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33 ChAPTER 5 – ias 8 Net profit or loss for the period, fundamental errors and changes in accounting policies all income and expenses must be included when arriving at profit for the period unless another IAS states differently a change in accounting policy should be adjusted in the prior period a correction of a fundamental error should be adjusted in the prior period transactions involving shareholders ( dividends, share issues, redemptions etc ) should not be included – these are shown on the statement of changes in equity in arriving at profit from ordinary activities, an entity should disclose those matters which are relevant to a fuller understanding of the entity’s performance examples in the IAS include: write down of inventories impairment of assets to recoverable amount restructuring costs profits ( losses ) or disposal of non-current assets court case settlements 34 chApter 5: iAs 8 Changes in accounting estimates should be adjusted in the current period examples include: provisions for doubtful debts changes in useful lives of depreciable assets any adjustment should be treated consistently by including them in the statement of comprehensive income classification as previously used the nature and amount of any change in accounting estimate having a material impact should be disclosed fundamental errors are those of such significance that the financial statements of a prior period can no longer be considered to have been reliable as at the date of issue. accounting treatment of fundamental errors: adjust the opening balance of retained earnings, and restate comparative information disclosure nature amount of correction in current and prior periods amount of correction relating to periods before the comparatives the fact that comparatives have been restated Paper f7 35 chApter 5: iAs 8 ExamplE 1 Adomas Co Statement of Comprehensive Income extract and summarised Statement of Financial Position for the year ended 31 December, 2003 $’000 Revenue 2,500 Cost of sales and expenses (1,200) Profit for the year 1,300 Statement of Financial Position at 31 December, 2003 Non-current assets Current assets Share capital Reserves Current liabilities 2,000 800 2,800 600 2,000 2,600 200 2,800 During 2004 it was discovered that certain non-current assets had been included in the records at 31.12.03 at $500,000 in excess of their recoverable amount and that this situation was unlikely to change. Prior to making any adjustment for the above the results and summarised Statement of Financial Position position of Adomas Co for 2004 was as follows: Statement of Comprehensive Income extract for the year ended 31 December, 2004 $’000 Revenue 2,600 Costs and expenses (1,400) Profit for the year 1,200 Statement of Financial Position at 31 December, 2004 Non-current assets Current assets Share capital Retained earnings Current liabilities 2,800 1,700 4,500 600 3,500 4,100 400 4,500 During 2004 some other items of property had been revalued by $300,000 (included in the above retained earnings figure) Prepare extracts from Adomas Co’s financial statements for the year ended 31 December, 2004. 36 chApter 5: iAs 8 Changes in accounting policy normally, policies should be applied consistently from one period to the next. Changes are therefore rare changes should only be made if: required by statute required by international financial reporting standard change will result in financial statements which are: more relevant and no less reliable or more reliable and no less relevant accounting treatment: adjust opening balance of retained earnings restate comparative information disclosure reasons for the change amount of the adjustment for each period presented amount of the adjustment relating to periods before the comparatives the fact that comparatives have been adjusted