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Section 10 – Accounting Policies, Estimates and Errors
10.2 Selection and application of accounting policies
10.2.1 Extract from FRS 102 – Section 10.2-10.6
10.3 Consistency of accounting policies
10.3.1 Extract from FRS 102- Section 10.7
10.3.2 OmniPro comment – Consistency of accounting policies
10.4 Changes in accounting policies
10.4.1 Extracts from FRS 102 – Section 10.8 – 10.10A
10.4.2.1 Definition of change in accounting policy
10.4.2.2 Changes in accounting policies and one exception to retrospective adjustment
10.4.2.3 Examples of changes in accounting policy
10.4.2.4 Examples of items which are not changes in accounting policies
10.5 Applying changes in accounting policies
10.5.1 Extracts from FRS 102 – Section 10.11
10.5.2.1 Change in accounting policy due to a change to requirements issued by the FRC
10.5.2.2 Change in accounting policy due to adoption of IAS 39 or IAS 33
10.5.2.3 Change in accounting policy due to other reasons (Section 10.11 (c) of FRS 102)
10.6 Retrospective application
10.6.1 Extracts from FRS 102 – Section 10.12
10.6.2 OmniPro comment – Retrospective application – change in accounting policy
10.7 Disclosure of a change in accounting policy
10.7.1 Extracts from FRS 102-Section 10.13 – 10.14
10.8 Changes in accounting estimates
10.8.1 Extracts from FRS102 section 10.15 – 10.18
10.8.2 OmniPro comment – change in accounting estimates
10.8.2.2 Examples of change in accounting estimate
10.8.2.3: Revising residual value – worked example
10.8.2.4: Disclosure of accounting estimates
10.9 Corrections of prior period errors
10.9.1 Extracts from FRS102 section 10.19 – 10.23
10.9.2.1 Assessment and accounting for a prior period error
10.9.2.2 Disclosures of prior period errors
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10.9 Corrections of prior period errors
10.9. 1 Extracts from FRS102 section 10.19 – 10.23
10.19 Prior period errors are omissions from, and misstatements in, an 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
(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
10.20 Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
10.21 To the extent practicable, an entity shall correct a material prior period error retrospectively in the first financial statements authorised for issue after its discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
10.22 When it is impracticable to determine the period-specific effects of a material error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period).
Disclosure of prior period errors
10.23 An entity shall disclose the following about material prior period errors:
(a) the nature of the prior period error;
(b) for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected;
(c) to the extent practicable, the amount of the correction at the beginning of the earliest prior period presented; and
(d) an explanation if it is impracticable to determine the amounts to be disclosed in (b) or (c) above.
Financial statements of subsequent periods need not repeat these disclosures.
10.9.2 OmniPro comment
10.9.2.1 Assessment and accounting for a prior period error
The point to consider in determining whether a prior year adjustment/restatement is required as a result of a prior year error is whether the error is material to the current and/or past periods (Section 10.21 of FRS 102). See 10.2.2.1 for a discussion on materiality.
As stated in Section 10.21 of FRs 102 where the error is material it must be corrected retrospectively whereby the comparative amounts are restated to correct the error or if the error was made before the start of the prior period presented, the opening balances at that date must be restated. Section 10.22 of FRS 102 makes it clear where the restatement to correct the comparative period is impracticable then it must be corrected at the start of the current period. Our view would be that it would be very rare to have a situation where this would be seen as impracticable.
As per Section 10.19 of FRS 102 a prior period error is an omission or misstatement in the financial statements for one or more prior periods from a failure to use, or misuse of:-
- Reliable information that was available up to the date of authorization of the financial statements; or
- Could reasonably be expected to be obtained and taken into account in the presentation and preparation of the accounts.
A key question to ask oneself is, if the directors had had the information up to date of sign off of the financial statements, would they have adjusted the financial statements. If the answer is yes then a prior period adjustment is required.
10.9.2.2 Disclosures of prior period errors
Section 10.23 of FRS 102 requires the entity to disclose:
- The nature of the prior period error
- For each prior period presented
- The amount of the correction for each financial statement line affected
- The amount of the correction at the earliest prior period presented where practicable
When disclosing this in the financial statements, the word ‘restated’ should be shown in the prior year comparatives in the balance sheet and profit and loss as well as being included at the top of any notes to the financial statements which were affected by the error.
On transition to FRS 102 as the whole of the prior year comparative will have changed since the prior period financial statements were issued, the prior year disclosure will be shown in the equity reconciliation and full details of the error provided in the notes detailing the transition adjustments. See an example of same in example 7 below.
See below the application of the above guidance.
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 |
(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 presented as equity | 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 as shown.
| Option 1 – 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
|
Option 2 – Analysis of prior year adjustments
The other option here is to show the prior year P&L and balance sheet with the adjustment & then the restated version as per below – you would still need the narrative in the section above.
Profit and Loss Account
|
2014 As previously stated |
Adjustments |
2014 Restated |
|
| CU | CU | CU | |
| Turnover | 1,500,000 | – | 1,500,000 |
| Cost of sales |
(1,105,000)
|
5,000
|
(1,100,000)
|
| Operating profit | 395,000 | 5,000 | 400,000 |
| Interest receivable | 5,000 | – | 5,000 |
| Interest payable |
(10,000)
|
–
|
(10,000)
|
| Profit before taxation | 390,000 | 5,000 | 395,000 |
| Tax on profit |
(39,000)
|
(500)
|
(39,500)
|
| Profit for the financial year |
351,000
|
4,500
|
355,500
|
Balance Sheet
|
2014 As previously stated |
Adjustments |
2015 Restated |
|
| CU | CU | CU | |
| Fixed assets | |||
| Tangible assets |
150,000
|
– |
150,000
|
| Current assets | |||
| Inventory | 200,000 | 100,000 | 300,000 |
| Cash at bank and in hand |
150,000
|
–
|
150,000
|
|
450,000
|
100,000
|
450,000
|
|
| Creditors – amounts falling due within one year |
(85,300)
|
(10,000)
|
(95,300)
|
| Net current assets |
354,700
|
90,000
|
354,700
|
| Total assets less current liabilities |
504,700
|
90,000
|
504,700
|
|
Capital and reserves |
|||
|
Called up share capital presented as equity |
100 | – | 100 |
| Profit and loss account |
504,600
|
90,000
|
504,600
|
| Shareholders’ funds |
504,700
|
90,000
|
504,700
|
Statement of changes in Equity or Movement in profit and loss reserves note
Note the lines ‘Prior year adjustment – change in accounting policy (see note X)’ is just included for illustrative purposes
| Called up Share | Profit and |
Total |
|
| Capital | Reserves | 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. Note the above shows a statement of changes in equity however a movement on profit and loss reserves note is only required if Section 1A is applied. So therefore, the P&L reserves column would only be required here.
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Example 1: Change in accounting policy
Example 2: Revising a residual value of an asset
Example 3: Revising a useful life of an asset
Example 4: Change in accounting estimate disclosure
Example 5: Change in functional currency – extract from notes to the financial statements
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