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NET PROFIT [IAS 8] DEFINTIONS [p5]

NET PROFIT [IAS 8] DEFINTIONS [p5]. ACCOUNTING POLICIES Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. CHANGE IN ACCOUNTING ESTIMATE

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NET PROFIT [IAS 8] DEFINTIONS [p5]

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  1. NET PROFIT [IAS 8]DEFINTIONS [p5] ACCOUNTING POLICIES Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. CHANGE IN ACCOUNTING ESTIMATE A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new development and, accordingly are not corrections of errors.

  2. NET PROFIT [IAS 8]DEFINTIONS [p5] PRIOR ERRORS Prior 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, information that: • was available when the financial statements for those periods were authorised for issue, and • could reasonably be expected to have been obtained and taken into account in the preparation and presentation of the financial statements.

  3. NET PROFIT [IAS 8]CHANGE IN ESTIMATE • MEASUREMENT [FRAMEWORK] • ACCEPTABLE • REALIABLE INFORMATION • DEFINITION [p5]: • ASSESSMENT OF STATUS • NEW INFORMATION • RECOGNITION [p34]: • RELATE TO CURRENT PERIOD • NOT CORRECTION OF ERROR • PITFALL [p35]: • NOT CHANGE IN POLICY • DIFFICULT TO DISTINGUISH [CHANGE IN ESTIMATE]

  4. NET PROFIT [IAS 8]CHANGE IN ESTIMATE • ACCOUNTING TREATMENT [p36]: • PROSPECTIVELY [CURRENT YEAR ONLY] [FROM DATE OF CHANGE] [FROM BEGINNING OF YEAR] • ADJUST PROFIT FOR YEAR [ADJUST EXPENSES] • TAX IMPLICATIONS: • DEPEND ON SARS RESPONSE • ACCEPT CHANGE [ADJUST TAXABLE INCOME] • DO NOT ACCEPT CHANGE [AFFECTS DEFERRED TAX]

  5. NET PROFIT [IAS 8]CHANGE IN ESTIMATE • DISCLOSURE [p39]: • INCOME STATEMENT [RESTATE RESULTS] • EQUITY STATEMENT [RESTATE PROFIT – YEAR] • NOTE (i) [DETAILS OF CHANGE (ii) REASONS FOR CHANGE (iii) EFFECT ON PROFIT • CURRENT YEAR • FOLLOWING YEARS

  6. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 1: INCOME STATEMENT [ Draft 2005] Gross profit 876 000 Expenses 372 000 Profit before tax 504 000 Tax 150 000 Profit after tax 354 000 Provision for warranties were previously based on an estimate of R160/unit. New information obtained after the drafted financial statements resulted in estimate Being revised to R230/unit. The provision for the current year was R168 000. SARS does not allow the provision.

  7. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 1: SOLUTION Provision [R160] 168 000 Revised [R230] 241 500 Adjustment 73 500 Deferred tax adjustment 22 050 INCOME STATEMENT [Redraft 2005] Gross profit 876 000 Expenses [372 000 + 73 500] 445 500 Profit before tax 430 500 Tax [150 000 – 22 050] 127 950 Profit after tax 302 550

  8. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 1: SOLUTION NOTE [2005] CHANGE IN ACCOUNTING ESTIMATE During the year the basis of calculating the provision for warranties changed due to additional information becoming available. The effect of the change on the profit was as follows: Increase in the provision <73 500> Decrease in deferred tax 22 050 Decrease in profit <51 450>

  9. NET PROFIT [IAS 8]CHANGE IN ESTIMATE • TREATMENT [DEPRECIATION] • AFFECT CURRENT YEAR ONLY • CATCH-UP METHOD • BASED ON COST • ADJUST ACCUM DEPR • BACKLOG ADJUSTMENT • DEPRECIATION [ADJUSTMENT + CURRENT] • DISTORTS FUTURE YEARS • RE-ALLOCATION METHOD • BASED ON CARRYING VALUE • BASED ON REMAINING LIFE • EVEN SPREAD OF EXPENSE

  10. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: 01/01/02 Purchase machinery - R910 000 Depreciate over 5 years [straight line] Residual value of zero 01/01/04 Revised useful life of 7 years Tax rate of 40% Tax payable and tax base were correctly calculated

  11. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: SOLUTION CATCH-UP METHOD: ExistingRevisedDifferTax COST [01/01/02] 910000 910000 DEPR [31/12/03] 364000260000 -104000 41600 CARRY VALUE 546000 650000 DEPR [31/12/04] 182000130000- 5200020800 CARRY VALUE 364000 520000 -156000 62400 DEPREC 364000520000 156000

  12. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: SOLUTION 31/12/04 DR: ACCUM DEPR 156000 CR: DEPRECIATION 156000 [Decrease depreciation due to change in estimated useful life] 31/12/04 DR: TAX EXPENSE 62400 CR: DEFERRED TAX 62400 [Provision for deferred tax due to change in depreciation]

  13. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: SOLUTION RE-ALLOCATION METHOD: ExistingRevisedDifferTax CARRY VALUE 546000 546000 DEPR [31/12/04] 182000109200- 7280029120 CARRY VALUE 364000 436800 -72800 29120 DEPREC 364000436800 72800 REMAINING LIFE = 5 YEARS [7 – 2]

  14. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: SOLUTION 31/12/04 DR: ACCUM DEPR 72800 CR: DEPRECIATION 72800 [Decrease depreciation due to change in estimated useful life] 31/12/04 DR: TAX EXPENSE 29120 CR: DEFERRED TAX 29120 [Provision for deferred tax due to change in depreciation]

  15. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: [cont…] INCOME STATEMENT 31/12/0431/12/03 PROFIT BEFORE TAX 870000 650000 TAXATION 245000190000 PROFIT AFTER TAX 625000 460000 INCOME STATEMENT: [31/12/04] Catch-upRe-allocate PROFIT BEFORE TAX 1026000 942800 TAXATION 307400274120 PROFIT AFTER TAX 718600 668680 PROFIT LESS R156000 & R72800 TAX ADD R62400 & R29120

  16. NET PROFIT [IAS 8]CHANGE IN ESTIMATE EXAMPLE 2: SOLUTION NOTES - FINANCIAL STATEMENTS: • OPERATING EXPENSES DEPRECIATION - ORIGINAL ESTIMATE 182000 182000 - CHANGE IN ESTIMATE -156000-72800 26000 109200 • CHANGE IN ESTIMATE The company changed the useful life of machinery from 5 to 7 years. The effect of the change on profit was as follows: Current year 156000 Following years -156000

  17. NET PROFIT [IAS 8]CORRECTION OF ERROR • DEFINITION [p41]: • RECOGNITION, MEASUREMENT • PRESENTATION [DISCLOSURE] • OMISSION, MISSTATEMENT • MATERIAL ERROR [SIGNIFICANT EFFECT] • CAUSES [p6]: • CALCULATION ERRORS • INCORRECT POLICIES • MISREPRESENTATION [FACTS & FRAUD]

  18. NET PROFIT [IAS 8]CORRECTION OF ERROR • ACCOUNTING TREATMENT [p42] • CORRECT IN YEAR OCCURRED • ADJUST PRIOR RESULTS [RESTATE COMPARATIVES] • CURRENT YEAR EFFECTS • TAX IMPLICATIONS • RE-OPENS ASSESSMENT [AFFECT COMPANY TAX] • NOT RE-OPEN ASSESSMENT [AFFECTS DEFERRED TAX]

  19. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: 01/01/02 Advertising expenses R240 000 Policy: write-off over 4 years 31/12/02 Actual treatment - Written off in full 31/12/04 Discovered the error Tax was correctly calculated [deducted expenses as incurred] Tax rate of 40%

  20. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION Effect Effect ErrorCorrectprofitTax 31/12/02 240000 60000 180000 72000 31/12/03 nil 60000 -60000 -24000 31/12/04 nil 60000 -60000 -24000

  21. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION DR: PREPAID ADVERT 120000 CR: DEFERRED TAX 48000 CR: ACCUM PROFIT 72000 [Adjust comparative results for correction] DR: ADVERTISING 60000 CR: PREPAID ADVERT 60000 [Advertising expenses for the year] DR: DEFERRED TAX 24000 CR: TAX EXPENSE 24000 [Provision i.r.o correction of error]

  22. NET PROFIT [IAS 8]CORRECTION OF ERROR • LIMITATION [p43]: • AS FAR BACK AS PRACTICAL • IMPRACTICABLE [RETROSPECTIVELY] [PERIOD SPECIFIC] [CUMULATIVE EFFECT] • RESTATE BALANCE [p44] [ADJUST OPENING BALANCE] [BALANCE SHEET INFO]

  23. NET PROFIT [IAS 8]CORRECTION OF ERROR • DISCLOSURE : • INCOME STATEMENT [RESTATED – RESULTS] [CURRENT & PRIOR YEARS] [EXPENSES & TAX] • EQUITY STATEMENT [RESTATE OPENING BALANCE] [ADJUSTED PROFIT AFTER TAX]

  24. NET PROFIT [IAS 8]CORRECTION OF ERROR • NOTES [p49] • DETAILS OF ERROR • EFFECT OF RESTATEMENT • EFFECT OF CORRECTION 1. COMPARATIVE RESULTS 2. NET EFFECT ON PROFIT [EXPENSE & TAX] 3. EFFECT ON BAL SHEET [ASSETS/LIABILITIES] 4. ACCUMULATED PROFIT

  25. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: [cont…] INCOME STATEMENT 31/12/0431/12/03 PROFIT BEFORE TAX 675000 490000 TAXATION 195000140000 PROFIT AFTER TAX 480000 350000 ACCUM PROFIT AT 1/1/03 R890000

  26. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION INCOME STATEMENT 31/12/0431/12/03 Profit before tax 615000 430000 Taxation 171000116000 Profit after tax 444000 314000 [Profit less R60000 & Tax less R24000]

  27. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION CHANGE IN EQUITY STATEMENTS: BALANCE AT 01/01/03 – RESTATED 998000 BALANCE PREVIOUSLY REPORTED 890000 CORRECTION OF ERROR 108000 PROFIT AFTER TAX – RESTATED 314000 BALANCE AT 01/01/04 – RESTATED 1312000 BALANCE PREVIOUS REPORTED 1240000 CORRECTION OF ERROR 72000 PROFIT AFTER TAX – RESTATED 444000 BALANCE AT END OF YEAR 1756000

  28. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION NOTES TO FINANCIAL STATEMENTS: 2. CORRECTION OF ERROR The company has incorrectly written off advertising expenses in full instead of spreading it over 4 years. The comparative figures have been appropriately restated. The effect of the correction was as follows: Net effect on income statement items: Increase advertising expenses -60000 Decrease in deferred taxation 24000 Decrease in profit after tax -36000

  29. NET PROFIT [IAS 8]CORRECTION OF ERROR EXAMPLE 3: SOLUTION Net effect on balance sheet items Increase in prepaid expenses 120000 Increase in deferred taxation -48000 Increase in accumulated profit 72000 Profit at beginning of year 36000

  30. NET PROFIT [IAS 8]CHANGE IN POLICY • DEFINITION [p5 & 13]: • PRINCIPLES, BASES & RULES • APPROPRIATE FOR BUSINESS • APPLIED CONSISTENCTLY [COMPARABILITY] • REASONS [p14]: • COMPLY WITH STANDARDS • IMPROVE INFORMATION [QUALITY & USEFULNESS] [RELIABLE & RELEVANT]

  31. NET PROFIT [IAS 8]CHANGE IN POLICY • PITFALLS : • DIFFERENCE IN SUBSTANCE • CHANGE IN CIRCUMSTANCES • ACCOUNTING TREATMENT: • AS CORRECTION OF ERRORS • TAX IMPLICATIONS • AS CORRECTION OF ERRORS

  32. NET PROFIT [IAS 8]CHANGE IN POLICY • DISCLOSURE [p28]: • AS CORRECTION OF ERROR • CHANGE IN POLICY NOTE • DETAILS OF CHANGE • REASONS FOR CHANGE • RESTATEMENT OF RESULTS • EFFECT OF CHANGE • CURRENT & COMPARATIVE • NET EFFECT ON PROFIT • EFFECT ON BALANCE SHEET • EFFECT ON ACCUM PROFIT

  33. NET PROFIT [IAS 8]CHANGE IN POLICY EXAMPLE 3: SOLUTION NOTES - FINANCIAL STATEMENTS: 2. CHANGE IN ACCOUNTING POLICY The company has changed its accounting policy of writing off advertising expenses from being expensed to spreading it over 4 years. The comparative figures have been appropriately restated. The effect of the correction was as follows: 31/12/0431/12/03 Net effect on income statement items: Increase in advertising expenses -60000 -60000 Decrease in deferred taxation 2400024000 Decrease in profit after tax -36000 -36000

  34. NET PROFIT [IAS 8]CHANGE IN POLICY EXAMPLE 3: SOLUTION 31/12/0431/12/03 Net effect on balance sheet items Increase in prepaid advertising 60000 120000 Increase in deferred taxation -24000 -48000 Increase in accumulated profit 36000 72000 Accumulated profit at beginning 36000

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