Ch18 sm loftus 2e - Solutiuon to the book PDF

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Solutiuon to the book...

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Solutions manual to accompany

Financial reporting 2nd edition by Loftus, Leo, Daniliuc, Boys, Luke, Ang and Byrnes Prepared by Noel Boys

© John Wiley & Sons Australia, Ltd 2018

Chapter18: Accounting policies and other disclosures

Chapter 18:Accounting policies and other disclosures Comprehension questions 1. What disclosures are required by AASB 101/IAS 1 regarding accounting policies? The contents of the summary of significant accounting policies note are broadly outlined in paragraph 117 of AASB 101. However, the details may be prescribed by other accounting standards or be a matter for management judgement. The accounting policies note will usually disclose the following information, typically in Note 1 or 2. First, the note usually states that the financial statements are GPFS. The note also discloses the statutory basis or other reporting framework, if any, under which the financial statements are prepared and whether the entity is a for-profit or not-for-profit entity. Second, the note should disclose the measurement basis or bases used in preparing the financial statements. Third, the note should provide a description of accounting policies. AASB 101 paragraph 119 states that the information provided should allow users to understand how transactions and other events are reflected in the reported financial performance and position, but leaves the detail to management judgement. Finally, the note should disclose information about the assumptions made concerning the future, and other major sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the note should include details of their nature and carrying amount at the end of the reporting period (AASB 101 paragraph 125).

2. Why would an accounting estimate change and how is the change accounted for? An accounting estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. For example, technological changes may require the estimate of an asset’s useful life to be downgraded, or new information received about the financial status of a customer may require an increase in the estimate of bad debts. According to AASB 108, paragraph 36 the change in an accounting estimate must be applied prospectively by including it in profit or loss in the reporting period of the change. The change may affect only the current period’s profit or loss (e.g. bad debts) or profit or loss of both the current period and future periods (e.g. depreciation due to the change in the useful life of a non-current asset). Additionally, the nature and amount of the change shall be disclosed for the current, and if practicable, for future financial periods.

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

3. What is a prior period error? How and when is it corrected? Prior period errors are omissions from, and other misstatements in, the entity’s financial statements for one or more previous reporting periods that are discovered in the current period. Errors can occur for a number of reasons, including mathematical mistakes, misinterpretation of information, mistakes in applying accounting policies, oversight or misinterpretation of facts, and fraud. If the error is material then AASB 108 requires that it be corrected in the period in which it was discovered by retrospective restatement of the financial statements affected by the error. In other words, the entity must change the prior year figures to reflect the figures that would have been reported had the error not occurred. This restatement may involve changing prior year comparative figures or restating the opening amounts of comparative figures depending on whether the error was in the prior year or further back. The aim is to present financial statements (restated) as if the error had never occurred by correcting the error in the comparative information for the previous period(s) in which it occurred. Extensive disclosures of the line by line effect of the error are also required in the year of correction.

4. What is the difference between ‘retrospective application’ and ‘retrospective restatement’? Retrospective application is used in the context of accounting policy changes (either when a new or revised accounting standard does not include any specific transitional provisions relating to the change, or, when an entity changes an accounting policy voluntarily), and refers to the application of a new accounting policy to transactions, other events and conditions as if that policy had always been applied. Retrospective restatement is used in the context of errors and refers to a correction of the recognition, measurement and disclosure of elements of financial statements as if a prior period error had never occurred.

5. When is it impracticable to make a retrospective change in an accounting policy or a retrospective restatement to correct an error? According to AASB 108 paragraph 5, 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:  the effects are not determinable;  it requires assumptions about what management’s intent would have been in that period; or  it requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

6. Outline the concept of materiality as it applies to financial reporting. Materiality is a concept essential to the preparation and presentation of general purpose financial statements. The Corporations Act's requirement that financial statements present a 'true and fair' view does not mean that the financial statements must be absolutely accurate to the last cent or absolutely complete in terms of the information disclosed. Rather, the notion of 'true and fair' is one of reasonableness, whereby the user can assume that the financial statements contain no material errors or omissions. According to paragraph 5 of AASB 108 (and paragraph 7 of AASB 101) omissions or misstatements 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 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. In most cases, accounting standards apply only where information resulting from their application is material. Thus, preparers need to make judgements as to whether the information provided by the application of a standard is material to report users. If a company's sole lease arrangement is deemed to be immaterial in respect of either its financial performance or financial position, the disclosure requirements of AASB 16 need not be applied.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

7. Explain the difference between adjusting and non-adjusting events occurring after the end of the reporting period. Describe the difference in the way such events impact on the preparation of financial statements. Events occurring after the end of the reporting period are defined in AASB 110 as those events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. There are two types of events described in AASB 110:  Adjusting events: after the end of the reporting period which provide evidence of conditions that existed at end of the reporting period (e.g. the settlement of a court case after the end of the reporting period that confirms the company had a present obligation at the end of the reporting period).  Non-adjusting events: after the end of the reporting period are events that are indicative of conditions that arose after the end of the reporting period (e.g. a flood or fire after the end of the reporting period that destroys a company’s building and plant). The treatment in the financial statements is different in both cases. Paragraph 8 of AASB 110 requires the financial effect of the adjusting events to be reflected in the financial statements prepared at the end of the reporting period, i.e. an adjustment must be made to the financial statements before publication. AASB 110, paragraph 21 requires material non-adjusting events to be disclosed by way of note to the financial statements. Such disclosures should include the nature of the event and either an estimate of its financial effect or a statement that such an estimate could not be made.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Case studies Case study 18.1 Accounting estimates The board of directors has resolved to change its accounting policy for capitalising gains or losses on its cash flow hedges recognised in other comprehensive income. Previously, such gains or losses were capitalised to hedged items but the directors now believe that taking such gains or losses to profit or loss is a more appropriate treatment. Due to a recent computer virus, all data from the non-current asset register, including specific depreciation details from prior periods, has been destroyed. Required The board of directors has approached you for advice regarding the disclosures, if any, that are required for this change in accounting policy.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

As the change in accounting policy was voluntary, the provisions of paragraph 29 of AASB 108 are applicable, requiring disclosures as follows:  the nature of the change  the reasons that applying the new accounting policy provides reliable and more relevant information  to the extent practicable, the amount of the adjustment for the current and previous periods to each financial statement line item affected and, if applicable, the basic and diluted earnings per share  the amount of the adjustment relating to periods prior to those presented to the extent practicable  if retrospective application is impracticable, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy was applied. To comply with paragraph 29, the change in accounting policy note may be worded as follows (other variations are possible): The board of directors has resolved to change its accounting policy with respect to its treatment of gains or losses on cash flow hedges recognised in other comprehensive income. Previously, such gains or losses were capitalised to hedged items but will now be taken to profit or loss. The board has taken the view that this policy change will lead to a consistent treatment of gains and losses on cash flow hedges throughout the term of such arrangements resulting in financial statements that provide a better reflection of the entity’s performance and financial position. Accordingly, the board believes the new accounting policy will provide reliable and more relevant information to its users. Retrospective application of this change in accounting policy is impracticable following a recent computer virus that destroyed the company’s accounting records.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Case study 18.2 Accounting policies Refer to case study 18.1. Assume the change in the accounting policy for capitalizing hedge gains or losses was due to the issue of a revised accounting standard, AASB 9/IAS 9 Financial Instruments, which requires all hedge gains or losses to be taken to profit or loss, thereby removing the choice to capitalise. Required Advise the company of the disclosures, if any, that are required by this change in accounting policy.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

As the change in accounting policy was due to the issue of a new accounting standard, the provisions of paragraph 28 of AASB 108 are applicable as follows:  the title of the standard  when applicable, that the change is made in accordance with the transitional provisions of the standard, a description of those provisions and provisions that might have an effect on future periods  the nature of the change in accounting policy  to the extent practicable, the amount of the adjustment for the current and previous periods to each financial statement line item affected and, if applicable, the basic and diluted earnings per share  the amount of any adjustment to periods prior to those presented to the extent practicable  if comparative information has not been restated because it is impracticable to do so, the circumstances that prevented retrospective application and a description of how and from when the change in accounting policy has been applied. To comply with paragraph 28, the change in accounting policy note may be worded as follows in the absence of any transitional provisions of the new accounting standard (other variations are possible). The entity’s accounts have been prepared applying the revised accounting standard AASB 9 / IAS 9 Financial Instruments issued by the Australian Accounting Standards Board. The revised standard requires entities to take all gains or losses on cash flow hedges recognised in other comprehensive income to profit or loss. Previously, the standard allowed for such gains or losses to either be taken to profit or loss or capitalised to the hedged item. Historically the entity chose to capitalise these gains or losses but now takes them to profit or loss in line with the revised standard. Retrospective application of this change in accounting policy is impracticable following a recent computer virus that destroyed the company’s accounting records.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Case study 18.3 Materiality Antelope Ltd is a catering company specialising in providing catering services to remote area mine sites. The company has operations in Australia but during the current year it acquired significant long-term contracts in Pakistan and Nigeria. AASB 8/IFRS 8 Operating Segments requires entities to disclose material segment information but Antelope Ltd has failed to comply with this requirement. Required Discuss whether the non-disclosure by Antelope Ltd of information about operations in Pakistan and Nigeria would be material.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

According to paragraph 7 of AASB 101, information is material if its omission or misstatement could influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The non-disclosure of information relating the existence of long-term contracts in both Pakistan and Nigeria would be material to the users of Antelope’s financial statement. Both countries are considered politically and economically unstable so there is a significant risk that these operations could be disrupted exposing Antelope Ltd to potential losses on the contracts and other losses if corporate employees are harmed or property is destroyed. Disclosing the information allows users to assess such risks when making predictions about the company’s future performance and position and ensures an informed decision can be made.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Case study 18.4 Events occurring after the end of the reporting period The statement of financial position of Waterbuck Ltd as at 30 June 2020 includes an asset ‘Debenture money receivable $500 000’ and a liability ‘Debentures $500 000’. Note 12 to the accounts reveals that the issue of the debentures to a private investor was approved by the board of directors on 28 June 2020 but the debenture issue did not take place until 17 July 2020. Required Comment on the accounting treatment of the debenture issue in accordance with the requirements of AASB 110/IAS 10.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

The issue of the debentures on 17 July 2020 is a non-adjusting event after the end of the reporting period as it is indicative of conditions that arose after the end of the reporting period. Approval by a Board of Directors does not create a present obligation to repay debentures hence no liability existed as at 30 June 2020 and the debenture asset and liability should not have been recognised. The end of the reporting period adjusting journal should be reversed and the debenture issue, including the amount, disclosed in a note to the financial statements accounts as required by AASB 110, paragraph 21.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Case study 18.5 Compliance with accounting policy disclosure requirements The accounting policy note from the CSR Ltd 2016 annual report was provided in figure 18.1. Required Provide a brief description of CSR’s accounting policies with respect to the following: 1. compliance 2. currency 3. depreciation 4. rounding.

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

Compliance: CSR prepares general purpose financial report in accordance with:  the Corporations Act 2001  applicable Accounting Standards and Interpretations including Australian Accounting Standards ensuring the Group’s financial statements and notes comply with IFRS, and  other requirements of the law. Currency: CSR’s presentation currency is the Australian dollar which also CSR’s functional currency. Depreciation: is applied to depreciable assets based on expected useful life using the straightline method. Rounding: amounts are rounded to the nearest tenth of a million dollars.

© John Wiley and Sons Australia Ltd, 2018

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Chapter18: Accounting policies and other disclosures

Application and analysis exercises Exercise 18.1 Annual reporting requirements, true and fair view The directors of an Australian company, Mango Ltd, have formed a view that compliance with a particular AASB standard will mean the company’s financial statements will not provide a true and fair view, which is contrary to the Corporations Act. Required Advise the directors how this problem can be resolved when preparing the company’s financial statements in accordance with AASB 101/IAS 1. (LO1 and LO5)

© John Wiley and Sons Australia Ltd, 2018

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Solutions manual to accompany Financial reporting 2e by Loftus et al.

Under s296(1) of the Corporations Act 2001, the financial report must comply with the accounting standards. The Act then addresses the issue of true and fair view under s297 as follows: s297 True and fair ...