Chapter 8 - Other Standards

Question 1

Accounting policies

Answer 1

The principles, bases, conventions, rules and practices applied by an entity which specify how the effects of transactions and other events are reflected in the financial statements.

IAS 8 requires an entity to select and apply appropriate accounting policies complying with IFRSs to ensure FS provide information that is

1. Relevant to decision making
2. Reliable in that they:-
   - represent faithfully the results and financial position of the entity.
   - reflect the economic substance of events and transactions and no merely the legal form.
   - are neutral (free from bias).
   - are prudent.
   - are complete in all material respects.

Question 2

Changing accounting policies

Answer 2

Generally, accounting policies are normally kept the same from period to period to ensure comparability of financial statements over time.

IAS 8 requires accounting policies to be changed only if:

1. Required by IFRSs
2. Result in a reliable and more relevant presentation of events or transactions.

A change in accounting policies occurs if there has been a change in

1. Recognition e.g. An expense is now recognised rather than an asset.
2. Presentation e.g. Depreciation is now included in cost of sales rather than administrative expenses.
3. Measurement basis e.g. Stating assets at replacement cost rather than historical cost.

Question 3

Accounting estimates

Answer 3

A method adopted by an entity to arrive at estimated amounts for the financial statements.

Most figures require estimation.
1. The exercise of judgement based on latest information available at the time.

2. At a later date, estimates may have to be revised as a result of the availability of new information, more experience or subsequent developments.

Question 4

Changes in accounting estimates

Answer 4

The requirements in IAS 8 are:

1. The effects of changes should be included in the statement of profit or loss in the period of the change and if subsequent periods are affected in those subsequent periods.
2. The effects of the change should be included in the same income or expense classification as was used for the original estimate.
3. If the effect of the change is material, it’s nature and amount must be disclosed.

Question 5

Prior period errors

Answer 5

Omissions from and misstatements in the financial statements for one or more prior periods arising from a failure to use information that was

1. Available when the financial statements for those periods were authorised for issue and
2. Could reasonably be expected to have been taken into account in preparing those financial statements.

Question 6

Correction of prior period errors

Answer 6

1. Restating the opening balance of assets, liabilities and equity as if the error had never occurred and presenting the necessary adjustment to the opening balance of retained earnings in the statement of changes in equity.
2. Restating the comparative figures presented as if the error had never occurred.
3. Disclosing within the accounts a statement of financial position at the beginning of the earliest comparative period. This means 3 statements of financial position will be presented
   - at the end of the current year
   - at the end of the previous year
   - at the beginning of the previous year

Question 7

Fair value measurement

Answer 7

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

IFRS 13 inputs to valuation techniques used to measure fair value:
1. Level 1 inputs comprise quoted prices (observable) in active markets for identical assets and liabilities at the measurement date.

2. Level 2 inputs are observable inputs, other than those included within Level 1 above which are observable directly or indirectly.
3. Level 3 inputs are unobservable inputs for an asset or liability based upon the best information available including information that may be reasonably available relating to market participants

Question 8

Accounting for inventory

Answer 8

IAS 2 inventories

Inventories are valued at lower of cost and NRV

Question 9

Cost

Answer 9

Cost of bringing items of inventory to their present location and condition (including cost of purchase and cost of conversion).

Cost of purchase:

• purchase price including import duties, transport and handling costs.
• any other directly attributable costs, less trade discounts, rebates and subsidies.

Cost of conversion:

• costs specifically attributable to units of production e.g. Direct labour, direct expenses and subcontracted work.
• production overheads which must be based on the normal level of activity.
• other overheads attributable in the particular circumstances of the business to bringing the product or service to its present location and condition.

Abnormal waste, storage costs, administrative overheads, selling costs should be excluded and charged as expenses of the period in which they are incurred.

Question 10

NRV

Answer 10

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Question 11

Biological assets

Answer 11

A living animal or plant. A biological asset should be recognised if:

1. It is probable that economic benefits will flow to the entity.
2. The cost of fair value of the asset can be reliably measured.
3. The entity controls the asset.

Recognition and measurement:

1. Fair value less estimated point of sale costs.
2. If there is no fair value, then use the cost model.

Subsequent measurement:
Revalue to fair value less point of sale costs at year end, taking any gain or loss to the statement of profit or loss.

Question 12

Bearer plants

Answer 12

Accounted for under IAS 16 Property, plant and equipment. A living plant that:

1. Is used in the production or supply of agricultural produce.
2. Is expected to bear fruit for more than one period and
3. Has a remote likelihood of being sold as agricultural produce except for incidental scrap sales.

Question 13

Agricultural produce

Answer 13

At the date of harvest the produce should be recognised and measured at fair value less estimated costs to sell.

1. Gains and losses on initial recognition are included in profit or loss for the period.
2. After produce has been harvested, IAS 41 ceases to apply. Agricultural produce becomes an item of inventory. (IAS 2 inventories)

Question 14

Government Gants and biological assets

Answer 14

IAS 41 applies to government grants related to a biological asset.

• unconditional government grants received in respect of biological assets measured at fair value are reported as income when the grant becomes available.
• if such a grant is conditional, the entity recognises it as income only when the conditions are met.

Question 15

Assets outside the scope of IAS 41

Answer 15

IAS 41 does not apply to intangible assets or to land related to agricultural activity.

• intangible assets are measured at cost less amortisation or fair value less amortisation (IAS 38 intangible assets).
• land is not a biological asset and IAS 16 property, plant and equipment applies.