Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors, Important Questions with Solutions for CA Final FR May & Nov 2021 Exams
Question 1 –
ABC Ltd. changed its method adopted for inventory valuation in the year 2018-2019. Prior to the change, inventory was valued using the first in first out method (FIFO). However, it was felt that in order to match current practice and to make the financial statements more relevant and reliable, a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
- 31st March, 2017 – Increase of Rs. 10 million
- 31st March, 2018 – Increase of Rs. 15 million
- 31st March, 2019 – Increase of Rs. 20 million
Profit or loss under the FIFO valuation model are as follows:
| 2018-2019 | 2017-2018 | |
| Revenue | 324 | 296 |
| Cost of goods sold | (173) | (164) |
| Gross profit | 151 | 132 |
| Expenses | (83) | (74) |
| Profit | 68 | 58 |
Solution –
Profit or loss under weighted average valuation method is as follows:
| 2018-2019 | 2017-2018 (Restated) | |
| Revenue | 324 | 296 |
| Cost of goods sold | (168) | (159) |
| Gross profit | 156 | 137 |
| Expenses | (83) | (74) |
| Profit | 73 | 63 |
Statement of changes in Equity (extract)
| Retained earnings | Retained earnings (Original) | |
| At 1st April, 2017 | 423 | 423 |
| Change in inventory valuation policy | 10 | – |
| At 1st April, 2017 (Restated) | 433 | – |
| Profit for the year 2017-2018 | 63 | 58 |
| At 31st March, 2018 | 496 | 481 |
| Profit for the 2018-2019 | 73 | 68 |
| At 31st March, 2019 | 569 | 549 |
Question 2 –
During 20X4-X5, Cheery Limited discovered that some products that had been sold during 20X3-X4 were incorrectly included in inventory at 31st March, 20X4 at Rs. 6,500.
Cheery Limited’s accounting records for 20X4-X5 show sales of Rs. 104,000, cost of goods sold of Rs. 86,500 (including Rs. 6,500 for the error in opening inventory), and income taxes of Rs. 5,250.
In 20X3-X4, Cheery Limited reported:
| Rs. | |
| Sales | 73,500 |
| Cost of goods sold | (53,500) |
| Profit before income taxes | 20,000 |
| Income taxes | (6,000) |
| Profit | 14,000 |
| Basic and diluted EPS | 2.8 |
The 20X3-X4 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs. 34,000. Cheery Limited’s income tax rate was 30% for 20X4-X5 and 20X3-X4. It had no other income or expenses.
Cheery Limited had Rs. 50,000 (5,000 shares of Rs. 10 each) of share capital throughout, and no other components of equity except for retained earnings.
State how the above will be treated /accounted in Cheery Limited’s Statement of profit and loss, statement of changes in equity and in notes wherever required for current period and earlier period(s) as per relevant Ind AS.
Solution –
Cheery Limited
Extract from the Statement of profit and loss
|
|
(Restated) | |
| 20X4-X5 | 20X3-X4 | |
| Rs. | Rs. | |
| Sales | 1,04,000 | 73,500 |
| Cost of goods sold | (80,000) | (60,000) |
| Profit before income taxes | 24,000 | 13,500 |
| Income taxes | (7,200) | (4,050) |
| Profit | 16,800 | 9,450 |
| Basic and diluted EPS | 3.36 | 1.89 |
Cheery Limited
Statement of Changes in Equity
|
|
Share capital | Retained earnings | Total |
| Balance at 31st March, 20X3 | 50,000 | 20,000 | 70,000 |
| Profit for the year ended 31st March, 20X4 as restated | 9,450 | 9,450 | |
| Balance at 31st March, 20X4 | 50,000 | 29,450 | 79,450 |
| Profit for the year ended 31st March, 20X5 | 16,800 | 16,800 | |
| Balance at 31st March, 20X5 | 50,000 | 46,250 | 96,250 |
Extract from the Notes
Some products that had been sold in 20X3-X4 were incorrectly included in inventory at 31st March, 20X4 at Rs. 6,500. The financial statements of 20X3-X4 have been restated to correct this error. The effect of the restatement on those financial statements is summarized below:
| Effect on 20X3-X4 | |
| (Increase) in cost of goods sold | (6,500) |
| Decrease in income tax expenses | 1,950 |
| (Decrease) in profit | (4,550) |
| (Decrease) in basic and diluted EPS | (0.91) |
| (Decrease) in inventory | (6,500) |
| Decrease in income tax payable | 1,950 |
| (Decrease) in equity | (4,550) |
There is no effect on the balance sheet at the beginning of the preceding period i.e. 1st April, 20X3.
Question 3 –
Entity ABC acquired a building for its administrative purposes and presented the same as property, plant and equipment (PPE) in the financial year 2011- 12. During the financial year 2012- 13, it relocated the office to a new building and leased the said building to a third party. Following the change in the usage of the building, Entity ABC reclassified it from PPE to investment property in the financial year 2012- 13. Should Entity ABC account for the change as a change in accounting policy?
Solution –
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring are not changes in accounting policies.
As per Ind AS 16, ‘property, plant and equipment’ are tangible items that:
a. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
b. are expected to be used during more than one period.”
As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for administrative purposes; or
b. sale in the ordinary course of business.”
As per the above definitions, whether a building is an item of property, plant and equipment (PPE) or an investment property for an entity depends on the purpose for which it is held by the entity. It is thus possible that due to a change in the purpose for which it is held, a building that was previously classified as an item of property, plant and equipment may warrant reclassification as an investment property, or vice versa. Whether a building is in the nature of PPE or investment property is determined by applying the definitions of these terms from the perspective of that entity. Thus, the classification of a building as an item of property, plant and equipment or as an investment property is not a matter of an accounting policy choice. Accordingly, a change in classification of a building from property, plant and equipment to investment property due to change in the purpose for which it is held by the entity is not a change in an accounting policy.
Question 4 –
While preparing the annual financial statements for the year ended 31st March, 2013, an entity discovers that a provision for constructive obligation for payment of bonus to selected employees in corporate office (material in amount) which was required to be recognised in the annual financial statements for the year ended 31st March, 2011 was not recognised due to oversight of facts. The bonus was paid during the financial year ended 31st March, 2012 and was recognised as an expense in the annual financial statements for the said year. Would this situation require retrospective restatement of comparatives considering that the error was material?
Solution –
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with Ind AS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are approved for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements if, inter alia, it makes a retrospective restatement of items in its financial statements and the retrospective restatement has a material effect on the information in the balance sheet at the beginning of the preceding period.
In the given case, expenses for the year ended 31st March, 2011 and liabilities as at 31st March, 2011 were understated because of non-recognition of bonus expense and related provision.
Expenses for the year ended 31st March, 2012, on the other hand, were overstated to the same extent because of recognition of the aforesaid bonus as expense for the year. To correct the above errors in the annual financial statements for theyear ended 31st March, 2013, the entity should:
a. restate the comparative amounts (i.e., those for the year ended 31st March, 2012) in the statement of profit and loss; and
b. present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April, 2011) wherein it should recognise the provision for bonus and restate the retained earnings.
Question 5 –
While preparing the financial statements for the year ended 31st March, 20X3, Alpha Limited has observed two issues in the previous year Ind AS financial statements (i.e. 31st March, 20X2) which are as follows:
Issue 1:
The company had presented certain material liabilities as non-current in its financial statements for periods as on 31st March, 20X2. While preparing annual financial statements for the year ended 31st March, 20X3, management discovers that these liabilities should have been classified as current. The management intends to restate the comparative amounts for the prior period presented (i.e., as at 31st March, 20X2).
Issue 2:
The company had charged off certain expenses as finance costs in the year ended 31st March, 20X2. While preparing annual financial statements for the year ended 31st March, 20X3, it was discovered that these expenses should have been classified as other expenses instead of finance costs. The error occurred because the management inadvertently misinterpreted certain facts. The entity intends to restate the comparative amounts for the prior period presented in which the error occurred (i.e., year ended 31st March, 20X2).
What is your analysis and recommendation in respect of the issues noted with the previously presented set of financial statements for the year ended 31st March, 20X2?
Solution –
As per paragraph 41 of Ind AS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with Ind AS if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are approved for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period. Accordingly, the stated issues in question are to dealt as under:
Issue 1
In accordance with para 41, the reclassification of liabilities from non-current to current would be considered as correction of an error under Ind AS 8. Accordingly, in the financial statements for the year ended March 31, 20X3, the comparative amounts as at 31 March 20X2 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements, if, inter alia, it makes a retrospective restatement of items in its financial statements and the restatement has a material effect on the information in the balance sheet at the beginning of the preceding period. Accordingly, the entity should present a third balance sheet as at the beginning of the preceding period, i.e., as at 1 April 20X1 in addition to the comparatives for the financial year 20X1-20X2.
Issue 2
In accordance with para 41, the reclassification of expenses from finance costs to other expenses would be considered as correction of an error under Ind AS 8. Accordingly, in the financial statements for the year ended 31 March, 20X3, the comparative amounts for the year ended 31 March 20X2 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the preceding period in addition to the minimum comparative financial statements if, inter alia, it makes a retrospective restatement of items in its financial statements and the restatement has a material effect on the information in the balance sheet at the beginning of the preceding period.
In the given case, the retrospective restatement of relevant items in statement of profit and loss has no effect on the information in the balance sheet at the beginning of the preceding period (1 April 20X1). Therefore, the entity is not required to present a third balance sheet.