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Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir,

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Accounting policies are defined as the specific principles,
practices applied by an entity in preparing and presenting financial

Application
Accounting policies must be applied consistently from one period to the next.
On rare occasions, it may happen that you cannot find an accounting policy suitable to
the transaction or event affecting your entity. In this case, th
(which will mean you, the accountant) will need to develop your own accounting policy.

Change in Accounting Policies
IA ! refers to two reasons for which a change
when re"uired by an I#$% or
when the change will result in reliable and more relevant presentation of information.

Accounting for a change in Accounting Policies

1. Transitional provisions given
In the event that the change in accounting policy is as a result of the initial application of
an I#$ in which transitional provisions are given, these provisions should ta&e
precedence over the general guidance supplied in IA !.

2. No transitional provisions / Voluntary Change
If the change is as a result of the initial application of an I#$ i
provisions are not given or it is a voluntary change in accounting policy, the general
guidance given in IA ! needs to b

3. Change allowed under Accounting standards
If for a given transaction accounting standard
shall adopt one such treatment
feels that the results can be more transparently presented if the other allowed
alternative treatment is adopted than
provided by IA ! ($etrospective application)

etrospective Application
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ACC!"NT#N$ P!%#C#&'
Accounting policies are defined as the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements'.
Accounting policies must be applied consistently from one period to the next.
On rare occasions, it may happen that you cannot find an accounting policy suitable to
the transaction or event affecting your entity. In this case, the management of the entity
(which will mean you, the accountant) will need to develop your own accounting policy.
IA ! refers to two reasons for which a change would be considered acceptable(

n the change will result in reliable and more relevant presentation of information.
Accounting for a change in Accounting Policies

In the event that the change in accounting policy is as a result of the initial application of
an I#$ in which transitional provisions are given, these provisions should ta&e
general guidance supplied in IA !.
Voluntary Change
If the change is as a result of the initial application of an I#$ in which transitional
are not given or it is a voluntary change in accounting policy, the general
guidance given in IA ! needs to be followed (retrospective application is to be made).
allowed under Accounting standards
for a given transaction accounting standard allows multiple treatments and company
treatment and apply it continuously. If the company subse"uently
feels that the results can be more transparently presented if the other allowed
alternative treatment is adopted than the company shall follow general guidelines
ctive application)
bases, conventions, rules and
statements'.
Accounting policies must be applied consistently from one period to the next.
On rare occasions, it may happen that you cannot find an accounting policy suitable to
e management of the entity
(which will mean you, the accountant) will need to develop your own accounting policy.
would be considered acceptable(
n the change will result in reliable and more relevant presentation of information.
In the event that the change in accounting policy is as a result of the initial application of
an I#$ in which transitional provisions are given, these provisions should ta&e
n which transitional
are not given or it is a voluntary change in accounting policy, the general
(retrospective application is to be made).
allows multiple treatments and company
the company subse"uently
feels that the results can be more transparently presented if the other allowed
the company shall follow general guidelines
Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA
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)he retrospective application of a change in accounting policy entails stating both the
current year's figures based on the new policy as well as ad*usting all prior years' figures
in accordance with the new policy (i.e. as if the policy had always been a

It may not, however, always be possible to calculate the effect on all the prior years'
figures, in which case the new policy is applied from the earliest prior period possible and
the cumulative effect on the assets, liabilities and e"uity be
disregarded.

All prior periods that are given as comparatives in an annual report (even if not part of
the financial statements for example any additional reports provided) must be restated
based on the new policy. All prior pe
ad*usted, but with the cumulative effect on the opening balance of retained earnings
disclosed as a single ad*ustment (e.g. in the statement of changes in e"uity).

+here the calculation of the ad*ustm
possible), the accounting policy is simply applied to the elements from as early as
possible with a net ad*ustment made to the opening retained earnings from this earliest
year'.

Prospective application
Applying a new policy prospectively means that the policy is applied to only the current and
future years with prior years' figures remaining unchanged. )his would compromise
comparability and consistency and is thus generally not allowed.

Accounting &sti(ates

A change in estimate is defined as an ad*ustmen
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
associated with, assets and liabilities'

Changes in esti(ates
,eed to be accounted for prospectively.

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)he retrospective application of a change in accounting policy entails stating both the
current year's figures based on the new policy as well as ad*usting all prior years' figures
in accordance with the new policy (i.e. as if the policy had always been a
It may not, however, always be possible to calculate the effect on all the prior years'
figures, in which case the new policy is applied from the earliest prior period possible and
the cumulative effect on the assets, liabilities and e"uity before this period are simply
All prior periods that are given as comparatives in an annual report (even if not part of
the financial statements for example any additional reports provided) must be restated
based on the new policy. All prior periods that are not given as comparatives must still be
ad*usted, but with the cumulative effect on the opening balance of retained earnings
disclosed as a single ad*ustment (e.g. in the statement of changes in e"uity).
+here the calculation of the ad*ustment to a specific prior period-s is impracticable (not
possible), the accounting policy is simply applied to the elements from as early as
possible with a net ad*ustment made to the opening retained earnings from this earliest
Applying a new policy prospectively means that the policy is applied to only the current and
figures remaining unchanged. )his would compromise
comparability and consistency and is thus generally not allowed.
as an ad*ustment of the carrying amount of an
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'
,eed to be accounted for prospectively.
)he retrospective application of a change in accounting policy entails stating both the
current year's figures based on the new policy as well as ad*usting all prior years' figures
in accordance with the new policy (i.e. as if the policy had always been applied').
It may not, however, always be possible to calculate the effect on all the prior years'
figures, in which case the new policy is applied from the earliest prior period possible and
fore this period are simply
All prior periods that are given as comparatives in an annual report (even if not part of
the financial statements for example any additional reports provided) must be restated
riods that are not given as comparatives must still be
ad*usted, but with the cumulative effect on the opening balance of retained earnings
disclosed as a single ad*ustment (e.g. in the statement of changes in e"uity).
ent to a specific prior period-s is impracticable (not
possible), the accounting policy is simply applied to the elements from as early as
possible with a net ad*ustment made to the opening retained earnings from this earliest
Applying a new policy prospectively means that the policy is applied to only the current and
figures remaining unchanged. )his would compromise
t of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset, that results from the
and obligations
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$reat news
IA ! specifically advises that if it is difficult to distinguish between a change in estimate and
a change in policy, the change should rather be treated as a change in estimate (which is
great news since a change in estimate is a lot simpler to account for than a change in policy).

&rrors )'pecifically prior year errors*

Omissions from, and misstatements in, the entity's
prior periods arising from a failure to use, or misuse of, reliable information that(
+as available when financial statements for those prior periods were authori.ed for
issue% and
/ould reasonably be expected to have b
preparation and presentation of those financial statements.

Accounting Treat(ent

1. Current year error
)o be corrected in the financial statements of the current year.

2. Prior period &rrors
If material, need to be ad*usted retrospectively


IAS IAS IAS IAS 8 8 8 8
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IA ! specifically advises that if it is difficult to distinguish between a change in estimate and
change should rather be treated as a change in estimate (which is
news since a change in estimate is a lot simpler to account for than a change in policy).
&rrors )'pecifically prior year errors*
missions from, and misstatements in, the entity's financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that(
as available when financial statements for those prior periods were authori.ed for
/ould reasonably be expected to have been obtained and ta&en into account in the
preparation and presentation of those financial statements.
)o be corrected in the financial statements of the current year.
d*usted retrospectively
IA ! specifically advises that if it is difficult to distinguish between a change in estimate and
change should rather be treated as a change in estimate (which is
news since a change in estimate is a lot simpler to account for than a change in policy).
financial statements for one or more
prior periods arising from a failure to use, or misuse of, reliable information that(
as available when financial statements for those prior periods were authori.ed for
een obtained and ta&en into account in the
Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA
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Practice +uestions for changes in Accounting &sti(ates

+uestion 1
0achinery was purchased on 1 2anuary 344
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(
/ost (1-1-3441)
Accumulated depreciation
,et carrying amount (61-13-3443)

On the 1-1-3446, the useful life of the asset was re

e,uired-
9sing the re:allocation method(
A. /alculate the effect of the change in estimate.
;. how the *ournal entries assuming that depreciation had not yet been
/. how the *ournal entries assuming that depreciation had already been processed.
7. 7isclose the change in estimate.

+uestion 2

0achinery was purchased on 1 2anuary 3481, on which date it was est
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(

/ost (1-1-3441)
Accumulated depreciation
,et carrying amount (61-13-3443)

On the 1-1-3446, the residual value was re

e,uired-
9sing the re:allocation method(
A. /alculate the effect of the change in estimate.
;. how the *ournal entries assuming that depreciation had not yet been *ournalised.
/. how the *ournal entries assuming that depreciation had already been processed.
7. 7isclose the change in estimate.


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Practice +uestions for changes in Accounting &sti(ates
y was purchased on 1 2anuary 3441, on which date it was estimated to have a useful
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(
$s 544 444
$s 344 444
3) $s 644 444
useful life of the asset was re:estimated at < years (at 61 7ec 3446)

the change in estimate.
;. how the *ournal entries assuming that depreciation had not yet been *ournali.ed
/. how the *ournal entries assuming that depreciation had already been processed.
7. 7isclose the change in estimate.
was purchased on 1 2anuary 3481, on which date it was estimated to have a useful
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(
$s 544 444
$s 344 444
3) $s 644 444
6, the residual value was re:estimated to be $s =4 444.

A. /alculate the effect of the change in estimate.
;. how the *ournal entries assuming that depreciation had not yet been *ournalised.
/. how the *ournal entries assuming that depreciation had already been processed.
7. 7isclose the change in estimate.
was estimated to have a useful
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(
estimated at < years (at 61 7ec 3446).
*ournali.ed.
/. how the *ournal entries assuming that depreciation had already been processed.
imated to have a useful
life of 5 years and a nil residual value. )he carrying amount on 61 7ecember 3483 was(
;. how the *ournal entries assuming that depreciation had not yet been *ournalised.
/. how the *ournal entries assuming that depreciation had already been processed.
Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA
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Correction of &rrors and Changes

+uestion 3
;alance of retained earnings at 61 7e

>rofit for the years


7uring one inspectional review it was identified that following expenses were not recorded
in the respective years%
344= $s 134,444
3414 $s 1?4,444
3411 $s 314,444

e,uired
Account for treatment as per IA !

+uestion .
@t >i company limited is changing its accounting policy of valuing stoc& (cost flow formula)
from #I#O basis to +.A. the change will have the following impacts(

/losing stoc& value
344! increase by $s =4,444
344= increase by $s 164,444
3414 7ecrease by $s 154,444
3411 increase by $s ?4,444

!ther infor(ation
;alance of its retained earnings
>rofit for the years

e,uired
Account for treatment as per IA !


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Changes in Accounting Policies
at 61 7ecember 344= $s !44,444
3414 $s <44,444
3411 $s 54,444
7uring one inspectional review it was identified that following expenses were not recorded
Account for treatment as per IA !
@t >i company limited is changing its accounting policy of valuing stoc& (cost flow formula)
from #I#O basis to +.A. the change will have the following impacts(
e by $s =4,444
increase by $s 164,444
7ecrease by $s 154,444
increase by $s ?4,444
$s 1<,44,444 (344=)
$s ?34,444 (3414)
$s =44,444 (3411)
Account for treatment as per IA !
7uring one inspectional review it was identified that following expenses were not recorded
@t >i company limited is changing its accounting policy of valuing stoc& (cost flow formula)

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+uestion / )#(pact of ta0es*

;alance of retained earnings at 61 7ecember 344=

>rofit for the years


7uring one inspectional review it was identified
in the respective years%

344! $s 344,444
344= $s 134,444
3414 $s 1?4,444
3411 $s 314,444

e,uired
Account for treatment as per IA ! if the tax rate is suggested at <4A.

+uestion 1

@t >i company limited is changing its accounting policy of valuing stoc& (cost flow formula)
from #I#O basis to +.A. the change will have the following impacts(

/losing stoc& value
344! 7ecrease by $s 644,444
344= increase by $s <54,444
3414 increase by $s !44,444
3411 7ecrease by $s <44,444

!ther infor(ation
;alance of its retained earnings
>rofit for the years

e,uired
Account for treatment as per IA ! if the tax rate is suggested at <4
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at 61 7ecember 344= $s 1,144,444
3414 $s ?44,444
3411 $s !54,444
7uring one inspectional review it was identified that following expenses were not recorded
Account for treatment as per IA ! if the tax rate is suggested at <4A.
changing its accounting policy of valuing stoc& (cost flow formula)
from #I#O basis to +.A. the change will have the following impacts(
7ecrease by $s 644,444
increase by $s <54,444
increase by $s !44,444
7ecrease by $s <44,444
$s 6,<44,444 (344=)
$s 1,644,444 (3414)
$s 3,144,444 (3411)
Account for treatment as per IA ! if the tax rate is suggested at <4A.
that following expenses were not recorded
changing its accounting policy of valuing stoc& (cost flow formula)

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+uestion 2


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+uestion 3
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+uestion 4
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'tate(ent of Changes in &,uity
+uestion 15
#ollowing is the data pertaining to Bing Bhan Cimited(

1. Opening balances
Particulars
hare /apital
hare >remium
/apital $eserves
)ranslation $eserves
Dedging $eserves
Eeneral $eserves
$etained Farnings

3. )otal /omprehensive Income(
Particulars

>rofit after )ax
!ther Co(prehensive #nco(e )Net of Ta0*
Fxchange Eain on foreign Operations
Dedging Eains

6. /orrection of Frrors
a. Affecting >rofit and Cosses ($etained Farnings)
Particulars
Frrors pertaining to years prior to
3414
Frrors pertaining to year 3414
Frrors pertaining to year 3411

b. Affecting Other /omponents of F"uity
i. >rior to year 3414 translation reserves were wrongly credited by $s 1,?44,444
(before tax) due to
ii. In year 3414 translation reserves were wrongly credited by $s
tax) due to ta&ing a wrong translation rate.
IAS IAS IAS IAS 8 8 8 8
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'tate(ent of Changes in &,uity
#ollowing is the data pertaining to Bing Bhan Cimited(
A(ount in )s 555*
5,444
3<,444
3,444
?,444
<,444
11,444
3?,444
)otal /omprehensive Income(
2511 2515 2554
)A(ount in s 555*
1,G44 1,644 1,144
!ther Co(prehensive #nco(e )Net of Ta0*
Fxchange Eain on foreign Operations 644 G44 3!44
?44 <44 544
Affecting >rofit and Cosses ($etained Farnings)
)A(ount in s
555*
&ffect
Frrors pertaining to years prior to 3,<44 Fxpenses not recorded
Frrors pertaining to year 3414 $s 1,144 Incomes not recorded
$s ?44 Fxpenses not recorded
Affecting Other /omponents of F"uity
>rior to year 3414 translation reserves were wrongly credited by $s 1,?44,444
(before tax) due to ta&ing a wrong translation rate.
translation reserves were wrongly credited by $s
tax) due to ta&ing a wrong translation rate.
Fxpenses not recorded
Incomes not recorded
Fxpenses not recorded
>rior to year 3414 translation reserves were wrongly credited by $s 1,?44,444
translation reserves were wrongly credited by $s 3!4,444 (before
Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA Ahmed Raza Mir, ACA
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<. /hanges in Accounting >olicy
)he company had the policy of valuing the stoc& on #I#O basis. In order to bring
uniformity of accounting policy in the group and better presentation the company moved
to weighted average policy. )he change has the following effects on profits(
6ear
344!
344=
3414
3411

5. $ight shares issued in march(
6ears
3414
3411

G. /ash 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
announced in eptember)
6ears
344=
3414
3411

?. crip 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
announced in eptember)
6ears
344=
3414
3411
!. Amount e"ual to 14A of profit
to general reserves.
=. Incremental depreciation for 3411 was $s 1,!44 (3414 $s 1,<44)
14. In 0ay 3411 $s 5,444,444 worth convertible preference shares were converted to
ordinary shares at a premium of $s
11. )ax rate for 344=, 3414 and 3411 is <4A.

e,uired

>repare a statement of changes in e"uity for the year ended 61 7ecember 3411 as per the
re"uirements of /ompanies Ordinance 1=!<
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)he company had the policy of valuing the stoc& on #I#O basis. In order to bring
uniformity of accounting policy in the group and better presentation the company moved
eighted average policy. )he change has the following effects on profits(
A(ount )s in 555* &ffect
644 /losing stoc& is to increase
544 /losing stoc& is to increase
=44 /losing stoc& is to 7ecrease
?44 /losing stoc& is to

ights Price
64A $s 35 per share
1 for 5 shares held $s <4 per share
/ash 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
7inal #nteri(
64A 35A
54A 65A
?4A 34A
crip 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
7inal #nteri(
34A 14A
65A 35A
14A <4A
Amount e"ual to 14A of profit after tax is transferred every year from retained earnings
Incremental depreciation for 3411 was $s 1,!44 (3414 $s 1,<44)
In 0ay 3411 $s 5,444,444 worth convertible preference shares were converted to
ordinary shares at a premium of $s < per share.
)ax rate for 344=, 3414 and 3411 is <4A.
>repare a statement of changes in e"uity for the year ended 61 7ecember 3411 as per the
re"uirements of /ompanies Ordinance 1=!<.
)he company had the policy of valuing the stoc& on #I#O basis. In order to bring
uniformity of accounting policy in the group and better presentation the company moved
eighted average policy. )he change has the following effects on profits(
/losing stoc& is to increase
/losing stoc& is to increase
/losing stoc& is to 7ecrease
/losing stoc& is to increase
$s 35 per share
$s <4 per share
/ash 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
crip 7ividends (#inal Announce in first wee& of #eb next year while the Interim is
after tax is transferred every year from retained earnings
In 0ay 3411 $s 5,444,444 worth convertible preference shares were converted to
>repare a statement of changes in e"uity for the year ended 61 7ecember 3411 as per the

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