CAF 7 – IAS 8

Accounting Policies,
IAS 8 Changes in Accounting
Estimates and Errors
09
Page | 1
INTRODUCTION
SCOPE
1. Selection and application of accounting policies
2. Accounting for changes in accounting policies
3. Accounting for changes in accounting estimates
4. Accounting for correction of prior period errors

MAIN DEFINITIONS
Accounting are the specific principles, bases, conventions, rules and practices
Policies applied by an entity in preparing and presenting financial statements.
is an adjustment of the carrying amount of an asset or a liability, or the
amount of the periodic consumption of an asset, that results from the
Change in
assessment of the present status of, and expected future benefits and
accounting
obligations associated with, assets and liabilities. Changes in
estimates
accounting estimates result from new information or new developments
and, accordingly, are not corrections of errors.
are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or
misuse of, reliable information that:
(a) was available when financial statements for those periods were
authorised for issue; and
Prior Period (b) could reasonably be expected to have been obtained and taken
errors into account in the preparation and presentation of those
financial statements.

Such errors include the effects of mathematical mistakes, mistakes in

applying accounting policies, oversights or misinterpretations of facts,
and fraud.

TREATMENT DEFINITIONS
Retrospective is applying a new accounting policy to transactions, other events and
application conditions as if that policy had always been applied.
of a change in accounting policy and of recognising the effect of a
change in an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events
Prospective
and conditions occurring after the date as at which the policy is
application
changed; and
(b) recognising the effect of the change in the accounting estimate
in the current and future periods affected by the change.
is correcting the recognition, measurement and disclosure of amounts
Retrospective
of elements of financial statements as if a prior period error had never
restatement
occurred.

© kashifadeel.com
 CAF 7 – IAS 8

OTHER DEFINITIONS
are Standards and Interpretations adopted by the IASB. They comprise:
(a) IFRSs;
IFRSs
(b) IASs; and
(c) IFRICs or the former SICs.
Page | 2 Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that users
make on the basis of the financial statements. Materiality depends on
Material
the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a
combination of both, could be the determining factor.
Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so. For a particular prior
period, it is impracticable to apply a change in an accounting policy
retrospectively or to make a retrospective restatement to correct an
error if:
(a) the effects of the retrospective application or retrospective
restatement are not determinable;
(b) the retrospective application or retrospective restatement
requires assumptions about what management’s intent would
Impracticable have been in that period; or
(c) the retrospective application or retrospective restatement
requires significant estimates of amounts and it is impossible to
distinguish objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the
date(s) as at which those amounts are to be recognised,
measured or disclosed; and
(ii) would have been available when the financial statements
for that prior period were authorised for issue from other
information.

ACCOUNTING POLICIES
SELECTION & APPLICATION
Specific IFRS The accounting policy or policies applied to that item shall be
applies to a determined by applying the IFRS considering any relevant
transaction / implementation guidance. Those policies need not be applied when the
event effect of applying them is immaterial.
management shall use its judgement in developing and applying an
accounting policy that results in information that is:
(i) relevant
(ii) reliable (faithful, reflecting the substance, neutral, prudent &
No specific IFRS
complete)
applies to a
transaction /
In making such judgement, the management should consider following
event
sources:
(a) IFRS dealing with similar and related issues; and
(b) Framework to IFRSs; and
(c) Recent pronouncement of other standard-setting bodies.
Accounting policies should be applied consistently unless required or permitted by IFRSs.

Latest update: March 2020

 CAF 7 – IAS 8

CHANGES IN ACCOUNTING POLICIES

CHANGE
An entity shall change an accounting policy only if the change:
When to (a) is required by an IFRS; or
change? (b) results in the financial statements providing reliable and more relevant Page | 3
information.
The following are NOT changes in accounting policies:
Not a
(a) the application of an accounting policy for transactions and events that
change in
differ in substance from those previously occurring; and
accounting
(b) the application of a new accounting policy for transactions and events
policies
that did not occur previously or were immaterial.

APPLICATION OF IAS 8
The initial application of revaluation model under IAS 16 or IAS 38 shall be
Exemption
dealt in accordance with IAS 16 or IAS 38 respectively, and not in
from IAS 8
accordance with IAS 8.
Transitional The initial application of an IFRS may result in change in accounting policy,
provisions which should be accounted for in accordance with Transitional Provisions
of that IFRS.
When IAS 8 If the IFRS does not include any transitional provisions or the change in
applies? accounting policy is voluntary, the following requirements of IAS 8 shall be
applied.

ACCOUNTING TREATMENT UNDER IAS 8

Change in accounting policy shall be applied retrospectively except to the
extent that it is impracticable to determine either period specific effects or
cumulative effect of change.

Retrospective application has three steps:

Retrospective (a) Apply new policy in current periods.
Application (b) Apply new policy in comparative period as if in comparative period
the new policy was applicable.
(c) For periods before the comparative period, adjust the opening
balance of each affected component of equity for the earliest prior
period presented and other comparative amounts disclosed, as if
new policy had always been applied.
When it is impracticable to determine the period specific effects for one
or more prior periods, the entity shall apply the new accounting policy as at
Partial
the beginning of earliest period for which retrospective application is
Retrospective
practicable (which may be current period) and shall make a corresponding
Application
adjustment to the opening balance of each affected component of equity for
that period.
Prospective When it is impracticable to determine the cumulative effect, the new policy
Application should be applied prospectively.

© kashifadeel.com
 CAF 7 – IAS 8

DISCLOSURES
An entity shall disclose:
(a) title of the IFRS
(b) if change made in accordance with transitional provisions, the fact
thereof
Page | 4 (c) nature of the change
Change in (d) amount of adjustment for all period presented for each line item and
accordance EPS
with an IFRS (e) amount of adjustment for period not presented, unless impracticable
(f) the circumstances due to which retrospective application is
impracticable

Financial Statements of subsequent periods need not to repeat these

disclosures.
An entity shall disclose:
(a) nature of the change
(b) reasons why new policy gives more relevant and reliable
information.
(c) amount of adjustment for all period presented for each line item and
Voluntary EPS
change (d) amount of adjustment for period not presented, unless impracticable
(e) the circumstances due to which retrospective application is
impracticable

Financial Statements of subsequent periods need not to repeat these

disclosures.

Latest update: March 2020

 CAF 7 – IAS 8

CHANGES IN ACCOUNTING ESTIMATES

As a result of the uncertainties inherent in business activities, many items
in financial statements cannot be measured with precision but can only
be estimated. An estimate may need revision if changes occur in the
Introduction
circumstances on which the estimate was based or as a result of new Page | 5
information or more experience. By its nature, the revision of an estimate
does not relate to prior periods and is not the correction of an error.
A change in the measurement basis applied is a change in an accounting
policy, and is not a change in an accounting estimate. When it is difficult
In case of
to distinguish a change in an accounting policy from a change in an
confusion
accounting estimate, the change is treated as a change in an accounting
estimate.
The effect of change in an accounting estimate relating to profit or loss
shall be recognised prospectively (from the date of change to onward) by
Statement of
including it in PL in:
comprehensive
(a) The period of change, if the change affects that period only; or
income
(b) The period of change and future periods, if the change affects
both.
Statement of To the extent that a change in an accounting estimate gives rise to
financial changes in assets and liabilities, or relates to an item of equity, it shall be
position / recognised by adjusting the carrying amount of the related asset, liability
changes in or equity item in the period of change.
equity
Estimates may be required of:
(a) Bad debts (usually affects profit or loss of current year only);
(b) Inventory obsolescence;
Examples (c) The fair value of financial assets and financial liabilities;
(d) The useful life or depreciation method (usually affects profit or
loss of current year and future years as well);
(e) Provision for warranties, etc.
An entity shall disclose the nature and amount of change in accounting
estimate and its effect in the current period. Effect in future periods shall
Disclosures
also be disclosed unless impracticable, in which case, an entity shall
disclose that fact.

© kashifadeel.com
 CAF 7 – IAS 8

ERRORS
Unless impracticable, an entity shall correct material prior period errors
retrospectively in the first set of financial statements authorised for issue
after their discovery by:
Page | 6 Retrospective (a) restating the comparative amounts for the prior periods presented in
restatement which the error occurred; or
(b) restating the opening balance of assets, liabilities and equity for the
earliest prior period presented, if the error occurred before the
earliest prior period presented.
When it is impracticable to determine the period specific effects of an
Partial
error, the entity shall make retrospective restatement for the earliest period
Retrospective
for which retrospective restatement is practicable (which may be current
Application
period).
Prospective When it is impracticable to determine the cumulative effect, the entity
Application shall correct the error prospectively.
An entity shall disclose:
(a) nature of the prior period error
(b) amount of correction for all period presented for each line item and
EPS
(c) amount of correction at the beginning of earliest period presented
Disclosures (d) the circumstances due to which retrospective restatement is
impracticable
(e) description of how and from when the error has been corrected

Financial Statements of subsequent periods need not to repeat these

disclosures.

RECLASSIFICATION
Sometime, an item is wrongly classified in a wrong category, for example, an
expense that has to be accounted for under Cost of Sales was inadvertently
Issue
categorized in Administrative expenses or an item of Administrative
expenses was wrongly classified in Cost of Sales.
Such wrong reclassification is corrected once this is identified, even though
Not a have to change last year’s financial statements figures, but since there will
restatement be no impact on the overall financial statements, this is regarded as
reclassification and not restatement.
If such case a rise, where the impact is Nil on the Financial Statements and
if the item is material, a note is given in Financial Statement describing the
reclassification.
Illustrative Head of
Head of
Description Account Amount in PKR
note Earlier
Account Now

Vehicle running and Cost of Administrative

1,000,000
Maintenance Sales Expenses
.

Latest update: March 2020

 CAF 7 – IAS 8

SYLLABUS
Reference Content/Learning outcome

A3 Accounting policies, changes in accounting estimates; and errors (IAS-8)

Page | 7
LO1.3.1 Define accounting policies, accounting estimates and prior period errors
Account for the effect of change in accounting estimates and policies in the
LO1.3.2
financial statements
Understand and analyse using examples, IFRS guidance on accounting
LO1.3.3
policies, change in accounting policies and disclosure
Understand and analyse using examples, IFRS guidance on accounting
LO1.3.4
estimates, changes in accounting estimates and disclosure
Understand and analyse using examples, IFRS guidance on errors, correction
LO1.3.5
of errors and disclosure.
Proficiency level: 2 Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
- 15 - 10 18 - 17 14 - - 091 -
Objective Type 01 -
1
Total Marks 16 (including IFRS 16)

© kashifadeel.com
 CAF 7 – IAS 8

PRACTICE Q&A
Sr.# Description Marks Reference
BASIC UNDERSTANDING
1C Identify the difference of policy, estimates and errors 08 CI
Page | 8 2C G Ltd – Change in accounting policy (retrospective) with
10 CI
complete disclosures
3C Delta Ltd – Change in accounting policy (prospective) with
06 CI
complete disclosures
4C Ibmeed Textile Limited – Change is estimate 03 CI
5C Beto Co – Correction of error with complete disclosures 10 CI
EXAMS LEVEL
6C Wonder Limited – All relevant FS impact including
20 QB
correction of error note and change in estimate
7H Mohani Manufacturing Limited: Change in policy and
10 QB
correction of error
8H Asif Engineering Limited: SFP, SCI, SCE – change in policy 10 PE S16
9H Chand Paints Limited: Correction of error note and SCE 18 PE A16
10H Marvelous Limited: Correction of error and change in
estimate with deferred tax impacts and detailed disclosure 17 PE A17
note
11C Daffodil Limited: SCE with comparative with dividend, share
14 PE S18
issue and correction of errors
12C Coal Limited: (+IFRS 16) 16 PE A19

Latest update: March 2020

 CAF 7 – IAS 8

QUESTION 01
Whether the following are changes in accounting policies, changes in accounting estimates
or prior period errors: (08)
BL changed its accounting for land and buildings from cost model to revaluation
1. model.
2. The useful life of plant was revised downwards following impairment loss.
Page | 9
3. The depreciation method for depreciating furniture was changed from straight line
method to reducing balance method.
4. The cost formula used for valuation of inventories was changed from FIFO to
weighted average.
5. It was discovered that last year company’s inventory sheets were under-casted.
6. It was discovered that actual NRV of inventory was much lower than expected.
7. Measurement of financial assets and liabilities
8. Presentation (e.g. an entity changes from presenting a classified statement of
financial position (current and non-current assets and current and non-current
liabilities shown as separate classifications) to a liquidity presentation (items
presented in order of liquidity without current/non-current classification)

QUESTION 02
G Ltd adopted IFRSs from the beginning of year 2012. As a consequence, G Ltd changed its
accounting policy for the treatment of borrowing costs that are directly attributable to the
acquisition of a hydroelectric power station under construction for use by G Ltd. In previous
periods, G Ltd had charged such costs as an expense. G Ltd has now decided to capitalise
these costs, rather than treating them as an expense as a result of adopting IAS 23.

G Ltd expensed borrowing costs directly related to construction of qualifying asset incurred
of Rs.2,600 during 2011 and Rs.5,000 in 2010 and Rs.4,000 in 2009. G Limited accounting
records for 2012 show profit before tax of Rs.27,000 (after deducting Rs.3,000 borrowing
costs relating to qualifying assets). The income tax is Rs.8,100. G Ltd has not yet recognised
any depreciation on the power station because it is not yet in use.

In 2011, G Limited reported:

Rs.
Profit before interest and tax 20,600
Interest expense (all on qualifying assets) (2,600)
Profit before tax 18,000
Tax (5,400)
Profit 12,600

Year 2011 reported retained earnings was Rs.20,000 and closing retained earnings was
Rs.32,600. G Ltd’s tax rate was 30% for 2012, 2011 and prior periods. G Ltd had Rs.10,000
of share capital throughout, and no other components of equity except for retained earnings.

Required:
Relevant extracts of financial statements with disclosure note. (10)

© kashifadeel.com
 CAF 7 – IAS 8

QUESTION 03
During 2012, Delta Co changed its accounting policy for depreciating property, plant and
equipment, so as to apply much more fully a components approach, whilst at the same time
adopting the revaluation model. In the years before 2012, Delta’s assets records were not
sufficiently detailed to apply a components approach fully. At the end of 2011, management
commissioned an engineering survey, which provided information on the components held
Page | 10 and their fair values, useful lives, estimated residual values and descriptive amounts at the
beginning of 2012. However, the survey did not provide a sufficient basis for reliably
estimating the cost of those components that had not previously been accounted for
separately, and the existing records before the survey did not permit this information to be
reconstructed. Delta’s management considered how to account for each of the two aspects
of the accounting change. They determined that it was not practicable to account for the
change to a fuller components approach retrospectively, or to account for that change
prospectively from an earlier date than the start of 2012. Also, the change from a cost model
to a revaluation model is required to be accounted for prospectively. Therefore, management
concluded that it should apply Delta’s new policy prospectively from the start of 2012.

Additional information:
Delta’s tax rate is 30%.
Rupees
Property, plant and equipment at the end of 2011:
Cost 25,000
Depreciation (14,000)
Net book value 11,000

Prospective depreciation expense for 2012 (old basis) 1,500

Some results of engineering survey:

Valuation 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7

Required:
Extracts from notes with new depreciation charge with disclosure note (06)

QUESTION 04
Ibmeed Textile Limited (ITL) purchased a plant on January 01, 2011 for Rs. 1,120,000. At
this date the useful life of the asset was estimated at 10 years after which it can be sold for
Rs. 120,000. However, during 2013 ITL estimates the remaining useful life of this plant as 6
years and expects to fetch residual value of Rs. 170,000. ITL uses straight line method for
depreciating such plants.

Required:
Calculate the amount of depreciation from year 2011 to 2018. (03)

Latest update: March 2020

 CAF 7 – IAS 8

QUESTION 05
During 2012, Beta Co discovered that some products that had been sold during 2011, were
incorrectly included in inventory at 31 December 2011 at Rs.6,500. Beta’s accounting
records for 2012 show sales of Rs.104,000; cost of goods sold of Rs.86,500(including
Rs.6,500 for the error in opening inventory); income taxes of Rs.5,250.

In 2011, Beta reported: Page | 11

Rs.
Sales 73,500
Cost of goods sold (53,500)
Profit before income taxes 20,000
Income taxes (6,000)
Profit 14,000

Year 2011 reported retained earnings was Rs.20,000 and closing retained earnings was
Rs.34,000. Beta’s income tax rate was 30% for 2012 and 2011. It had no other income or
expenses. Beta had Rs.5,000 of share capital throughout, and no other components of
equity except for retained earnings.

Required:
Relevant extracts of financial statements. (10)

QUESTION 06
Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery.
Following are the draft extracts of the statement of financial position and the statement of
profit or loss for the year ended 30 June 2015:
Statement of Financial Position
2015 2014
Rs. m Rs. m
Property, plant and equipment 189 130
Retained earnings 166 108
Deferred tax liability 45 27

Statement of profit or loss

2015 2014
Rs. m Rs. m
Profit before taxation 90 120
Taxation 32 42
Profit after taxation 58 78

Following additional information has not been taken into account in the preparation of the
above financial statements:
(i) Cost of repairs amounting to Rs.20 million was erroneously debited to the machinery
account on 1 October 2013. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2014, WL reviewed the estimated useful life of its plant and revised it from
5 years to 8 years. The plant was purchased on 1 July 2013 at a cost of Rs.70
million.
Depreciation is provided under the straight line method. Applicable tax rate is 30%.

© kashifadeel.com
 CAF 7 – IAS 8

Required
Prepare relevant extracts (including comparative figures) for the year ended 30 June 2015
related to the following:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
Page | 12 (d) Correction of error note (20)

QUESTION 07
Mohani Manufacturing Limited is engaged in manufacturing of spare parts for motor car
assemblers. The audited financial statements for the year ended December 31, 2014
disclosed that the profit and retained earnings were Rs.21 million and Rs.89 million
respectively. The draft financial statements for the year show a profit of Rs.15 million.
However, following adjustments are required to be made:

(i) The management of the company has decided to change the method for valuation of
raw materials from FIFO to weighted average. The value of inventory under each
method is as follows:
FIFO Weighted Average
Rs.m Rs.m
December 31, 2013 37.0 35.5
December 31, 2014 42.3 44.5
December 31, 2015 58.4 54.4

(ii) In 2014, the company purchased a plant for Rs.100 million. Depreciation on plant
was recorded at Rs.25 million instead of Rs.10 million. This error was discovered
after the publication of financial statements for the year ended December 31, 2014.
The error is considered to be material

Required
Produce an extract showing the movement in retained earnings, as would appear in the
statement of changes in equity for the year ended December 31, 2015. (10)

QUESTION 08
The following information has been taken from the financial statements of Asif Engineering
Limited (AEL) for the year ended 31 December 2015:

2015
2014 2013
(draft)
---------- Rs. in million ----------
Property, plant equipment 2,430 2,402 2,105
Stores and spares 73 80 70
Retained earnings as at 31 December 353 224 101
Net profit 129 123 112

In the above financial statements, AEL has recognized consumption of spare parts as
expense. AEL has now decided to change its above policy and classify consumption of
spares having useful life of more than one year as capital spares under property, plant and
equipment.

Latest update: March 2020

 CAF 7 – IAS 8

Following information pertains to capital spares consumed during the past three years:
Parts issued during the year Useful life of the
Year ended Rs. in million issued parts
31 December 2013 55 5 years
31 December 2014 39 3 years
31 December 2015 44 4 years
Page | 13
Depreciation on these parts is to be charged using straight line method over its useful life.

Required:
In accordance with the requirements of International Financial Reporting Standards, prepare
the revised extracts (including comparative figures) of the following:
(a) Statement of financial position as at 31 December 2015 (04)
(b) Statement of comprehensive income for the year ended 31 December 2015 (03)
(c) Statement of changes in equity for the year ended 31 December 2015 (03)
(Ignore taxation)

QUESTION 09
Chand Paints Limited (CPL) is engaged in the manufacturing of chemicals and paints. In
April 2016 it was discovered that certain errors had been made in the financial statements
for the year ended 30 June 2015.The errors were corrected in 2016.The details are as
follows:
2015
2016 2015
After correction
(Draft) Audited
of errors
---------- Rs. in million -----------
Statement of comprehensive income
Sales tax, commission and discounts (7,939) (8,246) (7,916)
Cost of sales (45,508) (44,606) (44,633)
Selling and distribution expenses (2,940) (2,635) (2,441)
Administration expenses (2,356) (2,254) (2,149)
Other operating charges (495) (467) (515)
Other operating income 920 427 509
Profit for the year 4,089 3,723 4,359

Statement of financial position

Trade and other receivables 1,839 1,613 2,025
Trade and other payables 11,600 8,894 8,670

The share capital and un-appropriated profit of CPL as on 1 July 2014 was
Rs.10,400 million and Rs.19,089 million respectively.

The details of dividend declared are as follows:

2016 2015
Cash dividend – Interim 10% 5%
– Final 15% 10%

Required:
(a) Prepare a correction of error note to be included in the financial statements for the
year ended 30 June 2016. (Ignore earnings per share and taxation) (10)
(b) Prepare the statement of changes in equity for the year ended 30 June 2016. (08)

© kashifadeel.com
 CAF 7 – IAS 8

QUESTION 10
Following information has been extracted from the draft financial statements of Marvellous
Limited (ML) for the year ended 30 June 2017:

Statement of financial position

2017 2016
Page | 14
Rs. in million
Property, plant and equipment 700 612
Retained earnings 275 240
Deferred tax liability 58 52
Provision for taxation 12 16

Statement of profit or loss

Profit before taxation 65 85
Taxation 30 25
Profit after taxation 35 60

The following matters are under consideration of the management:

 It was identified that ML’s obligation to incur decommissioning cost related to a plant
has not been recognised. The plant was acquired on 1 July 2014 and had been
depreciated on straight line basis over a useful life of four years. The expected cost
of decommissioning at the end of the life is Rs. 50 million. Applicable discount rate is
8%.

 In view of significant change in the expected pattern of economic benefits from an

item of the equipment, it has been decided to change the depreciation method from
reducing balance to straight line. The equipment was purchased on 1 July 2015 at a
cost of Rs. 80 million having estimated useful life of 5 years and residual value of Rs.
16 million. The depreciation at the rate of 27.5% on reducing balance method is
included in the above draft financial statements.

The following balances pertain to ML’s statement of financial position as on 30 June 2015:
Rs. in million
Property, plant and equipment 650
Retained earnings 180
Deferred tax liability 40
Provision for taxation 24

Applicable tax rate is 30%. Tax authorities consider decommissioning cost as an expense
when paid.

Required:
Prepare extracts from the following (including comparative figures) for the year ended 30
June 2017:
(a) Statement of financial position (08)
(b) Statement of profit or loss (03)
(c) Correction of error note (06)

Latest update: March 2020

 CAF 7 – IAS 8

QUESTION 11
For the purpose of preparation of statement of changes in equity for the year ended 31
December 2017, Daffodil Limited (DL) has extracted the following information:

2017 2016 2015

Draft Audited Audited
Page | 15
--------- Rs. in million ---------
Net profit 650 318 214
Transfer to general reserves 112 - 141
Transfer of incremental depreciation - 49 55
Final cash dividend – - 7.5%

Additional information:
(i) Details of share issues:
 25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market
price per share immediately before the entitlement date was also Rs. 18 per
share.
 A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
 50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The
market price per share immediately before the entitlement date was Rs. 25 per
share.
 A bonus issue of 15% was made on 1 September 2017 as interim dividend.

(ii) After preparing draft financial statements, it was discovered that depreciation on a
plant costing Rs. 700 million has been charged @ 25% under reducing balance
method, from the date of commencement of manufacturing i.e. 1 July 2014.
However, the plant was available for use on 1 February 2014.

(iii) Share capital and reserves as at 31 December:

2015 2014
------ Rs. in million ------
Ordinary share capital (Rs. 10 each) 1,600 1,600
General reserves 1,801 1,709
Revaluation Surplus 49 104
Retained earnings 1,430 1,302

Required:
Prepare DL’s statement of changes in equity for the year ended 31 December 2017 along
with comparative figures. (Ignore taxation) (14)

© kashifadeel.com
 CAF 7 – IAS 8

QUESTION 12
Coal Limited (CL) is preparing its financial statements for the year ended 30 June 2019.
Following information is available:
(i) On 1 January 2019, CL acquired a machine on lease from a bank. Fair value of
machine on acquisition was Rs. 70 million. CL incurred initial direct cost of Rs. 5
million and received lease incentives of Rs. 2 million.
Page | 16
The terms agreed with the bank are as follows:
 The lease term and useful life are 4 years and 10 years respectively.
 Instalment of Rs. 17 million is to be paid annually in advance on 1 January.
 The rate implicit in the lease is 15.096% per annum.
 At the end of the lease term, CL has an option to purchase the machine at its
estimated fair value of Rs. 25 million. It is not reasonably certain that CL will
exercise this option. (07)
(ii) During the year, it was discovered that due to some calculation error in excel sheet,
fair value of CL’s office building was taken incorrectly as Rs. 460 million instead of
Rs. 360 million. Resultantly, the building was recorded based on incorrect revaluation
amount in CL’s financial statements for the year ended 30 June 2017. This building
as acquired on 1 July 2015 for Rs. 500 million and then revalued for the first time on
30 June 2017.
CL follows revaluation model for subsequent measurement of its building classified
as property, plant and equipment and charges depreciation over its useful life of 10
years using straight line method. CL accounts for revaluation on net replacement
value method and transfers the maximum possible amount from the revaluation
surplus to retained earnings on an annual basis.
As on 30 June 2019, the revalued amount of building has been determined at Rs.
320 million. (09)

Required:
Prepare extracts from CL’s statement of financial position and related notes to the financial
statements for the year ended 30 June 2019 alongwith comparative figures for the above.
(Note on Property, plant and equipment is not required)

Latest update: March 2020

 CAF 7 – IAS 8

ANSWER 01
1. Change in accounting policy
2. Change in accounting estimate
3. Change in accounting estimate
4. Change in accounting policy
Page | 17
5. Prior period error
6. Change in accounting estimate
7. Change in accounting policy
8. Change in accounting policy

ANSWER 02
G Ltd – Statement of Comprehensive Income (extracts)
2012 2011
Rs. Rs.
Profit before interest and tax 27,000+3,000 30,000 20,600
Interest 0 0
Profit before tax 30,000 20,600
Tax @ 30% (9,000) (6,180)
Profit after tax 21,000 14,420

G Ltd – Statement of changes in equity

Restated
Share
Retained Total
capital
earnings
Rs. Rs. Rs.
Balance as at January 1, 2011 (previously reported) 10,000 20,000 30,000
Change in accounting policy (net of tax @ 30%) 6,300 6,300
Balance as at January 1, 2011 (Restated) 10,000 26,300 36,300
Profit for the year ended 2011 14,420 14,420
Balance as at December 31, 2011 10,000 40,720 50,720
Profit for the year ended 2012 21,000 21,000
Balance as at December 31, 2012 10,000 61,720 71,720
Extracts from the notes
During 2012, G Ltd changed its accounting policy for the treatment of borrowing costs
related to a hydroelectric power station under construction for use by G Ltd. Previously G Ltd
expensed such costs as incurred. They are now capitalised in the cost of asset concerned.
The change of policy is for better presentation and comparison with local industry and for
complying with requirement of IAS 23. This change in accounting policy has been accounted
for retrospectively, and the comparative statements for 2011 have been restated.
Effect on 2011 Prior periods
Rs. Rs.
Decrease in interest expenses 2,600 9,000
Increase in income tax expense (780) (2,700)
Increase in profit 1,820 6,300

Increase retained earnings as at December 31, 2011 8,120

Increase in assets (CWIP) as at December 31, 2011 11,600

© kashifadeel.com
 CAF 7 – IAS 8

ANSWER 03
Rs.
Depreciation expense on existing PPE for 2012 (new basis) 2,000

Extract from the notes

Page | 18
From the start of 2012, Delta changed its accounting policy for depreciating property, plant
and equipment, so as to apply much more fully a components approach, whilst at the same
time adopting the revaluation model. Management takes the view that this policy provides
reliable and more relevant information because it deals more accurately with components of
property, plant and equipment. The policy has been applied prospectively from the start of
2012 because it was not practicable to estimate the effect of applying the policy either
retrospectively or prospectively from any earlier date. Accordingly the adoption of new policy
has no effect on prior years. The effect on the current year is to increase the carrying
amount of property, plant and equipment at the start of year by Rs. 6,000; increase the
opening deferred tax provision by Rs. 1,800; create a revaluation surplus at the start of the
year by Rs. 4,200; increase the deprecation expense by Rs. 500 and reduce tax expenses
by Rs. 150.

ANSWER 04
Per year depreciation Rs.
Year 1 and 2 (Rs. 1,120,000 – 120,000) / 10 years 100,000
Year 3 to 8 ((Rs. 1,120,000 – (100,000 x 2 years dep.)) – 170,000) / 6 years 125,000

ANSWER 05
Beta Co
Statement of Comprehensive Income (extracts)
Restated
2012 2011
Rs. Rs.
Sales 104,000 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

Beta Co
Statement of changes in equity
Restated
Share
Retained Total
capital
earnings
Rs. Rs. Rs.
Balance as at January 1, 2011 5,000 20,000 25,000

Profit for the year ended 2011 9,450 9,450

Balance as at December 31, 2011 5,000 29,450 34,450

Profit for the year ended 2012 16,800 16,800

Balance as at December 31, 2012 5,000 46,250 51,250

Latest update: March 2020

 CAF 7 – IAS 8

Extracts from the notes

Some products that had been sold in 2011 were incorrectly included in inventory at 31
December 2011 at Rs.6,500. The financial statements of 2011 have been restated to correct
this error. The effect of the restatement on those financial statements is summarised below.

There is no effect in 2012.

Page | 19
Effect on 2011 Rs.
Increase in cost of goods sold (6,500)
Decrease in income tax expense 1,950
Decrease in profit (4,550)

Decrease in inventory (6,500)

Decrease in income tax payable 1,950
Decrease in equity (4,550)

ANSWER 06
Wonder Limited
Statement of Financial Position (Extracts) as at June 30, 2015
2014
2015
Rs. m
Rs. m
(Restated)
PPE [189 – 20 + 1.5 + 2 + 6] ; [130 – 20 + 1.5] 178.5 111.5
Retained Earnings [See SCE] 158.65 95.05
Deferred tax Liability [45 – 5.55 + 2.4] ; [27 – 5.55] 41.85 21.45

Statement of Profit or Loss (Extracts) for the year ended June 30, 2015
2014
2015
Rs. m
Rs. m
(Restated)
Profit before taxation [90 + 2 + 6] ; [120 – 20 + 1.5] 98 101.5
Taxation [32 + 2.4] ; [42 – 5.55] (34.4) (36.45)
Profit after taxation 63.6 65.05

Statement of Changes in Equity (Extracts) for the year ended June 30, 2015
Rs.m
Balance as at July 01, 2013 [108 – 78] 30
Profit for the year ended June 30, 2014 [Restated] 65.05
Balance as at June 30, 2014 95.05
Profit for the year ended June 30, 2015 63.6
Balance as at June 30, 2015 158.65
Notes to the Financial Statements for the year ended June 30, 2015
Note X: Correction of error: During the year ended June 30, 2013, the repair work was
erroneously debited to machine account. The effect of this error is as follows:
2014
Effect on the statement of Profit or Loss
Rs.m
Repairs and maintenance (20)
Depreciation (20 × 10% × 9 ÷ 12) 1.5
Tax expenses (30% × (20-1.5)) 5.55
Decrease in profit for the year (12.95)

© kashifadeel.com
 CAF 7 – IAS 8

2014
Effect on the statement of Financial position
Rs.m
Property, plant and equipment (20 – 1.5) (18.55)
Deferred tax liability (Rs.18.5 × 30%) 5.55
Retained earnings (18.50 - 5.55) (12.95)

Page | 20 Working for understanding 2014 2015

Correction of error 2014 PPE - PPE -
Dr. Repairs Cr. PPE 20 Profit -
Depreciation reversal impact 2014 [20 / 10 years x 9/12] PPE+ PPE+
Dr. PPE Cr. Dep exp 1.5 Profit +
Deferred tax impact 2014 [profit – 20 + 1.5 = 18.5 x 30%] DTL - DTL -
Dr. DTL Cr. Tax exp 5.55 Tax exp -
Depreciation reversal impact 2015 [20 / 10 years x 12/12] PPE+
Dr. PPE Cr. Dep exp 2 Profit +
Depreciation reversal estimate change 2015 PPE+
[56/4 years – 56/7 years] Profit +
Dr. PPE Cr. Dep exp 6
Deferred tax impact 2015 [profit + 2 + 6 = 8 x 30%] DTL +
Dr. Tax exp Cr. DTL 2.4

ANSWER 07
Mohani Manufacturing Limited
Statement of changes in equity (restated)
For the year ended December 31, 2015 Share Retained
Total
Capital earnings
Rs. m Rs. m Rs. m
Balance at January 01, 2014 – previously reported Rs.89 - 68
21
Effect of change in accounting policy (1.5)
Balance at January 01, 2014 – restated 66.5
Profit for the year – restated 39.7
Balance at December 31, 2014 106.2
Profit for the year 8.8
Balance at December 31, 2015 115

W1 2015 2014 2013

Profit before correction 15 21
Increase (decrease) in closing inventory (4) 2.2 (1.5)
(Increase) decrease in opening inventory (2.2) 1.5

Extra depreciation reversed 15

Profit restated (or impact on RE) 8.8 39.7 (1.5)

Latest update: March 2020

 CAF 7 – IAS 8

ANSWER 08
Part (a)
Asif Engineering Ltd.
Extracts from statement of financial 2014 2013
2015
position (Restated) (Restated)
--------- Rs. in million --------- Page | 21
Property, plant & equipment (W-2) 2,498 2,461 2,149
Stores and spares 73 80 70
Retained earnings 421 283 145

Part (b)
Extracts from statement of
2015 2014 (Restated)
comprehensive income
--------- Rs. in million ---------
Net profit (W-1) 138 138

Part (c)
Extracts from statement of changes in equity: Retained earnings
Rs. in million
Balance as at 1 January 2014 101
Effect of retrospective change in accounting policy (W-1) 44
Balance at 1 January 2014 – restated 145
Total comprehensive income – 2014 (W-1) 138
Balance as at 1 January 2015 – (restated) 283
Total comprehensive income – 2015 138
Balance as at 31 December 2015 421

W 1: Computation of net profit: Depreciation expense for the year

2013 2014 2015
…….Rs. in million……..
Depreciation for 2013 (55÷5) 11 11 11
Depreciation for 2014 (39÷3) - 13 13
Depreciation for 2015 (44÷4) - - 11
11 24 35
Less: Amount already charged 55 39 44
Adjustment to be made in net profit 44 15 9
Profit for the year 123 129
Adjusted profit for the year 138 138

W 2: Property, plant and equipment: 2013 2014 2015

…….Rs in million………
As given 2,105 2,402 2,430
Add: Stores issued 2013 55 55 55
Add: Stores issued 2014 0 39 39
Add: Stores issued 2015 0 0 44
Less: Accumulated depreciation
(11) (35) (70)
2014: 11 + 24 and 2015: 11 + 24 + 35
Revised carrying value 2,149 2,461 2,498

© kashifadeel.com
 CAF 7 – IAS 8

ANSWER 09
Part (a)
Chand Paints Limited
Notes to the financial statements - For the year ended 30 June 2016
The effect of retrospective restatement on statement of comprehensive income is tabulated
below:
Page | 22 2015
Increase / (decrease) in income Rs. in million
Increase in sales tax, commission and discounts (7,916 – 8,246) (330)
Decrease in cost of sales (44,633 – 44,606) 27
Increase in selling and distribution expenses (2,441 – 2,635) (194)
Increase in administration expenses (2,149 – 2,254) (105)
Decrease in operating income (602)
Decrease in other operating charges (515 – 467) 48
Decrease in other operating income ( 509 – 427 ) (82)
Decrease in profit for the year (636)

The effect of retrospective restatement on statement of financial position for 2015

is Tabulated below:
Decrease in trade debts (2,025 – 1,613) (412)
Increase in trade and other payables (8,894 – 8,670) 224
Decrease in un-appropriated profit (636)

Part (b)
Chand Paints Limited
Statement of changes in equity
For the year ended 30 June 2016

Description Share Retained Total

capital earnings
---------Rs. in million----------
Balance as on 1 July 2014 10,400 19,089 29,489
Interim dividend for the year ended 30 June 2015
(520) (520)
(10,400×5%)
Total comprehensive income for the year 2015 - restated 3,723 3,723
Balance as at 30 June 2015 restated 10,400 22,292 32,692
Final dividend for the year ended 30 June 2015
(1,040) (1,040)
(10,400×10%)
Interim cash dividend for the year 2016 (10,400×10%) (1,040) (1,040)
Total comprehensive income for the year 4,089 4,089
Balance as at 30 June 2016 10,400 24,301 34,701

Latest update: March 2020

 CAF 7 – IAS 8

ANSWER 10
Marvelous Limited
Part (a) 2017 2016 2015
Statement of financial position (extracts) Restated Restated
--------------- Rs. in million -------------
--
Page | 23
Assets
Property, plant & equipment
2015: (650+36.75 – 9.19) 677.56
2016: (612+36.75 – (9.19 ×2) 630.37
2017: 700+36.75 – (9.19×3) + (15.95 – 10.5) 714.63

Equity & liabilities

Retained earnings
2015: 180 – (2.94+9.19 – 3.64) 171.51
2016: 240 – (60 – 51.34) – 8.49 222.85
2017: 275 – (35 – 29.98) – (8.66+8.49) 252.83
Deferred tax liability
2015: (40 –3.64) 36.36
2016: [52 – 3.64 – 3.71) 44.65
2017: [58 – 3.64 – 3.71 – 2.15) 48.50
Provision for decommission
2015: (36.75+2.94) 39.69
2016: (39.69+3.18) 42.87
2017: (42.87+3.43) 46.30

Provision for taxation 12.00 16.00 24.00

Part (b) 2017 2016

Extract from statement of profit or loss Restated
Profit before tax
2016: (85 – 3.18 – 9.19) 72.63
2017: (65 – 3.43 – 9.19 + 5.45) 57.83
Taxation
2016: (25–3.71) (21.29)
2017: (30-2.15) (27.85)
Profit after tax 29.98 51.34

Part (c) Correction of error note

It was identified in current year that the company did not recognise decommissioning liability
related to plant which was acquired on 1 July 2014. The effects of this error are as follows:

Effect on the statement of profit or loss 2016

Increase/(decrease) in income: Rs. m
Increase in finance cost (3.18)
Increase in depreciation (9.19)
Decrease in profit before tax (12.37)
Decrease in deferred tax liability (12.37×30%) 3.71
Decrease in profit after tax (8.66)

© kashifadeel.com
 CAF 7 – IAS 8

Effect on the statement of financial position 2016 2015

Increase/(decrease) in retained earnings: ------ Rs. in million -----
Increase in PPE (630.38–612): (677.56–650) 18.38 27.56
Increase in provision for decommission (42.87) (39.69)
Decrease in deferred tax liability (3.64 +3.71) 7.35 3.64
Decrease in retained earnings (17.14) (8.49)
Page | 24
Working: 2017 2016 2015
Effects on Profit: --------- Rs. in million --------
Correction of error:
Recording of Decommissioning liability
Increase in PPE (50÷1.084) 36.75
Increase in decommissioning liability (36.75)
Increase/(decrease) in income
(Increase) in finance cost
2015: 36.75×0.08 (2.94)
2016: (36.75+2.94)×0.08 (3.18)
2017: (36.75+2.94+3.18)×0.08 (3.43)

(Increase) in depreciation (36.75÷4) (9.19) (9.19) (9.19)

Change in Estimate :
Reversal of dep. on RBM (80×0.725×0.275) 15.95
Inclusion of dep. on SLM [(80×0.725–16)÷4] (10.5)

Decrease in profit before tax (7.17) (12.37) (12.13)

Decrease in deferred tax (PBT×0.3) 2.15 3.71 3.64
Total effect on Profit (5.02) (8.66) (8.49)
Total effect on Retained earnings (22.17) (17.15) (8.49)

ANSWER 11
Share Share General Reval. Retained
Total
capital premium Reserves Surplus earnings
Rs. in million
Balance as at 31 December 2015 1,600.00 1,801.00 49 1,430 4,880
Effect of correction of error W1 (54.69) (54.69)
Balance as at 31 Dec. 2015
(restated) 1,600.00 1,801.00 49 1,375.31 4,825.31
Final cash dividend 2015
(1,600 x 7.5%) (120.00) (120.00)
Right issue @25%
(at Rs. 18 per share) 400.00 320.00 720.00
Net Profit (Restated)
318 + 13.67 W1 331.67 331.67
Transfer of incremental depreciation (49) 49 -
Balance as at 31 December 2016 2,000.00 320.00 1,801.00 - 1,635.98 5,756.98
Final bonus dividend 2016 -
(2,000 x 10%) 200.00 (200.00)
Right issue
(50m @ Rs. 15 per share) 500.00 250.00 750.00
Interim bonus dividend (2700 x 15%) 405.00 (405.00) -
Net Profit 650 + 10.25 W1 660.25 660.25
Transfer to General reserves 112.00 (112.00) -
Balance as at 31 December 2017 3,105.00 570.00 1,913.00 - 1,579.23 7,167.23

Latest update: March 2020

 CAF 7 – IAS 8

W1 Correction of error working Correct Incorrect

Adjustment
depreciation depreciation
Rs. in million
Cost 700 700
Depreciation 2014 [700 x 25% x 11/12] ; (160.42)
[700 x 25% x 6/12] (87.50) 72.92
539.58 612.5 Page | 25
Depreciation 2015 @25% (134.90) (153.13) (18.23)
404.68 459.37 54.69

Depreciation 2016 @25% (101.17) (114.84) (13.67)

303.51 344.53
Depreciation 2017 @25% (75.88) (86.13) (10.25)

ANSWER 12
Coal Limited
Statement of financial position as on 30 June 2019
2019 2018 2017
Restated Restated
Non-current assets ------------ Rs. in million ------------
Building 320 315* 360
Right of use asset (W1) 51.41 - -

Equity
Revaluation surplus (W2) 20.00 - -

Non-current liabilities
Lease liabilities (W3) 27.60 - -

Current liabilities
Current portion of lease liabilities (W3) 11.15 - -
Interest payable [5.85(W3) x 6/12] 2.93 - -
*360 – Depreciation (i.e. 360 / 8 years)
Coal Limited
Notes to the financial statements for the year ended 30 June 2019
1. Maturity analysis of lease liabilities:
2019 2018
Not later than one year 17 -
Later than one year but not later than five years 34 -
51 -

2. Correction of error note

It was identified in current year that revalued amount of one of its buildings was taken as
Rs. 460 million instead of 360 million in 2017's financial statements of the company.
Effect on the statement of profit or loss 2018
Increase in income: Rs. m
Decrease in depreciation expense [(460 – 360) / 8 years) 12.50

© kashifadeel.com
 CAF 7 – IAS 8

Effect on the statement of financial position 2018 2017

---- Rs. in million ----
Decrease in PPE (315-460×7÷8) : (360-460) (87.50) (100.00)
Decrease in Revaluation surplus (60×7÷8) : (400-460) (52.50) (60.00)
Decrease in retained earnings [40 – (40 / 8years)] (35.00) (40.00)

Page | 26 W1: Right of use asset Rs. in million

Present value of lease rental 17×3.2796 (annuity factor @15.096) 55.75
Initial direct cost 5.00
Lease incentive (2.00)
58.75
Depreciation 58.75 /4 years × 6/12 (7.34)
51.41

W2: Revaluation surplus Rs. in million

Revalued amount 320.00
Carrying value [360 – (360 / 8 years x 2 years)] (270.00)
50.00
Less: Impairment reversal (40÷8×6) (30.00)
20.00

W3: Lease Schedule (Advance Payments)

Balance at Rental Principal Balance at end Interest @
Time
beginning Rs. Rs. element Rs. Rs. 15.096% Rs.
2019 55.75 17 (17) 38.75 5.85
2020 38.75 17 (11.15) 27.60

Latest update: March 2020

 CAF 7 – IAS 8

ICAP OBJECTIVE BASED QUESTIONS

01. Which TWO of the following situations would not require a prior year adjustment as per IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
(a) In last year's financial statements, inventories were understated by a material
amount due to system error
(b) A company has changed its allowance for irrecoverable receivables from 10% of
outstanding debt to everything over 120 days old Page | 27
(c) A new accounting standard has been issued that requires a company to change its
accounting policy but gives no guidance on the specific application of the change
itself
(d) A company has decided to move from charging depreciation on the straight line
basis to the reducing balance basis

02. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
how is a change in accounting estimate accounted for?
(a) By changing the current year figures but not the previous years' figures
(b) By changing the current year figures and the previous years' figures
(c) No alteration of any figures but disclosure in the notes
(d) Neither alteration of any figures nor disclosure in the notes

03. According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how
should a material error in the previous financial reporting period be accounted for in the
current period?
(a) By making an adjustment in the financial statements of the current period through
the statement of profit or loss, and disclosing the nature of the error in a note.
(b) By making an adjustment in the financial statements of the current period as a
movement on reserves, and disclosing the nature of the error in a note.
(c) By restating the comparative amounts for the previous period at their correct value,
and disclosing the nature of the error in a note.
(d) By restating the comparative amounts for the previous period at their correct value,
but without the requirement for a disclosure of the nature of the error in a note.

04. Which of these changes would be classified as ‘a change in accounting policy’ as determined
by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
(a) Increased the allowance for irrecoverable receivables from 5% to 10% of
outstanding debts
(b) Changed the method of valuing inventory from FIFO to average cost
(c) Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
(d) Changed the useful life of motor vehicles from six years to four years

05. In which TWO of the following situations can a change in accounting policy be made by an
entity?
(a) If the change is required by an IFRS
(b) If the entity thinks that a new accounting policy would be easier to report
(c) If a new accounting policy would show more favourable results
(d) If a new accounting policy results in more reliable and relevant presentation of
events or transactions

06. Which one of the following would be treated under IAS 8 Accounting policies, changes in
accounting estimates and errors as a change of accounting policy?
(a) A change in valuation of inventory from a weighted average to a FIFO basis
(b) A change of depreciation method from straight line to reducing balance
(c) Adoption of the revaluation model for non-current assets previously held at cost
(d) Capitalisation of borrowing costs which have arisen for the first time

© kashifadeel.com
 CAF 7 – IAS 8

07. Which of the following would be a change in accounting policy in accordance with IAS 8
Accounting policies, changes in accounting estimates and errors?
(a) Adjusting the financial statements of a subsidiary prior to consolidation as its
accounting policies differ from those of its parent
(b) A change in reporting depreciation charges as cost of sales rather than as
administrative expenses
(c) Depreciation charged on reducing balance method rather than straight line
Page | 28 (d) Reducing the value of inventory from cost to net realisable value due to a valid
adjusting event after the reporting period

08. Which of the following items is a change of accounting policy under IAS 8 Accounting
policies, changes in accounting estimates and errors?
(a) Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
(b) Switching to purchasing plant using leases from a previous policy of purchasing
plant for cash
(c) Changing the value of a subsidiary's inventory in line with the group policy for
inventory valuation when preparing the consolidated financial statements
(d) Revising the remaining useful life of a depreciable asset

09. The directors of Tom Limited are disappointed by the draft profit for the year ended 30
September 2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is
being depreciated on a straight-line basis over a five-year period. On 1 October 2012, the
production manager believed that the plant was likely to last eight years in total (i.e. from the
date of its purchase).

Jerry believes that as the useful life estimate has increased, the previous years’ depreciation
was overstated and it depreciation expense should be reversed in current year leading to
increased profit.

What is the nature of the change being proposed by Jerry and how should it be applied?
(a) Change of accounting policy : Retrospective application
(b) Change of accounting policy : Prospective application
(c) Change of accounting estimate : Retrospective application
(d) Change of accounting estimate : Prospective application

10. If it is impractical to make a retrospective application to a period:

(a) Make the change only to the current period
(b) Apply the change to the earliest period that is practical
(c) Do not make the change at all
(d) Make the change in next year

11. Which TWO of the following would be treated as a change of accounting policy?
(a) Entity has received its first government grant and is applying the deferred income
method.
(b) Entity has revalued its properties. Up to now they had all been carried at historical
cost.
(c) Entity has reclassified development costs from other operating expenses to cost of
sales.
(d) Entity has increased its irrecoverable debt allowance from 10% to 12%.

12. Correcting the recognition, measurement and disclosure of amounts in financial statements
as if a prior-period error had never occurred. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective restatement

Latest update: March 2020

 CAF 7 – IAS 8

13. Specific principles bases conventions rules and practices applied in presenting financial
statements. This defines:
(a) Accounting estimates
(b) Accounting policies
(c) Prospective application
(d) Accounting method

14. Adjustment of the carrying amount of an asset or a liability or the consumption of an asset as Page | 29
a result of change in assessment. This defines:
(a) A change in accounting estimate
(b) Accounting policies
(c) Misstatements
(d) Correction of error

15. Applying a new policy to transactions as if that policy had always been applied. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective application

16. The directors of Tom Limited are disappointed by the draft profit for the year ended 30
September 2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is
being depreciated on a straight-line basis over a five-year period. On 1 October 2012, the
production manager believed that the plant was likely to last eight years in total (i.e. from the
date of its purchase).

Jerry believes that as the useful life estimate has increased, the previous years’ depreciation
was overstated and it depreciation expense should be reversed in current year leading to
increased profit.

Adjusting for the change of useful life correctly, what will be the carrying amount of the plant
at 30 September 2013?

Rs. ___________

17. Imad Textile Limited (ITL) purchased a plant on January 01, 2011 for Rs. 1,120,000. At this
date the useful life of the asset was estimated at 10 years after which it can be sold for Rs.
120,000. However, during 2013 ITL estimates the remaining useful life of this plant as 6
years and expects to fetch residual value of Rs. 170,000. ITL uses straight line method for
depreciating such plants.
Calculate the amount of depreciation for the year ended on 31 December 2018.

Rs. ___________

18. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an
intangible asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
2016 4
2015 3
The applicable tax rate is 30%.
What amount should be deducted from retained earnings in statement of changes in equity
on 1 January 2018 for correction of above error?

Rs. ___________

© kashifadeel.com
 CAF 7 – IAS 8

19. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an
intangible asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
Page | 30
2016 4
2015 3
The applicable tax rate is 30%.

Calculate the effect on profit after tax for the year ended 31 December 2018 correction of
above error.

Rs. ___________

20. Most of entity’s competitors value their inventory using the average cost (AVCO) basis,
whereas the entity uses the first in first out (FIFO) basis.

The value of inventory at 30 September 2013 (on the FIFO basis) is Rs. 20 million, however
on the AVCO basis it would be valued at Rs. 18 million. By adopting the same method
(AVCO) as its competitors. The inventory at 30 September 2012 was reported as Rs. 15
million, however on the AVCO basis it would have been reported as Rs. 13.4 million.

What will be the effect of the change on profits for the year ended 30 September 2013?

Rs. ___________

21. Disclosure requirements of IAS 8 in respect of change in accounting policy are NOT [A19]
applicable in case of:
(a) change in method for inventory valuation from FIFO to weighted average
(b) initial adoption of revaluation model for property, plant and equipment
(c) change in revenue recognition policy
(d) none of the above (01)

Latest update: March 2020

 CAF 7 – IAS 8

OBJECTIVE BASED ANSWERS

01. (b) & (d) A change in the calculation of the allowance for irrecoverable receivables,
and a change in the depreciation method, are changes in accounting
estimate so therefore require prospective adjustment only.

02. (a) Change in accounting estimates results in alteration of figures but not Page | 31
retrospectively. The change is made prospectively.

03. (c) The prior period error is corrected by restating the comparative amounts for
the previous period at their correct value. A note to the accounts should
disclose the nature of the error, together with other details.

04. (b) A change in the method of inventory valuation would be classed as a

change in accounting policy under IAS 8. The allowance for receivables,
useful life and depreciation method are all accounting estimates.

05. (a) & (d) A change in accounting policy may be made firstly if this is required by an
IFRS Standard. If there is no requirement, an entity can choose to change
their accounting policy if they believe a new accounting policy would result
in a more reliable and relevant presentation of events and transactions.
Entities cannot change their accounting policies simply to make financial
reporting easier, or to try and show a more favourable picture of results.

06. (a) A change of depreciation method is treated as a change of accounting

estimate. Adoption of the revaluation method is dealt with under IAS 16.
Application of a new accounting policy (such as capitalisation of borrowing
costs) for transactions that did not previously occur is not a change in
accounting policy according to IAS 8.

07. (b) This is a change in presentation which will affect calculation of gross profit
and will be retrospectively adjusted when presenting comparatives. (a( and
(d) are simply adjustments made during preparation of the financial
statements, (c) is a change of accounting estimate.

08. (a) This is a change in presentation so qualifies as a change in accounting

policy.

09. (d) This is a change of accounting estimate so does not need to be

retrospectively applied.

10. (b) In this situation, change is applied to the earliest period possible.

11. (b) & (c) This is change in measurement basis, so it is a change in accounting
policy. This is a change in presentation, so it is a change of accounting
policy.

12. (a) Correction of error in previous period is called retrospective restatement.

13. (b) Specific principles bases conventions rules and practices applied in
presenting financial statements are accounting policies.

14. (a) Change in assessment is change in estimate.

15. (b) Retrospective application is applying a policy as if it had always been

applied.

© kashifadeel.com
 CAF 7 – IAS 8

16. Rs. 10 million

Rs. m
Original cost 1 October 2010 20
Two years depreciation ((20/5) × 2) (8)
Carrying amount at 1 October 2012 12
Depreciation to 30 September 2013 (12 / 6) (2)
Page | 32 Carrying amount at 30 September 2013 10

17. Rs. 125,000 Per year depreciation Rs.

Year 2011 (Rs. 1,120,000 – 120,000) / 10 years 100,000
Year 2012 100,000

Year 2013 ((Rs. 920,000 – 170,000) / 6 years 125,000

18. Rs. 7.7 million Adjustment in opening balance of retained earnings (net of tax)
Rs. 4m + 4m + 3m = Rs. 11m x 70% = Rs. 7.7 million

19. Rs. 3.5 million Effect on profit for the year ended 31 December 2018 (net of tax)
Rs. 5m x 70% = Rs. 3.5 million

20. Rs. (400,000) FIFO AVCO Profit

Rs. m Rs. m Rs. m
Year to 30 September 2012 15 13.4 (1.6)
B/f 1 October 2012 1.6
Year to 30 September 2013 20 18 ( 2.0)
At 30 September 2013 (0.4)
The net effect at 30 September 2013 of this will be to reduce current year
profits by Rs. 400,000.

21. (b) initial adoption of revaluation model for property, plant and equipment

Latest update: March 2020