Accounting Policies, Changes In Accounting Estimates, And Errors

Retrospective Application

Accounting policies as per Australian Accounting Standard Board 108 refers as the particular methods, systems, actions, judgments, rules and ideology adopted by management of an entity in presentation and preparation of the books of accounts and financial statements which helps them to disclose all the material facts relating to the financial and non financial affairs of the company and are adherence to generally accepted accounting principles and international financial reporting standards. The accounting policies usually applied by an entity in agreement with complex transactions happen in any business related to Depreciation, valuation of Goodwill,  Inventory valuation, calculation of research and development cost, preparation of consolidated financial statements.

Retrospective application in relation to accounting policies means applying a new accounting policies in any particular year as if it is applied from the first year in which transaction relating to such accounting policy starts.

Retrospective Restatement refers as revising the values of previous years account balances in respect of error occurred in previous period and their identification, existence and presentation in financial statements of an entity as these error was never happen.

If the revised AASB 138 relation to intangibles which indicates the revision in methods of capitalization of research and development costs are Changes in Accounting Estimates as per AASB 108. Change is estimates are happen due to change in any laws and new inventions in accounting which requires the adjustment of book value of assets recognized in its financial statements by an entity in a particular period.

 In the given case of Biotran Limited, the change in accounting estimate in relation to research and development expenditure shall be accounted for in the current and future financial statements on prospective basis only in the year and years for which such change in estimated effects the profit or loss of an entity. So the Biotran will take the effect in the profit and loss account for the year 2018 and thereafter.

 The accounting policy can be changed only if it is permitted only if it is required by the applicable laws for the time being in force and if the change in policies results in better presentation of the financial statements of an entity.

In the given case of Biotran Ltd, the company is permitted to change its accounting policy in valuation of material inventory from Weighted average to FIFO only if :

• It is required as per the Australian Accounting Standard to Board to value the inventory at FIFO method
• And such change in valuation of inventory provides the more accurate information about the financial performance of the company

The accounting treatment of change in accounting policy can be done retrospectively or as per the provisions of laws according to which changes in accounting policy happen.

Retrospective Restatement

In the case of Biotran Ltd, the change in valuation of material inventory is done as per the choice of the company to provide more accurate information and such change shall be applied as Retrospective Application of change in accounting policy.

There are two situations in which retrospective application cannot be applied by an entity in respect of change in accounting policy. They are:

i. Difficult  to determine the effect in relation to particular periods

ii. Difficult to ascertain the total effect due change in policy

If an entity shall not able to determine the effect in of change in policy in particular periods, then an entity shall take the effect of such change in the book values of the assets and liabilities effected from such  at the start of period for which change identified and the subsequent effect of the same in the equity component of an entity

The Biotran Ltd will shall decrease the value of inventories mention in the head Current Assets as on 1st July, 2015 and correspondingly decrease the value of General Reserves shown as Equity Component   on 1st July 2015 by $ 180,000 in current reporting period.

The change in accounting estimate will bring corresponding change in assets or liabilities of an entity shall be accounted for by adjusting book values of that assets or liabilities in the period for which change is take place in an entity.    

In the given siuation, BIotran Ltd on account of changes in estimated useful life and residual value of its building should account for the effect on depreciation expense of building in the current year and for the future year over the remaining revised useful life of building.  

As per Australian Auditing Standard Board 137, Provisions are defined as tentative amount and timing recognized as a liability to an entity. It is the amount set aside by the company for its doubtful economic duty which may arise in future.

The provision in the books of accounts of entity be identified if there is liability for an entity arises in the current period from the past acts of entity and it sure that the entity has to pay money for settlement of such liability and the amount to be paid can be guessed rationally by the management of an entity.

In the case of Benson Ltd, the obligation in relation to restoring the effected environment be regarded as provisions in the financial statements as:

• the company has constructive obligation in current year from its previous years actions
• the amount has to be spent by company in next two years in restoring the environment to fulfill its obligation   
• the cost of restoration can be estimated by the company in a reasonable manner

Changes in Accounting Estimates

The following are the three commonly used methods as AASB 137 for recording the amount of provisions in the books of account of an entity:

i. Best Judgment- In this method the provision is recognized at an amount which an entity is require to pay or incur at the end of the particular period in the rational manner to settle the obligation at the end of  particular period.

ii. Present Value- In this method, the amount of provision is calculated by the present value of future expenditure which an entity is expected to incur to settle the obligation. This method applied in case where change of money has material impact with passage of time.

iii. Future Event- In this method, the value of provision will be the amount require to resolve the obligation in particular future event. The provision in this method is only recognized when the there is substantive chances of happening of future event.

The expected value of that has to paid by an entity in settling the future obligation is the another approach measuring the value of provision under risk and uncertainty method.

In the case of Benson Ltd., the expected value that may be paid by company which is determine by the best judgment and after applying prudence approach to settle the obligation and recognition of provision in the books of account.

Under Risk and Uncertainty method of value of the provision, the value of provision is the more likely outcome from circumstance and event in measurement of the obligation of an entity.

In the given case of Benson Ltd., the manner of risk taken into account for estimate the amount of provision is the expected result of costs that is likely to be incur and the chances of its occurrence from restoration of contaminated environment by the company.

The company should recognized the amount of Provision calculated by Present value of  Risk and Uncertainty for group transaction. The most single most likely outcome that is cost of $ 400,000 is more than the other outcomes and is it highest probable outcome. But the other possible results are higher and lower than the most likely result, the best approach to settle the possible obligation is more higher than the present value of most likely result that is $ 400,000 costs as on 30 June, 2016.  Thus, the value will be calculated using the expected value method.

Value of Provision  = [( $ 420,000 X 20%) + ( $ 400,000 X 70%) +( $ 300,000 X 5%) +

( $ 200,000 X 5%)] / ( 1.04)²

= $ 359, 652

Reference

AASB Official Website, (2010),”Provisions, Contingent Liabilities and Contingent Assets” available onhttps://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf accessed at 06/05/2017   

AASB Official Website, (2010),”Property, Plant and Equipmentss” available on https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf accessed at 06/05/2017   

AASB Official Website, (2011),”Accounting Policies, Changes in Accounting Estimates and Errors” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf accessed at 06/05/2017

Firoz, M. and Ansari, A.A.,( 2010),” Environmental accounting and international financial reporting standards (IFRS)”- International Journal of Business and Management, 5(10), pp.105-112.

Taplin, R., Tower, G. and Hancock, P., 2002, June. Disclosure (discernibility) and compliance of accounting policies: Asia–Pacific evidence. In Accounting Forum (Vol. 26, No. 2, pp. 172-190). Blackwell Publishers Ltd..

Wells, M.J., 2011. Framework-based approach to teaching principle-based accounting standards. Accounting Education, 20(4), pp.303-316.

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