DFS Retrospective Application of Changes in Accounting Policy

Beth
Beth Feels At HomeRegistered Posts: 40
Hi,

I wondered if anyone can help me?!

I have been through an example of the retrospective application of an accounting policy many times and I still can't quite work out where some of the figures are coming from!

I'm looking at one in the BPP course companion which shows depreciation being applied to the cost of a building which has been owned for a couple of years but which hadn't been depreciated. I don't know where the retained earnings for the year have come from in the table.

Would anyone have a similar example they could show me?

Thank you for any help!!!

Comments

  • Steve Collings
    Steve Collings Experienced Mentor Registered Posts: 997
    Hi,

    With retrospective application you are applying the new policy to a transaction(s) as if that policy had always been in force so you have to restate the comparative year, and the opening retained earnings figure (retained earnings = accumulated profits from the income statement) because otherwise the financial statements will not achieve comparability which is one of the mandatory characteristics under the IASB Framework.

    The opening balance of retained earnings is adjusted for the change to account for the change as if the new policy had always been in place. So for example if you previously capitalised development costs of $1,000 in 2003 but in 2004 adopted IFRS and IAS 38 prohibited such capitalisation (meaning they would have to be written off to the income statement), then you would reduce retained earnings by $1,000 in 2003 (ie restate the comparative year). This is because you cannot have one year using one policy whilst the comparative year uses an old policy. The effect of the new policy means that development expenditure is written off to the income statement (thus reducing profits), so you need to reduce the previous year's retained earnings (cr balance sheet, dr retained earnings) to apply the new policy.

    Maybe if you could post the question you are working from I may be able to show you how the figures are calculated.

    Kind regards
    Steve
  • Beth
    Beth Feels At Home Registered Posts: 40
    Hi Steve,

    Thank you very much for your help but i've figured it out! I think I spent too many hours looking at it... I left it for a couple of days and when I worked through it again I got it first time.

    Thanks very much though!
  • Steve Collings
    Steve Collings Experienced Mentor Registered Posts: 997
    Hi Beth,

    Try to focus your studies more into the interpretation of issues such as restatement of financial statements due to accounting policy changes and/or estimation techniques rather than trying to look into too much detail at IAS 8. I think it is more important to understand what gives rise to an accounting policy change and how this differentiates from a change in estimation technique (accounting policy change = apply retrospectively, estimation technique change = apply prospectively). If you know that a change in accounting policy will give rise to the prior years financial statements being restated and how to do this (i.e. adjust the b/f opening retained earnings figure and the deal with the other side of the transaction) you'll be completely fine.

    Regards
    Steve
  • NickyW
    NickyW Feels At Home Registered Posts: 97
    Does anyone know if there are any examples of this in the Kaplan book or any specific exam questions with this in?
    Thanks
    Nicky
  • NickyW
    NickyW Feels At Home Registered Posts: 97
    No one has replied to my thread!! Is there anyone out there who can help me and give me some exam examples of retrospective application of policy - because I really don't understand the above thread!!
    Thanks
    Nicky
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