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LECTURE WEEK TWO

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

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  1. LECTURE WEEK TWO FINANCIAL INFORMATION 1 INCOME STATEMENT

  2. 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

  3. 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]”.

  4. 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

  5. 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”

  6. Errors: Recognition of errors • Errors occur as a result of: • Mathematical errors • Mistakes in applying accounting policies • Oversight or misinterpretations of facts and frauds

  7. 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)

  8. 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.

  9. 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.

  10. 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 expenses. Beta had RM 5,000 of share capital Throughout and no other equity. Its share are not publicly traded and does not disclose EPS.

  11. FRS 108 (2006): Changes in Accounting Policies • Definition: “…specific principles, bases, conventions, rules and practices … in preparing and presenting financial statements” [6]

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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: Dr Amortisation expense (CY) 1M Amortisation expense (PY) 5M Cr Intangible Asset 6M

  18. Retrospectively as prior year adjustment Dr Amortisation expense 1M Opening retained profit 5M Cr Intangible asset 6M • Prospective Adjustment Dr Amortisation expense 2M Cr Intangible asset 2M

  19. FRS 108 (2006): Changes in Accounting Estimates

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