- 15 Marks
FR – L2 – Q10 – Accounting policies and changes in estimates
Question
AccraTech Company has previously written off any expenditure on borrowing costs in the period in which it was incurred.
The company has appointed new auditors this year. They have expressed the view that the previous recognition of borrowing costs in the statement of profit or loss was in error. The company has decided to correct the error retrospectively in accordance with IAS 8.
The financial statements for 20X3 and the 20X4 draft financial statements, both reflecting the old policy, show the following:
Statement of changes in equity (extract)
| 20X3 | 20X4 |
|---|---|
| Retained earnings | Retained earnings |
| GH₵000 | GH₵000 |
| 22,500 | 23,950 |
| 3,200 | 4,712 |
| (1,750) | (2,500) |
| 23,950 | 26,162 |
Opening balance
Profit after tax for the period
Dividends paid
Closing balance
Borrowing costs written off were GH₵500,000 in 20X3 and GH₵600,000 in 20X4.
The directors have calculated that borrowing costs, net of depreciation which should have been included in property, plant and equipment had the correct policy been applied, are as follows:
| GH₵000 |
|---|
| At 30 December 20X2 |
| At 31 December 20X3 |
| At 31 December 20X4 |
Had the correct policy been in force depreciation of GH₵450,000 would have been charged in 20X3 and GH₵870,000 in 20X4.
Required
Show how the change in accounting policy must be reflected in the statement of changes in equity for the year ended 31 December 20X4. Work to the nearest GH₵000.
Answer
Financial Reporting
SECTION B: APPLICATION OF ACCOUNTING AND FINANCIAL REPORTS STANDARDS
10 AccraTech
Statement of changes in equity (extract)
| Retained earnings 20X4 | Retained earnings 20X3 | |
|---|---|---|
| GH₵000 | GH₵000 | |
| Working balances as reported | 23,950 | 22,500 |
| Change in accounting policy (W2) | 450 | 400 |
| Re-stated balance | 24,400 | 22,900 |
| Profit after tax for the period (W1) | 4,442 | 3,250 |
| Dividends paid | (2,500) | (1,750) |
| Closing balance | 26,342 | 24,400 |
Workings
(1) Revised profit
| 20X4 | 20X3 | |
|---|---|---|
| GH₵000 | GH₵000 | |
| Profit as reported | 4,712 | 3,200 |
| Borrowing costs not written off | 600 | 500 |
| Depreciation | (870) | (450) |
| Revised profit | 4,442 | 3,250 |
(2) Prior period adjustment
The prior period adjustment is the reinstatement of the GH₵400,000 asset on 1 January 20X3 and the GH₵450,000 asset at 1 January 20X4. On 31 December 20X4 the closing balance above of GH₵26,342,000 can be reconciled as the original GH₵26,162,000 plus the reinstatement of the remaining asset of GH₵180,000.
Emile Woolf International
138
Institute of Chartered Accountants, Ghana
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