Lecture week two
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LECTURE WEEK TWO. FINANCIAL INFORMATION 1 INCOME STATEMENT. ERRORS: FRS 108 (2006). Errors can arise in respect of: Recognition Measurement Presentation or; Disclosure Financial statement not comply with FRS: Material errors Immaterial errors. Definition of errors:.

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Lecture week two




Errors frs 108 2006

ERRORS: FRS 108 (2006)

  • Errors can arise in respect of:

    • Recognition

    • Measurement

    • Presentation or;

    • Disclosure

      Financial statement not comply with FRS:

    • Material errors

    • Immaterial errors

Definition of errors

Definition of errors:

  • (FRS 108 (2005))

    “errors with significant effect on FS of one or more periods that the FS can no longer be considered as reliable as at the date of their issue [6]”.

Materiality standard defines

Materiality: Standard defines

  • Omissions or misstatements of items are material if:

    • Individually or collectively influence the economic decision of users

    • Depends on the size and nature, judged in the surrounding circumstances

  • FRS 108 (2006): Concept of material errors eliminated

Lecture week two

  • Prior period error:

    “ are omissions from and misstatements in the entity’s financial statements from one or more prior periods arising from a failure to use, or misuse of reliable information”

Errors recognition of errors

Errors: Recognition of errors

  • Errors occur as a result of:

    • Mathematical errors

    • Mistakes in applying accounting policies

    • Oversight or misinterpretations of facts and frauds

Measurement of errors

Measurement of errors:

  • Errors discovered in that period are corrected before the financial statement are authorized for issue

  • Prior period error are corrected in the comparative information for that subsequent period (material error discovered in subsequent period)

Measurement of errors1

Measurement of errors:

FRS 108: Entity shall correct material prior

error retrospectively by:

  • Restating the comparative amounts for the prior period presented in which the error occurred

  • If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity.

Retrospective method

Retrospective Method

Example 1:

During 2002, Beta Co discovered that some

products that has been sold in 2001 were

incorrectly included in inventory at 31

December 2001 at RM6,500.

Beta’s accounting records for 2002 shows sales of

RM104,000,cost of goods sold of RM86,500

(including RM6,500 for the error) and income tax

of RM5,250.

Lecture week two

2001 opening retained earnings was

RM20,000 and closing retained earnings

was RM34,000.

Beta Income taxes rate was 30% for 2002

and 2001.It had no other income and


Beta had RM 5,000 of share capital

Throughout and no other equity. Its share

are not publicly traded and does not disclose


Frs 108 2006 changes in accounting policies

FRS 108 (2006): Changes in Accounting Policies

  • Definition:

    “…specific principles, bases, conventions, rules and practices … in preparing and presenting financial statements” [6]

Lecture week two

Consistency in adoption?

  • to ensure comparability over a period of times by users

  • “…change…ONLY if required by statute, or by MASB, or if the change will result in a more appropriate presentation of events or transactions in the financial statements…” [44]

    A more appropriate presentation?

  • - new policy results in more relevant or reliable information

Selection and application of accounting policies

Selection and Application of Accounting Policies

  • Apply to transaction ,event or condition when a standard specifically applies

  • Accounting policies in standard need not be applied when the effect of applying them is immaterial

  • The initial application of policy for revaluation of fixed assets and the changes of policy is not under this standard

Applying changes in accounting policies

Applying changes in accounting policies

  • Effect the changes in accordance with specific transitional provisions in the new standard

  • Absence of transitional provisions , apply the changes retrospectively

    Eg. Inventory measurement

    Change from Lower of cost to replacement cost----- change in accounting policies

Retrospective application

Retrospective Application:

  • Adjust the opening balances of each effected component of equity for the earliest prior period presented

  • The other comparative amount disclose for each prior period presented

Example changes in accounting policy

Example: changes in accounting policy

Beta Co. purchased an intangible asset for

RM10M in the year 2001. It carried the asset

as a permanent item, i.e. ..at cost and

without amortizations.

For a current year 2006, the company

changed its accounting policy to amortize

the intangible asset on a straight line

method over 10 years

Method to effect a change in accounting policy

Method to effect a change in accounting policy:

  • Cumulative effect of the change in policy up to the end of the prior year is RM5M

  • As a current year adjustment:

    DrAmortisation expense (CY)1M

    Amortisation expense (PY)5M

    CrIntangible Asset6M

Lecture week two

  • Retrospectively as prior year adjustment

    DrAmortisation expense1M

    Opening retained profit5M

    CrIntangible asset6M

  • Prospective Adjustment

    DrAmortisation expense2M

    CrIntangible asset2M

Frs 108 2006 changes in accounting estimates

FRS 108 (2006): Changes in Accounting Estimates

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