. made the following errors: a. December 31, 20x] inventory was understated by P2s,g b. ‘December 31, 20x2 inventory was overstated by Pag, Ae ¢. Purchases on account in 20x1 were understated by p, (not included in physical count). °¥ P100,009 d. Advances to suppliers in 20x2 totaling P139, inappropriately charged as purchases. oe e ae 31, 20x1 Prepaid insurance was overstated by f. Décember 31, 20x1 unearned rent income was overstated P26,000. y g- December 31, 20x2 interest receivable was understated 5 { 17,000. : y h. December 31, 20x2 accrued salaries payable was understated by P30,000. i. Advances from customers in 20x2 totaling P60,000 were inappropriately recognized as sales but the goods were delivered in 20x3. Depreciation expense in 20x1 was overstated by P7,200 k. In 20x2, the acquisition cost of a delivery truck amounting to 90,000 was inappropriately charged as expense. The delivery truck has a useful life of five years. ABC’s policy is to provide a full year’s straight line depreciation in the year of acquisition and none in the year of disposal. 1. A fully depreciated equipment with no residu sold in 20x3 for P50,000 but the sale was recorded in following year. 000 were al value Wa ; and Profits before correction of errors were P123,000, 156,000 210,000 in 20x1, 20x2, and 20x3, respectively. : 123008 Retained earnings before correction of errors were Pi ; ively: P1,279,000 and P1, 489,000 in 20x, 20x2, and 20x3, respect : . wi Requirements: Ignoring income taxes, compute for the fol Scanned with CamScanner351 — part 1 ie of the errors on the following: ‘The ee ad 20x3 profit 7 2.2 gd, and 20x3 year-end retained earnitigs v2 2, and 20x3 year-end working capital ‘ ed profits for the years 20x1, 20x2, and 20x3, The prected retained earnings for years 20x1, 20x2, and 20x3, ede all necessary correcting entries assuming the errors discovered in 20x3 while the books in 20x3 are still open. ee e if a all necessary correcting entries assuming the errors 3 oan discovered in’early in 20x4 after the books in 20x3 are already closed. lutions: (Mable | . 20x 20x2 20x3 | “Tadhusted profits 123,000 156,000 210,000 | Conections ~(over)/umderstatement . 4. Understatement of 20x1 inventory 25,000 (25,000) - |b. Overstatement of 20x2 inventory (40,000) 40,000 ¢ Understatement of 20x1 purchases (100,000) ~ 100,000 - 4. Overstatement of 20x2 purchases 130,000 (130,000) ¢.Overstatement of 20x1 prepaid insurance (5,000) 5,000 - £. Overstatement of 20x1 unearned * rent 26,000 (26,000) . g. Understatement of 20x2 interest ‘income 17,000 (17,000) }- Understatement of 20x2 accrued : salaries + (80,000) 30,000 i, Overstatement of 20x2.advances/ sales (60,000) 60,000 }-Overstatement of 20x1 depreciation expense 7,200 - . Acquisition cost of delivery truck in 202 90,000 he Depreciation on delivery truck 18,000) (18,000) * Conected profits 76,200 299,000 : Scanned with CamScannerSe ee ae ; inappropriately charged jivery truck that was inapp) ged « i es ra to profit. However, the related annual Ee of 718,000 (0,000 + 5 years) not recognized ig _ lepreci deducted from the 20x2 and 20x3 profit. xThe cost of sold is fully depreciated and it has a uipment ie eds represents the gain on sale. ssgince the & the proce’ residual value, of the errors on the 20x1 year-end retained The net effect " earnings is simply the net effect on the 20x1 profit, ie, P46,800 ; overstated (see Table 1). : j The net effects of the errors on the 20x2 and 20x3 year-end *. retained earnings are simply the cumulative net effects of ertors — on subsequent years’ profits computed as follows: ee 20x1 20x2 . 20x3 Unadjusted retained earniny 7,123,000 _1,279,000__1,489,000_ i BS Net effect of errors on profits in: . 20x1 (46,800) (46,800) -——_—(46,800), 202, 143,000 143,000 20x3 15,000 Net effect of errors on retained cermin ss (over) / under (46,800) 96,200» 111,200 Adjusted retained earnings 1,076,200 1,375,200 __1,600200 fetch that the net effect of the errors in the 20rd and oie arnings is limited ‘to the counterbalancing errors in 202 “Decsuse al cn rbalancing errors in both 20x and 20:2 ! counterbalanced, nnt*tbalancing errors in 20x1 have already Unadj ; 4 d Comeans retained earnings in 20x2 7,279,000 b. Overs eS Om (oven ander d. Overstatement 2 ae inventory (40,000) of 8 Understatement of ae Purchases ee b Scanned with CamScanner353 es - Part 1 ecto derstatement of 20x2 accrued salaries (30,000) Un eer of 20x2 advances/ sales (60,000) i. pee aenent of 20x1 depreciation expense : 720, = i omusition cost of delivery truck in 20x2* 90,000 i Depreciation on delivery truck 18,000) adjusted retained earnings in 20x2 1,375,200 Observe that the net effect of the errors in the 20x3 resined earnings is limited only to the non-counterbalancing errors in 20x1, 20x2, and 20x3 because all of the:counterbalancing, errors in previous periods have already counterbalanced. Haadjusted retained earnings in 20x3 1,489,000 "Overstatement of depreciation in 20x1 7,200 Historical cost of delivery truck : 90,000 Accumulated depreciation on the delivery truck (36,000) Gain on sale not recorded in 20x3 50,000 Nel effect of errors on the 20x3 retained earnings 111,200 Adjusted retained earnings in 20x3 1,600,200. (Altemative solution: Another way to determine the net effect of errors in retained eamings is to simply get the sum of the net effect of errors in i Ofit for the current and subse juent periods. 20x1 0x7 20x3 | Net effect of errors on retained earnings: | 2x1: (46,800)« : (46,800) gp 48.000 + 46 800))¢ noe | D8: 15,000 + 143,009 + (46,800)]* aaa | Aiusted retained earnings LOO 200 1575 200_ 1,600,200 | ‘Amounts Tepresent the net effect of errors in profits (vefer to Table 1). | | orking capital equals current assets minus current liabilities. affeg UY *tors affecting current assets and current liabilities” “st Working capital, bas ad Scanned with CamScanner‘able 2 in ital i, fe net effect of the errors on working capital is computeg z nder ae of 20x1 inventory 25,000 b. Overstatement of 20x2 inventory (40,000) c. Understatement of 20x1 accounts 2 (100,000) payable: d. Understatement of 20x2 advances to suppliers® e. Overstatement of 20x1 prepaid ieee ean £, Overstatement of 20x1 unearned rent 26,000 g. Understatement of 20x2 interest receivable 17,000 h. Understatement of 20x2 accrued salaries (20,000) i, Understatement of 20x2 advances to 130,000 (60,000) 7} Understatement of cash due to the sale of equipment not recorded in 20x3 Net effect of errors on working capital (over/under 50,000 (54,000) 17,000 50,000 6 Observe the following on Table 2: © The effects of the €trors on profit (Le., overstatement ot understatement) are the same with their effects on working capital. Table 2 is just copied from: Table 1. Howete noncurrent items are excluded because they do not affet working capital, If current assets understated (direct i E current liabilities are understated, working cai! ® overstated (inverse telationship). i Counterbalancing errors affecting current assets and a Habilties affect working capital only in the year Ht are understated, working capital is Telationship). = _ Scanned with CamScanneryi tts vet committed. Working capital in subsequent years is not fr fiected because the errors have already counterbalanced or al offset. hases on account is understated, accounts Payable is also ct “Per ed. Understatement in current verted: liabilities overstates seking CaP advances to suppliers are normally classified as current receivables. Understatement in current assets understates working capital. «Advances from customers are normally classified as current abilities. Understatement in current liabilities overstates working capital. mary of answers to requirements: A, The net effect of the errors on the following: a. 20x1, 20x2, and 20x3 profit: Answers: (46,800), 143,000, and 15,000 b. 20x1, 20x2, and 20x3 year-end retained eamings: ‘Answers: (46,800), 96,200, and 111,200 © 20x1, 20x2, and 20x3 year-end working capital Answers: (54,000), 17,000 ancl 50,000 1 The corrected profits for the years 20x1, 20x2, and 20x3. Ansiers: (76,200), 299,000 andi 225,000 4. The corrected retained earnings for years 20x1, 20x2, and 20x3, Answers: 1,076,200, 1,375,200 and 1,600,200 (Mmirement (4): Correcting entries ~ Books still open The following are the correcting entries assuming the errors were ‘lsovered in 20x3 and the books are still open. * | No comtecting entry. The effect of the error - has already counterbalanced. | Retained earnings — jan. 1,20:3 40,000 Cost of goods sold 40,000 Scanned with CamScannerio iy eat rrr i | No correcting entry. The effect of the error has already counterbalanced. d. | Cost of goods sold 130,000 Retained earnings — Jan. 1, 20x3 e. | No correcting entry. The effect of the error . has already counterbalanced. £ | No correcting entry. The effect of the error 2 has already counterbalanced. g- | Interest income 17,000 Retained earnings — Jan. 1, 20x3 h. | Retained earnings — Jan. 1, 20x3 30,000 Salaries expense i, | Retained earnings — jan. 1, 20x3 60,000 Sales : j. | Accumulated depreciation 7,200 Retained earnings — Jan. 1, 20x3 Ca equipment 90,000 . Retained earnings — Jan. 1, 20x3 K.1) Depreciation expense 18,000 Retained earnings — Jan, 1, 20x3 18,000 lated depreciation tf % E | Gat, Se 50,000 Accumulated depreciation (amount not given) zz i Equipment (equal to accumulated deprecation) peeing i. | Scanned with CamScanneryore Patlt 357 onciliations: : fe rrecting entries above are reconciled as follows: e 0 ~ Netadjustment t0 stained earnings ey cr 130,000 17,000 30,000 60,000 I 7,200 I 90,000 18,000 | 148,000 - 244,200 | Net adjustment to R/E 1/1/x3 - credit 96,200 Notice the net adjustment computed above is equal to the net effect of errors on the 20x2 retained earnings (computed earlier). Net adjustment to 20x3 profit Increase (Decrease) b (decrease in COGS) 40,000 4d (increase in COGS) (130,000) 8. (decrease in interest income) (17,000) h ecrease in salaries expense) 30,000 i (increase in sales) 60,000 (increase in depreciation expense) + (18,000) | (increase in gain) 50,000 Net adjustment to 20%3 profit 15,000 . Notice the net adjustment computed above is equal to the "et effect of errors on the 20x3 profit (computed earlier). ‘ If the Correcting entries above are posted, their effects on *he 203 opening retained earnings and 20x3 profit are as follows: | | | | | 2 Be Scanned with CamScannerRetained earnings — Dec. 31, 20x2 Profit -20x3 Unadjusted balance. 1,279,000 210,000 Net adjustments 96,200 15,000 djusted balances 1,375,200 225,000 Adjusted eA Kequivement (5): Correcting entries - Books closed If the errors were after the 20x3 books are already closed, only correcting entries for non-counterbalancing errors shall be made, ‘a.. | No correcting entry. The effect of the error - to. | has already counterbalanced. 4 i. | j. - | Accumulated depreciation 7,200 Retained earnings Dec. 31, 20x3 7,200 k. | Transportation equipment 90,000 Retained earnings — Dec. 31, 20x3 90,000 k.1 | Retained earnings ~ Dec. 31, 20x3 36,000 Accumulated depreciation 36,000 1. | Cash 50,000 Accumulated depreciation (amount not given) xx Equipment (equal to accumulated depreciation) ie Retained earnings — Dec. 31, 20:3 _|_ 50,0008 footie let adjustment to retained earnings Dr. a ‘ 1 j. k. 90,000 kl i 36,000 50,000 1 yr 36,000__ 1471 4,200 ’ Net adjustment to R/E 12/31/x3 - credit Scanned with CamScanner359 ao Ritubaed enrmiags Dee 3 pee - Dec, 3: ed balance 1,489,000 120s Dnadjust adjustments 111,200 _yetaipsiments__——__ti100 If income taxes were not ignored, the corrections to retained earnings should have been net of income tax effect. The income tax effect of a correction is recognized as deferred tax Ijability: (asset) for prior period errors and current tax liability (asset) for current period errors. Events after the Reporting Period Events after the reporting period are “those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.” (PAS 10.3) For example, Entity A’s reporting period ends on December 31, 20x1 and its financial statements.are authorized for issue on March 31, 20x2. Events after the reporting period are those events that occur within January 1, 20x2 to March 31, 202. > The date of authorization of the financial statements is the fhe financial statements for date when management authorizes tl issue regardless of whether such authorization is final or subject to further approval. Case 1: ABC Co. completes the draft of its December 31, 20x1 year-end financial statements on January 31, 20x2. On February 5, 20x2, the board of directors reviews the financial statements and authorizes fit and selected other them for issue. The entity announces its Pro! : . ae financial information on February 23, 20x2 The faa statements are made available to, shareholders and oe March 1, 20x2. The shareholders approve the financial sta | Scanned with CamScanner360 at their annual meeting on March 18, 20x2 and the g financial statements are then filed with a regulatory body 1, 20x2. Proved On Apri Analysis: The financial statements are authorized for issue on Febyy 5, 20:2 (date of board authorization for issue). Events after therapy period will include events occurring from Jaiiuary 1, 20x2 to Febunne rg 20x2. a a pe Case 2: On March 1, 20x2, the-management of ABC Co. authorizes| financial statements for issue to’ its supervisory board. The | supervisory board. is made up solely of non-executives and may include representatives of employees ‘and other outside interests The supervisory board approves the financial statements on I March 10, 20x2. The financial statements are made available to _| shareholders and others on March 14, 20x2, The shareholders approve the financial statements at their annual meeting on March 23, 20x2 and the financial statenients are then filed with @ regulatory body on April 1, 20x2. Analysis: The financial statements are authorized for issue on March 1, 2082 (date of management authorization for issue to the supers) board). Events after the reporting period «vill include events occurring from January 1, 20x2 to March 1, 20x2. Two types of events after the reporting period 1. Adjusting events after the reporting period dof provide evidence of conditions that existed at the ev! . Teporting period. 2. Non-adjusting events after the reporting that are indicative of conditions that 4r0s period. — are events evet!® eriod - are ev" 4 if after the report Scanned with CamScannering events after the reporting period 1 ae events, ag the name suggests, re, ba) ee the financial statements, Exampl se settlement after the reporting peri * confirms that the entity has a present reporting period. — a The receipt of information after the rey indicating that an asset was impaired at the period. For example: i, The bankruptcy of a customer that Occurs after the reporting period may indicate that the carrying amount of a trade receivable at the end of Teporting period’ is - impaired. ' ii, The sale of inventories after the reporting period may give evidence to their net realizable value at the end of reporting period. : . The determination after the reporting period of the cost of asset purchased, or the proceeds from asset sold, before the end of reporting period: |The determination after the reporting period of the amount of profit-sharing or bonus Payments, if the entity had a present legal or constructive obligation at the end of reporting period tomake such payments. The discovery of fraud or errors that indicaté that the financial statements are incorrect. PAS i09) quire adjustments of es of adjusting events: iod of a.court case that obligation at the end of Porting period end of reporting t | Non-adjusting events after the reporting period : er adjusting events do not require adjustments of amounts in the financial statements. However, they are disclosed if they are ‘material, Examples of non-adjusting events: . " '8es in fair values, foreign exchange rates, interest rates or market prices after the reporting period. 2 Casualty losses (eg., fire, storm, or earthquake) occurring after | © Teporting period but before the financial statements were authorized for issue. 4 Scanned with CamScannereh oh ge cc. Litigation arising solely from events occurring after ‘a reporting, period. : oe d. Significant commitments or contingent liabilities entered aj : eg, significant guarantees. the reporting period, : Major ordinary share transactions and potential Ordinary ghare transactions after the reporting period. bination after the reporting period, f, Major business com! : “Announcing, or commencing the implementation of, a major restructuring after the reporting period. h. Announcing a plan to discontinue an operation after the reporting period. Change in tax rate enacted after the reporting period. j. Declaration of dividends after the reporting period (PAS 10.22) i. Dividends Dividends declared after the reporting period are not recognized as liability at the end of reporting period because no present obligation exists at the end of reporting period. Going Concern PAS 10 prohibits the preparation of financial statements on @ going concern basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so. Musteation 1: dentifying adjusting and non-adjusting eve" ABC Co.'s current reporting period ends on December 31, 208! The following transactions occurred after the end of repo period: OnJanuary 5,20%2, ABC declared F2;000,000 dividend » On ieee 15, 20x2, ABC issued 1,000 shares with Pf per share of P100 for P600 per share. 50 c. On February 1, 20x2, a building with a carrying amount : December 31, 20x1 of P500,000 was totally razed PY. roo | On February 2, 20x2, ABC installed anol! 8 nad legislation tequires that the oil rig be uninstalled, at the f Scanned with CamScannerfal life and the site where it was installed be restored. mates the present value of the decommissioning and ' i 000,000. : 2 Oe ‘ABC received notice of a litigation in Oa to an accident that happened on December 31, 20x1: ABC estimates a probable loss of P200,000. On March 5, 20x2, ABC purchased a subsidiary for P10,000,000 ina business combination accounted for using the acquisition ‘method. Goodwill of 2,500,000 was recognized on the business combination. its use “ABC est The financial statements were authorized for issue on March 1, 20x2. Requirement; Identify the adjusting events. Solytion: Fite liability on pending litigation 200,000.00 Total adjusting events 200,000, & Notes: Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events are those that are indicative of conditions that arose after the reporting period. ‘© (a) to (c): The declaration of dividends, issuance of shares, and impairment of the building after the reporting period are noi- adjusting events, () There is no present obligation for decommissioning and testoration costs as of the end of reporting period because the oil rig was installed after the reporting period. ( The business combination is neither recognized nor disclosed in the December 31, 20x1 financial statements because the business combination is not an event after the Teporting period, i.e., it occurred after the financial statements were authorized for issue. : Scanned with CamScannernleVis justi t because it provi * Only (e) is an adjusting event se it Provides ey: a present obligation as at the reporting date (i, fem happened on December 31, 20x1), _ sastetion 2: Accounting for adjusting events ABC Co,’s current reporting period ends The following transactions occurred aftes period: on December 31, t the end of of P120,000, b.. Inventories costing P1,000,000 realizable value of 900,000 it statements. During January 20; 880,000. Actual selling costs © The year-end accounts receivable include a. pion, receivable from XYZ, Inc. No allowance for doubtful ax Was recognized on this receivable as of December 31, 20x1.0n February 3, 20x2, XYZ filed for bankruptcy. It was estimated that the receivable will not be collected. The fair value of financial assets measured at fait val | through profit or loss significantly declined to 80,000 on February 28, 20x2. The financial assets are recognized in Be 20x1 year-end financial statements at 300,000 which che fair value as of December 31, 20x1. al On March 5, 20x2, a case was resolved requiring & _ amount of P200,000. The 20x1 year-end financial sta! included a provision for loss on litigation of P150,000. were recognized at thei in the 20x1 yearend § x2, the inventories were sold amounted to P30,000, sderation of the ABC Co's 20x1 Profit before tax before condense a tons is 2,200,000. The financial state hori for issue on March 1, 20x2. ot } “ wide Requirement: Compute for the adjusted profi. PP Scanned with CamScanner365 fiom: December 31, 20x1 : fit, it ovision for loss on pending eduction in provi «ation (120K - 100K) 7 Ee a tion in NRV of inventories [900K - (880K - 30K)] vpinent Joss on receivables Aujsted profit, December 31, 204 Notes: , 4} The actual settlement of a provision after the reporting period int before the financial statements are authorized for issue may provide evidence regarding the amount of probable loss that should have been recognized as at the reporting date. }) The sale of inventories after the reporting period may give evidence to their net realizable value at the end of reporting period. ) The bankruptcy of a customer that occurs aftet the reporting period may indicate that the carrying amount of a trade receivable at the end of reporting period is impaired. Changes in fair values. after the reporting period are non- adjusting events. Thus, the decline in the fair value of the FVPL investment is disclosed only in the 20x1 financial Statements, Events after the reporting period include only events that Sccur between the end of the reporting period and the date that the financial statements are authorized for issue. In the illustration above, events after the reporting period include only events occurring from January 1, 20x2 to March 1, 20x2. Case resolved on March 5, 20x2 is not an event after the "porting period for purposes of PAS 10. Therefore, ‘neither _ adjustment nor disclosure is necessary for the transaction. adjusting entries are as follows: Estimated liability on pending litigation | 20,000 Probable loss on litigation 20,000 Scanned with CamScanner> Ser Dec. 31, | Cost of goods sold / Impairment loss 50,000 20x Inventor) Dec. 37, | Impairment loss on receivables Too000 oo Accounts receivable Disclosure The following are disclosed in the notes: a. Date of authorization for issue and who gave the auth b. An update on the disclosures to include the effects events. c. Non-adjusting events that are material, including: i. the nature of the event; and ii an estimate of its financial effect, or a statement an estimate cannot be made. Otization, Of adjusting that such Chapter 7: Summary _ ¢ The notes is an integral part of the financial statements, I Presents (a) information regarding the basis of preparation cf financial statements, (b) information required by the PRS and (c) other information not required by PERSs but i relevant to users of financial statements. Accounting Policies, Changes in Estimates and Errors The two types of accounting changes are (a) change in accountng | policy and (b) change in accounting estimate. ; Accounting policies are those adopted by an entity in preparing and presenting its financial statements. PAS 8 requires the .consistent selection and application & accounting policies. An accounting policy shall be dane only when it (a) is required by a PERS; or (b) resuls relevant and more reliable information. ew ‘Scope of 7" T inting | _Effectol Pana Description | Accounting | sma 1. Change in > Ghange in >a Transitional |» on they accounting | measurement provision | begin dl policy basis. |». Retrospective balants . | application | relay Lc. If(b)is___-|_earm y Scanned with CamScanner367 impracticable] _ accounted for prospective | retrospectively | application > Changes inthe | > Prospective | >in profitor | [zchange in Fealzation (or application loss of account incurrence) of current period estima expected inflow or current and (or outflow) of | future periods, economic if the change benefits from affects both assets (or liabilities). foe es |g Gorreetion | > Misapplication of | a.” Retrospective! > On the of prior principles, | restatement beginning period oversight orb. IF (b) is | balance of Gnar misinterpretation impracticable, "retained offacts,and | prospective | earings, if mathematical | application accounted for mistakes. l | retrospectively ©” When it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in an accounting estimate. + A voluntary change in accounting policy is accounted for by retrospective application. Early application of a PERS is not a voluntary change in accounting policy. * Counterbalancing errors automatically reverse in subsequent period if not corrected. Non-counterbalancing errors do not automatically reverse in subsequent period. * Relationships between accounts: I ending inventory is understated, profit is also understated — Direct relationship. If an asset-related account is understated, profit is also understated - Direct relationship. 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. * Events after the Reporting Period Events after the reporting period are’ those that occur between L__the end of reporting period and the date the financial Scanned with CamScannerPROBLEMS L PROBLEM 1: TRUE OR FALSE 1 statements issue. : thori aa The date the financial statements are au torized for issue isthe date when an entity's management authorizes the Financia, aaements for issue, regardless of whether Such authorization js for final issuance or for further approval by other parties, Adjusting events are those that provide coseatiRicny that existed at the end of reporting period. The financial statements are adjusted for these events. : Non-adjusting events are those that provide conditions tha arose after the end of reporting period. If relevant to users, these events are disclosed in the financial statements. ‘Accounting Policies, Changes in Estimates and Errors PAS 1 encourages, but does not require, the disclosure of the domicile and legal form of the entity, its country of incorporation and the address of its registered. office (0 principal, place of business, if different from the registere! office) and a description of the nature of the enti’ operations and its principal activities. 4 According to PAS 8 Accounting Policies, Changes in Estima and Errors, the three main categories of accounting chang®s*" change in estimate, change in policy, and correction of pa period errors. of Changes in accounting estimates are considered to be Pe oe Normal accounting process and not corrections OF chart of past periods, A change in the percentage used in determining ¥"™ accounts receivable is a change in accounting PINGPY oe A change from a principle that is not generally accept jon ™ | oats Benerally accepted is considered to be aco mr. lect 4 Scanned with CamScanner