Chapter # 08

Accounting Policies, Change in

Accounting estimates and Errors

IAS-08
Question # 01 Page # 535:
During 2003, a revised IFRS on borrowing costs (IAS-23) was published. The company had previously been expensing borrowing costs
as a period cost, but the revised IFRS required that all borrowing costs be capitalized to the related asset. The borrowing costs were all
incurred on construction of a plant. The revised IFRS provided transitional provisions that allowed the company to capitalize the costs
from years beginning on or after 2004, or before this date, if preferred. This entity choose to capitalize the borrowing costs from the
earliest date possible. The plant is not yet available for use. The effect of this change is as follows:
2003 2002 2001
Interest expense Rs. Rs. Rs.
Old policy 9,000 17,000 15,000
New policy 0 0 0
The following drafts were produced before adjusting for the change in accounting policy:
Draft statement of comprehensive income 2003 2002
For the year ended 31st December 2003 (Extracts) Rs. Rs. Required:
Profit 455,000 380,000 Prepare relevant extracts (including
comparative figures) for the year ended
Draft statement of financial position 2003 2002 2001 31 December 2003 related to the
As at 31st December 2003 (Extracts) Rs. Rs. Rs. following:
Assets (a) Statement of financial position
Plant 500,000 450,000 300,000 (b) Statement of profit or loss
Equity (c) Statement of changes in equity
Retained earnings 955,000 500,000 120,000 (d) Change in Accounting Policy note
The construction of the plant is not yet complete. (e) Pass the journal entries
Question # 01 Page # 554:
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 comprehensive income 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 198 108
Statement of comprehensive income
2015 2014
Statement of profit or Loss
Rs. m Rs. m
Profit for the year 90 78
Following additional information has not been taken into account in the preparation Required:
of the above financial statements: Prepare relevant extracts (including
comparative figures) for the year
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the
ended 30 June 2015 related to the
machinery account on 1 October 2013. The estimated useful life of the machine is following:
10 years.
(a) Statement of financial position
(ii) On 1 July 2014, WL reviewed the estimated useful life of its plant and revised it
(b) Statement of Comprehensive
from 5 years to 8 years. The plant was purchased on 1 July 2013 at a cost of Rs. 70 income
million. (c) Statement of changes in equity
Depreciation is provided under the straight line method. (d) Correction of error note
Question # 02 Page # 554:
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:
Date FIFO Weighted Average
Rs. in “million”
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.
Question # 03: Continuing from Q.2 prepare note for change in policy for the year ended 31.12.15?
 Effect of Stock
Sales 1,000 1,000 1,000 1,000 1,000
Cost of Sales (Dr. Nature) Basic Opening Stock ↑ Opening Stock ↓ Closing Stock ↑ Closing Stock ↓
Opening Stock 400 600 200 400 400
Add Purchases x x x x x
Less Purchase Return x x x x x
Less Discount Received x x x x x
Add Wages x x x x x
Add Carriage Inward x x x x x
Less Closing Stock (100) (100) (100) (200) (50)
300 500 100 200 350
Sales Less COS
Profit 700 500 900 800 650

Opening Stock ↑ Dr. Cost of Sales ↑ Dr. Profit ↓ Dr. Capital ↓

Opening Stock ↓ Cr. Cost of Sales ↓ Cr. Profit ↑ Cr. Capital ↑

Closing Stock ↑ Dr. Cost of Sales ↓ Cr. Profit ↑ Cr. Capital ↑

Closing Stock ↓ Cr. Cost of Sales ↑ Dr. Profit ↓ Dr. Capital ↓
Question # 05 Page # 556: {ICAP Example # 04}
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
Rs. in million
Property, plant and equipment 700 612
Retained earnings 275 240
Statement of profit or loss
Profit for the year 65 85
The following matters are under consideration of the management:
• It was identified that ML’s had incorrectly charged Rs. 36.75 million as maintenance expense, incurred
on installation of the plant. The plant was available for use on 1 July 2014 and had been depreciated on
straight line basis over a useful life of four years.
• 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: (Ignore tax)
Rs. in million Required: Prepare extracts from the statement of financial
Property, plant and equipment 650 position, statement of profit or loss and correction of error note
Retained earnings 180 (including comparative figures) for the year ended 30 June 2017.
Question # 01 Page # 543: (Spring-15 Q # 04 – 15 Marks)
The following information pertains to draft financial statements of Pak Ocean Limited (POL) for the year
ended 31 December 2014. 2014 2013
(i) Rs. in “million”
Net Profit for the year 78 52
Incremental depreciation on revaluation of PPE 1.5 2.3
Revaluation surplus arose during the year 10 12
(ii) Installation of an assembly plant was completed in December 2012 at a cost of Rs. 60 million and
it was ready for use on 1 February 2013. However, depreciation for the year ended 31 December 2013
amounting to Rs. 4.5 million was worked out from the date of production i.e. 1 April 2013. The mistake
was corrected by adjusting the profit and loss account for the year ended 31 December 2014.
(iii) Shareholders' equity as at 1 January 2013 was as follows:
Rs. in million
On 30 November 2014, POL issued 25% right shares to Share capital (Rs. 100 each) 200
its ordinary shareholders at Rs. 120 per share. Retained earnings 45
(iv) Cash dividend and bonuses declared/paid
For the year ended Final *Interim
during the last three years:
Cash Bonus Cash Bonus
Required: Prepare Statement of Changes in Equity
31 December 2012 – 15% 16% –
for the year ended 31 December 2014 in accordance
31 December 2013 18% – 20% –
with the requirements of the Companies Ordinance,
31 December 2014 – 25% – 10%
1984 and International Financial Reporting Standards.
* Declared with half yearly accounts
Question # 05 Page # 547: {Autumn-23, Q # 01 – 09 Marks}
The retained earnings column, extracted from the draft statement of changes in equity of Puffer Limited (PL) for the year
ended 31 December 2022, is as follows: Rs. in million
The following changes have not been incorporated into the draft Balance as at 31 December 2020 928
financial statements of PL: Final cash dividend @ 10% for the year 2020 (114)
(i) PL has decided to change the method for valuation of Profit for the year 2021 258
inventory from ‘first-in, first-out’ (FIFO) to the weighted Balance as at 31 December 2021 1,072
average. The value of inventory under each method has been Profit for the year 2022 328
determined as follows: Balance as at 31 December 2022 1,400
FIFO Weighted average Rs. in million
------- Rs. in million ------- As at 31 December 2020 15
As at 31 December 2020 438 460 As at 31 December 2021 19
As at 31 December 2021 560 520 As at 31 December 2022 23
As at 31 December 2022 601 618
(ii) In view of increasing bad debts, PL has decided to double the provision for doubtful receivables.
The balance of provision for doubtful receivables prior to this change were as follows:
(iii) PL has also decided to recognise all borrowing costs incurred in a year as an expense. Previously, borrowing costs
related to qualifying assets were capitalised as part of the cost of that asset. Total borrowing costs incurred during the
years 2022 and 2021 amounted to Rs. 87 million and Rs. 95 million, respectively. Of these, Rs. 53 million and Rs. 38
million were capitalised in the cost of head office building in 2022 and 2021, respectively. The construction of the
building is expected to complete in 2023.
Required: (a) Briefly discuss how the above changes should be incorporated in PL’s financial statements. (03)
(b) Prepare the retained earnings column as would appear in PL’s statement of changes in equity for the year ended 31
December 2022, in accordance with IFRSs. (06)
Question # 03 Page # 544: (Spring-18 Q # 01-14 Marks)
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:
Additional information: 2017 2016 2015
(i) Details of share issues: Draft Audited Audited
• 25% right shares were issued on 1 --------Rs. in million--------
May 2016 at Rs. 18 per share. Net profit 650 318 214
• A bonus issue of 10% was made on 1 Transfer to general reserves 112 - 141
April 2017 as final dividend for 2016. Revaluation Surplus arose during the year - 150 -
• 50 million right shares were issued Transfer of incremental depreciation - 49 55
on 1 July 2017 at Rs. 15 per- share. Final cash dividend - 7.5%
• 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-----
Required: Ordinary share capital (Rs. 10 each) 1,600 1,600
Prepare DL’s statement of changes in equity General reserves 1,850 1,709
for the year ended 31 December 2017 along Retained earnings 1,430 1,302
with comparative figures. (Ignore taxation) Revaluation surplus - -
Question # 05 Page # 546: {Spring-23, Q # 07 – 15 Marks}
Roman Limited (RL) has extracted the following information for the purpose of preparation of statement of changes in equity
for the year ended 31 December 2022:
2022 2021 2020
Additional information: Draft Audited Audited
(i) On 1 February 2021, a bonus issue of 10% was --------- Rs. in million ---------
made as final dividend for 2020. Net profit 285 195 177
(ii) On 15 May 2021, RL issued right shares for Rs.
Revaluation surplus arising during the year - 115 (78)
20 per share. Right shares were issued in a
Transfer of incremental depreciation 30 26 28
proportion of 1 right share for every 4 ordinary
shares held. Transaction cost of Rs. 0.5 per share was also incurred.
(iii) On 1 May 2022, an item of property, plant and equipment was disposed of at its carrying value. An amount of Rs. 75
million was remaining in the revaluation surplus account in respect of this item’s previous revaluations.
(iv) On 1 July 2022, 50 million irredeemable preference shares having par value Rs. 10 each were issued at Rs. 15 per share.
(v) In October 2022, an interim 5% cash dividend on all shares was made.
(vi) The revalued amount of RL’s head office building was determined as Rs. 400 million as on 31 December 2021. However,
revaluation was not incorporated as the change in revalued amount was considered to be temporary by RL’s
management. The head office building had a carrying value of Rs. 350 million on 31 December 2021 and had a
remaining useful life of 10 years. A revaluation loss of Rs. 24 million was recorded on 31 December 2019 on its previous
revaluation.
(vii) Share capital and reserves as at 1 January: 2021 2020
------ Rs. in million ------
Required:
Ordinary share capital (Rs. 10 each) 800 800
Prepare RL’s statement of changes in equity for the year ended
31 December 2022 along with comparative figures. (15) Retained earnings 715 510
(Column for total is not required) Revaluation surplus 399 505