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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#ffffff” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ open=”off” title=”Index”]Section 10 – Accounting Policies, Estimates and Errors
10.2 Selection and application of accounting policies
10.2.1 Extract from FRS 102 – Section 10.2-10.6
10.3 Consistency of accounting policies
10.3.1 Extract from FRS 102- Section 10.7
10.3.2 OmniPro comment – Consistency of accounting policies
10.4 Changes in accounting policies
10.4.1 Extracts from FRS 102 – Section 10.8 – 10.10A
10.4.2.1 Definition of change in accounting policy
10.4.2.2 Changes in accounting policies and one exception to retrospective adjustment
10.4.2.3 Examples of changes in accounting policy
10.4.2.4 Examples of items which are not changes in accounting policies
10.5 Applying changes in accounting policies
10.5.1 Extracts from FRS 102 – Section 10.11
10.5.2.1 Change in accounting policy due to a change to requirements issued by the FRC
10.5.2.2 Change in accounting policy due to adoption of IAS 39 or IAS 33
10.5.2.3 Change in accounting policy due to other reasons (Section 10.11 (c) of FRS 102)
10.6 Retrospective application
10.6.1 Extracts from FRS 102 – Section 10.12
10.6.2 OmniPro comment – Retrospective application – change in accounting policy
10.7 Disclosure of a change in accounting policy
10.7.1 Extracts from FRS 102-Section 10.13 – 10.14
10.8 Changes in accounting estimates
10.8.1 Extracts from FRS102 section 10.15 – 10.18
10.8.2 OmniPro comment – change in accounting estimates
10.8.2.2 Examples of change in accounting estimate
10.8.2.3: Revising residual value – worked example
10.8.2.4: Disclosure of accounting estimates
10.9 Corrections of prior period errors
10.9.1 Extracts from FRS102 section 10.19 – 10.23
10.9.2.1 Assessment and accounting for a prior period error
10.9.2.2 Disclosures of prior period errors
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10.6 Retrospective application
10.6.1 Extracts from FRS 102 – Section 10.12
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.
10.6.2 OmniPro comment – Retrospective application – change in accounting policy
As detailed in Section 10.12 of FRS 102 Retrospective application involves:
- adjusting the carrying amount of the assets and liabilities (as at the earliest prior period presented), with a corresponding adjustment to profit and loss reserves
- adjusting the prior periods to show the affect the change in policy had on the prior year results. There is only a need to show the comparative balance sheet restated, there is no need to disclose balance sheets after that date.
In the financial statements, the financial statements should show the adjustment in the statement of changes in equity together with a note so that a reader of the financial statements can see how the profit and loss reserves moved from the prior year reported numbers to the current year. Where a change in accounting policy is adopted it will affect tax, this can be current or deferred tax depending on the jurisdiction and it is likely the prior year tax return will have to be restated. See 10.7.2 for disclosure requirements
Example 1: Change in accounting policy
Company A previously adopted a policy of carrying investments in subsidiaries at cost less impairment. During the current year the company decided to adopt a policy of carrying investments at fair value through the profit and loss as it provides the reader with more relevant data. The carrying amount of the investment at cost less impairment in the prior years was CU100,000. The company has determined the fair value of the investment to be CU150,000 at the start of the prior year and CU190,000 at the end of the prior year. The fair value at the end of the current year is CU240,000. Assume the deferred tax sales rate is 20% and this rate is used as this is the tax rate in which the asset is likely to be realised. Note corporation tax is not affected here as the adjustment is not chargeable to corporation tax but instead to capital gains tax. The accounting entries required in this case to restate the prior year accounts are: Journals required to the prior year’s financial statements/comparatives
| CU | CU | |
| Dr Investments (CU150,000-CU100,000) | 50,000 | |
| Cr Profit and Loss Reserves (CU50,000-CU10,000) | 40,000 | |
| Cr Deferred Tax Liability (CU50,000*20%) | 10,000 |
Being journal to reflect uplift in value from cost at the start of prior year including current tax impact which is posted to opening reserves.
| CU | CU | |
| Dr Investments (CU190,000-CU150,000) | 40,000 | |
| Cr Change in Fair Value in Profit and Loss | 40,000 | |
| Dr Deferred Tax in P&L | 8,000 | |
| Cr Deferred Tax Liability (CU40,000*20%) | 8,000 |
Being journal to reflect movement in fair value during the prior year including the current tax impact. Journals required in current year’s trial balance for the correction of opening reserves
| CU | CU | |
| Dr Investments (CU190,000-CU100,000) | 90,000 | |
| Cr Profit and Loss Reserves | 72,000 | |
| Cr Deferred Tax Liability (CU90,000*20%) | 18,000 |
Being journal to reflect adjustment for the restatement of the profit and loss reserves carried forward for the effect of the change of accounting policy applied retrospectively.
| CU | CU | |
| Dr Investments (CU240,000-CU190,000) | 50,000 | |
| Cr Change in Fair Value in Profit and Loss | 50,000 | |
| Dr Deferred Tax in P&L | 8,000 | |
| Cr Deferred Tax Liability (CU40,000*20%) | 8,000 |
Being journal to reflect movement in fair value during the current year including the current tax impact. The disclosure requirements in Section 10.14 would have to be complied with in this instance. Note if the change in accounting policy had of affected current tax her, current tax would be replaced with deferred tax above.
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Examples
Example 1: Change in accounting policy
Example 2: Revising a residual value of an asset
Example 3: Revising a useful life of an asset
Example 4: Change in accounting estimate disclosure
Example 5: Change in functional currency – extract from notes to the financial statements
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