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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-1/” type=”big” color=”red”] Return to Section 1 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” 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″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]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 effected 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.
Example 2: Revising a residual value of an asset
In year 1 an asset was purchased for CU100,000. It had an estimated life of 6 years. Its estimated residual value was estimated to be CU10,000. This residual value was assessed for indicators of change at each year end and there were no issues up to the end of year 4. During year 5 and at the end of year 5, due to a change in the market for this type of asset the residual value increased to CU20,000 (being the present value of future residual amount). At the end of year 4, the asset had a carrying amount as follows:
|
Cost |
CU100,000 |
|
Residual Value |
(CU10,000) |
|
Depreciable Amount |
CU90,000 |
|
Depreciation (90,000 / 6 yrs * 4 yrs) |
(CU60,000) |
|
Carrying Amount |
CU30,000 |
In year 5, the residual amount is CU20,000, therefore the depreciable amount is CU80,000. Deducting depreciation charged to date of CU60,000 leaves CU20,000 to be depreciated over the remaining useful life of 2 years. Therefore, depreciation of CU10,000 is charged in year 5 and year 6. Disclosure of the change in estimate would be required in the financial statements detailing the effect on current and future years.
If we take this example and assume the residual value increases to CU50,000, then the carrying amount in year 5 of CU30,000 is in excess of the residual amount. Therefore no depreciation is required in year 5 and 6 and any over depreciation is not reversed. Disclosure of the change in estimate would be required in the financial statements.
Example 3: Revising a useful life of an asset
In year 1 an asset was purchased for CU100,000. It had an estimated life of 10 years with a nil residual value. At the start of year 6, the company re-assessed the useful lifes and determined that only two years remained. The carrying value at the end of year 5 was CU50,000. Therefore with effect from the start of year 6, depreciation of CU25,000 would be charged i.e. CU50,000/2 years remaining life.
Disclosure of the change in estimate would be required in the financial statements.
Example 4: Change in accounting estimate disclosure
During the year ended 31 December 201X the company changed its depreciation method for freehold buildings and leasehold improvements to depreciating same over 50 years on a straight line basis as opposed to 10 years. The effect of same was to reduce the depreciation charge by CU680,000 for the current year. In future years the depreciation charge will be extended whereby the depreciation charge will be lower but will go on for a longer period of time as it is being depreciated over its useful life. The depreciation charge will reduce by CUXXX per year in future years as a result. The reason for the change in depreciation method is that the new policy more correctly reflects the useful life of these assets.
Example 5: Change in functional currency – extract from notes to the financial statements:
The company changed functional currency from Sterling (“£”) to United States Dollar (“US$”) on 31 December 2014. This change arose as a result of the acquisition of the company by a larger group. As a result a change was made to the cost and funding structure such that the primary economic environment in which the company operates resulted in a change in functional currency to US$.
The 2014 results and financial position for comparative purposes were retranslated to US$ as follows:
– Assets and liabilities at the closing rate of 1.6184 as at 31 December 2014
– Income and expenses for 2014 are retranslated at the 2014 average rate of 1.6259
– All resulting exchange differences were recognised as a separate component of equity, described as the exchange rate reserve.
|
|
Restated | |||||
|
2014 |
2014 |
|||||
|
US$ |
GBP |
|||||
|
Turnover |
237,601 |
146,134 |
||||
|
Cost of sales |
(220,264) |
(135,471) |
||||
|
Gross profit |
17,337 |
10,663 |
||||
|
Administrative expenses |
(16,066) |
(9,882) |
||||
|
Other operating income |
– |
– |
||||
|
Operating profit |
1,270 |
781 |
||||
|
Interest receivable |
– |
– |
||||
|
Interest payable and similar charges |
(355) |
(218) |
||||
|
Profit before taxation |
916 |
563 |
||||
|
Tax on profit |
(416) |
(256) |
||||
|
Profit / (loss) for the financial period after taxation |
499 |
307 |
||||
|
Balance sheet |
Restated |
|
|
|
|
2014 |
2013 |
|
|
|
US$ |
GBP |
|
|
Fixed assets |
|
|
|
|
Tangible assets |
5,637 |
3,483 |
|
|
Investments |
8,810 |
5,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
14,447 |
8,927 |
|
|
Current assets |
|
|
|
|
Debtors |
387,831 |
239,641 |
|
|
Cash at bank and in hand |
32,999 |
20,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
420,831 |
260,031 |
|
|
|
|
|
|
|
Creditors: amounts falling due within one year |
(255,617) |
(157,946) |
|
|
|
|
|
|
|
|
|
|
|
|
Net current assets |
165,214 |
102,086 |
|
|
|
|
|
|
|
Creditors: amounts falling due after more than one year |
(5,273) |
(3,258) |
|
|
Provision for liabilities |
(1,900) |
(1,174) |
|
|
|
|
|
|
|
Net assets |
172,488 |
106,581 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital and reserves |
|
|
|
|
Called-up share capital |
6 |
3 |
|
|
Other reserve |
64,548 |
39,884 |
|
|
Profit and loss account |
107,935 |
66,693 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity shareholder’s funds |
172,488 |
106,581 |
|
Example 6: Prior period error
During the 31 December 2015 year end, Company A noticed that the prior year financial statements omitted stock of CU100,000 which was material to the financial statements. Stock in the same location was also omitted at year ended 31 December 2013. The inventory in this location at that time was CU95,000. Given the materiality, this error requires a prior year adjustment. Assume a corporation tax rate of 10%. The adjustments required to correct this error are:
In the 31 December 2014 accounts to restate the opening balance
|
|
CU |
CU |
|
Dr Inventory |
95,000 |
|
|
Cr Profit and Loss Reserves (CU95,000-CU9,500 of current tax) |
|
85,500 |
|
Cr Corporation Tax Liability (CU95,000*10%) |
|
9,500 |
Being journal to reflect adjustment in respect of prior years’ including the additional tax payable
|
|
CU |
CU |
|
Dr Inventory |
5,000 |
|
|
Cr Cost of Sales |
|
5,000 |
|
Dr Current Income Tax in P&L (CU5,000*10%) |
500 |
|
|
Cr Corporation Tax Liability |
|
500 |
Being journal to reflect movement on stock incorrectly excluded from 2013 to 2014 and the related corporation tax payable as a result
See below an example of how this should be disclosed so as to meet the disclosure requirements.
Profit and Loss Account
|
|
2015 |
2014 Restated |
|
|
CU |
CU |
|
|
|
|
|
Turnover |
1,600,000 |
1,500,000 |
|
|
|
|
|
Cost of sales |
(1,220,000)
|
(1,100,000)
|
|
|
|
|
|
Operating profit |
380,000 |
400,000 |
|
|
|
|
|
Interest receivable |
5,000 |
5,000 |
|
|
|
|
|
Interest payable |
(1,000)
|
(10,000)
|
|
|
|
|
|
Profit before taxation |
384,000 |
395,000 |
|
|
|
|
|
Tax on profit on ordinary activities |
(38,400)
|
(39,500)
|
|
|
|
|
|
Profit for the financial year |
345,600
|
355,500
|
Balance Sheet
|
|
2015 |
2015 Restated |
|
|
CU |
CU |
|
Fixed assets |
|
|
|
Tangible assets |
190,000
|
150,000
|
|
|
|
|
|
Current assets |
|
|
|
Inventory |
400,000 |
300,000 |
|
Cash at bank and in hand |
360,000
|
150,000
|
|
|
760,000
|
450,000
|
|
|
|
|
|
Creditors – amounts falling due within one year |
(99,700)
|
(95,300)
|
|
|
|
|
|
Net current assets |
660,300
|
354,700
|
|
|
|
|
|
Total assets less current liabilities |
850,300 |
504,700 |
|
|
|
|
|
Capital and reserves |
|
|
|
Called up share capital |
100 |
100 |
|
Profit and loss account |
850,200
|
504,600
|
|
Shareholders’ funds |
850,300
|
504,700
|
|
Prior year adjustment |
|
Prior year adjustment – material error
The prior year adjustment is due to the omission of inventory located in an outside warehouse being excluded from the inventory at 31 December 2014 and 31 December 2013. The value of the inventory at 31 December 2014 was CU100,000 and the value of the inventory at 31 December 2013 was CU95,000. The financial statements for 2014 has been restated to correct this error.
The prior year adjustment resulted in an increase to the inventory balance at 31 December 2013 and 2014 of CU95,000 and CU100,000 respectively. This has resulted in the cost of sales for 31 December 2014 year end decreasing by CU5,000 and the profit and loss reserves increasing by CU85,500 being the net of tax adjustment and the tax charge for 2014 increasing by CU500. The effect of the restatement on each financial statement line item affected is shown below.
|
Analysis of prior year adjustments |
2014 |
|
|
CU |
|
Cost of sales for year ended 31 December 2014 |
|
|
Cost of sales as previously stated |
1,005,000 |
|
Adjustment for inventory previously excluded |
(5,000)
|
|
Cost of sales as restated |
1,100,000 |
|
Inventory for year ended 31 December 2014 |
|
|
Inventory at 31 December 2014 as previously stated |
200,000 |
|
Adjustment for inventory previously excluded |
100,000
|
|
Inventory as restated |
300,000 |
|
Income tax expense for year ended 31 December 2014 |
|
|
Income tax expense as previously stated |
39,000 |
|
Tax effect on adjustment for inventory previously excluded |
500
|
|
Income tax expense as restated |
(39,500)
|
|
Income tax payable |
|
|
Income tax payable at 31 December 2014 as previously stated |
(39,000) |
|
Tax effect on adjustment for inventory previously excluded |
(9,500) |
|
Tax effect on adjustment for inventory previously excluded |
(500)
|
|
Income tax payable as restated |
(49,000)
|
|
Profit and loss reserves at 31 December 2014 |
|
|
Profit and loss reserves at 31 December 2014 as previously stated |
414,600 |
|
Adjustment for inventory previously excluded net of tax at 31 December 2013. |
85,500 |
|
Adjustment for movement of inventory previously excluded net of tax in the 31 December 2014 year |
4,500
|
|
Profit and loss reserves at 31 December 2014 as restated |
504,600
|
|
Profit and loss reserves at 1 January 2014 |
|
|
Profit and loss reserves at 1 January 2014 as previously stated |
63,600 |
|
Adjustment for inventory previously excluded net of tax |
85,500
|
|
Profit and loss reserves at 1 January 2014 as restated |
149,100 |
|
Profit for the year after taxation for year ended 31 December 2014 |
|
|
Profit after tax for year ended 31 December 2014 as previously stated |
351,000 |
|
Movement on inventory previously excluded net of tax |
4,500
|
|
Profit after tax for year ended 31 December 2014 as restated |
355,500
|
|
Profit for the year after taxation for year ended 31 December 2013 |
|
|
Profit after tax for year ended 31 December 2013 as previously stated |
63,600 |
|
Inventory previously excluded net of tax |
85,500
|
|
Profit after tax for year ended 31 December 2013 as restated |
149,100 |
Note the lines ‘Prior year adjustment – change in accounting policy (see note X)’ is just included for illustrative purposes
|
|
Equity Share |
Retained |
Total |
|
|
Capital |
Earnings |
Equity |
|
|
CU |
CU |
CU |
|
|
|
|
|
|
Balance at 1 January 2014 as previously reported |
100 |
63,600 |
63,600 |
|
Prior year adjustment – change in accounting policy (see note X) |
– |
– |
– |
|
Prior year adjustment – correction of material error (see note X) |
|
85,500 |
85,500 |
|
Balance at 1 January 2014 as restated |
100 |
149,100 |
149,100 |
|
Profit for the year as previously reported |
|
351,000 |
351,000 |
|
Prior year adjustment – change in accounting policy (see note X) |
– |
– |
– |
|
Prior year adjustment – correction of material error (see note X) |
|
4,500 |
4,500 |
|
Profit for the year as restated (see note X) |
|
355,500 |
351,000 |
|
|
|
|
|
|
Balance at 31 December 2014 |
100 |
504,600 |
504,700 |
|
Balance at 1 January 2015 |
100 |
504,600 |
504,700 |
|
Profit for the year |
|
345,600 |
345,600 |
|
Balance at 31 December 2015 |
100 |
850,200 |
850,300 |
Note the inventory comparative figures would also be update and the word ‘Restated’ would be included under the comparative year as was done for the profit and loss and balance sheet above.
Example 7: Example disclosure of a prior year adjustment
|
|
Profit for the year ended 31-Dec 2014 |
Total equity |
Total equity as at 31-Dec 2014 |
|
as at |
|||
|
01-Jan |
|||
|
2014 |
|||
|
|
CU |
CU |
CU |
|
|
|
|
|
|
As reported under UK and Irish GAAP |
132,818 |
587,000 |
719,818 |
|
Accounting policy changes |
|
|
|
|
Impact of: |
|
|
|
|
– Holiday pay accrual |
(12,000) |
(62,000) |
(74,000) |
|
– Reversal of intangible asset |
|
(75,000) |
(75,000) |
|
– Revaluation of freehold premises |
– |
XXXX |
– |
|
– Additional depreciation on uplift as a result of revaluation of freehold premises |
(XXXX) |
– |
– |
|
– Rent free period for operating leases |
(32,000) |
|
(32,000) |
|
– Pension – recognition of group scheme |
|
|
|
|
– Restatement of previous business combination – goodwill derecognised and reversal of amortisation |
|
|
|
|
– Restatement of previous business combination – intangibles recognised and additional amortisation |
|
|
|
|
– Recognition of deferred tax on business combinations entered into prior to transition |
|
|
|
|
– Present valuing non-market rate loans/ financing transactions |
|
|
|
|
– Pension unrecognised service costs |
|
|
|
|
– Derivatives |
|
|
|
|
Deferred tax impact of: |
|
|
|
|
– Holiday pay accrual |
1,000 |
6,000 |
7,000 |
|
– Reversal of intangible asset |
|
9,375 |
9,375 |
|
– Rent free period for operating leases |
4,000 |
0 |
4,000 |
|
– Revaluation of freehold premises |
|
|
|
|
– Pension adjustments |
|
|
|
|
– Revaluation of freehold premises |
– |
(25,000) |
25,000 |
|
|
93,818 |
440,375 |
534,193 |
|
Correction of material errors (see note x) |
XXXX |
XXXX |
XXXX |
|
Current tax effect on the correction error |
(XXXX) |
(XXXX) |
(XXXX) |
|
|
XXXX |
XXXX |
XXXX |
|
As reported under FRS 102 |
93,818 |
440,375 |
534,193 |
a)Prior year adjustment – material error
The prior year adjustment is due to the omission of inventory located in an outside warehouse being excluded from the inventory at 31 December 2014 and 31 December 2013. The value of the inventory at 31 December 2014 was CU100,000 and the value of the inventory at 31 December 2013 was CU95,000. The financial statements for 2014 has been restated to correct this error.
The prior year adjustment resulted in an increase to the inventory balance at 31 December 2013 and 2014 of CU95,000 and CU100,000 respectively. This has resulted in the cost of sales for 31 December 2014 year end increasing by CU5,000 and the profit and loss reserves increasing by CU85,500 being the net of tax adjustment. The current tax liability in the comparative year has increased by CUXXX as a result of this adjustment.
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