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ACCOUNTING POLICIES,
CHANGES IN ACCOUNTING
ESTIMATES & ERRORS [IAS 8]
REVISION LECTURE
Prepared by Bianca Nel CA (SA)
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KEY DEFINITIONS [IAS 8.5]

ACCOUNTING POLICIES
The specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statement
Retrospective Restatement Prospective Application
Correcting the recognition, measurement of a change in accounting policy and of
and disclosure of amounts of elements of FS recognising the effect of a change in an
as if a prior period error had never occurred accounting estimate, respectively, are:
(a) applying the new accounting policy to
transactions, other events and conditions
occurring after the date as at which the
Retrospective Application policy is changed;
Is applying a new accounting policy to
transactions, other events and conditions as and
if that policy had always been applied (b) recognising the effect of the change in
the accounting estimate in the current and
future periods affected by the change

IMPRACTICABLE NB!
If after every reasonable effort to do so, DISCLOSE
something is NOT possible to do without incurring undue cost & effort.
Cost vs benefit?
Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so.
For a particular prior period, it is impracticable to apply a change in an accounting policy
retrospectively or to make a retrospective restatement to correct an error IF:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
(b) the retrospective application or retrospective restatement requires assumptions about
what management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires significant estimates
of amounts and it is impossible to distinguish objectively information about those
estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those
amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period were
authorised for issue from other information.
IFRS Part B include examples in terms of the disclosure of Retrospective
restatement of errors (Example 1) & Prospective application of change in
accounting policy (Example 3)

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IAS 8 WHAT/WHEN? HOW TO APPLY/TREAT/CORRECT? DISCLOSURE?

CHANGE IN ONLY IF: • Change in accounting policy resulting from the initial INITIAL APPLICATION OF IFRS VOLUNTARY CHANGE
Change required by IFRS & application of an IFRS -> specific transitional [EXCEPT WHEN IMPRACTICABLE] [EXCEPT WHEN
SELECTING & ACCOUNTING
reliable/relevant information of FS provisions, if these exist 1. Title IMPRACTICABLE]
APPLYING POLICY 2. When applicable 1. Nature
AP What is NOT a change in accounting • Changes in accounting policy resulting from the 3. Nature of change 2. Reason why NEW
policy? initial application of an IFRS (where no transitional 4. Description of transitional 3. Nature of change
differ in substance from those provisions exist) or voluntarily ->Account for provisions 4. Current period and each
When IFRS previously occurring retrospectively 5. Current period and each prior prior period amount for
applies period amount for each FS each FS item & BEPS/DEPS
new accounting policy for transactions, • If IMPRACTICALBE? item & BEPS/DEPS 5. Amount adjustment -
other events and conditions that did 6. Amount adjustment - periods periods before presented
not occur previously, or were before presented
immaterial IF IMPRACTICABLE:
Absence of
Early application => IF IMPRACTICABLE: Circumstances that led to
IFRS Exception: IAS 16 or IAS 38 Circumstances that led to condition & how and from
Develop = condition & how and from when change applied
prof when change applied
LECTURE EXAMPLE 1 & 2
judgement • An adjustment of the carrying • Apply change in estimate prospectively by • Disclose the nature and amount of a change in accounting
CHANGE IN
ESTIMATED amount of A/L, or the amount of including it in profit or loss in: The period of the estimate that has an effect in the current period or is
1. Relevant the periodic consumption of A, change and Future periods (if change affects expected to have an effect in future periods, except when
that results from the assessment future periods) impracticable to estimate that effect
AND
of the present status of, and
2. Reliable expected future • Where change in estimate affects A/L/E, the • If it is impracticable - an entity shall disclose that fact
benefits/obligations carrying amount of the A/L/E to be adjusted in
period of change prospectively
HIERARCHY:
Similar IFRS • NEW information /developments
No restatement of comparative figures
and therefore are not corrections
Definitions, of errors LECTURE EXAMPLE 3
recognition,
ERRORS Prior period errors are omissions from, • correct material prior period errors retrospectively (a) the nature of the prior period error
measure and misstatements in, the entity’s in the first set of FS after their discovery by: (b) for each prior period presented, to the extent practicable, the
financial statements for one or more amount of the correction: (i) for each FS line item affected AND
prior periods arising from failure to use, • restating the comparative amounts for the prior (ii) if IAS 33 applies to the entity, for basic and diluted earnings
or misuse of, reliable information period(s) presented in which the error occurred; or per share
(c) the amount of the correction at the beginning of the earliest
• if the error occurred before the earliest prior period prior period presented
• Changes in estimates are NOT errors presented, restating the opening balances (d) impracticable - circumstances that led to the existence &
description of how and from when the error has been corrected.
• If IMPRACTICALBE? Financial statements of subsequent periods need not repeat
these disclosures
LECTURE EXAMPLE 4

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Please attempt the following examples on your own.

Should you need help, watch the videos provided.
Note: Only videos for Example 1, 2 & 4 will be provided.

EXAMPLE 1: Change in Accounting Policy

1. Shake Ltd increases their inventory levels of shakes during the end of the winter season
in order to provide for the increased demand when clients want to work on their
summer bodies. After the draft financial statements for the year ended 31 December
20.10 had been prepared, the directors decided to change the inventory valuation
method of the shakes in order to comply with International Financial Reporting
Standards (IFRSs). The valuation method was changed from the last-in-first-out method
to the first-in-first-out method. The change in the inventory valuation method has not
been accounted for yet in the accounting records of Shake Ltd for the year ended
31 December 20.10.
The value of inventory based on the different valuation methods was as follows:
Last-in, First- First-in, First- Difference
out out
R R R
31 December 20.08 190 000 230 000 40 000
31 December 20.09 296 000 344 000 48 000
31 December 20.10 305 000 355 000 50 000

The SA Revenue Service indicated that they will accept the new inventory valuation method
for tax purposes and that they will not reopen the previous year’s tax assessments.

REQUIRED:

a) Disclose only additional information above in the notes to the annual financial
statements of Shake Ltd for the year ended 31 December 20.10 according to the
requirements of IAS 8 – Accounting policies, changes in accounting estimates and
errors.

• Comparative figures are required.

• No other notes are required.
• No accounting policy notes are required.

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NOTE:
First determine the following:
1. Will SARS reopen the previous years' tax assessments?
2. Will SARS accept the new accounting policy?

In this question the change in accounting policy is accepted by the SA Revenue Service, but
the previous years' tax assessments will not be re-opened.

Tax purposes the change in accounting policy will not affect taxable income in the prior
periods and the cumulative effect of the change in accounting policy will be included in
taxable income in the current period.

Accounting purposes the change in accounting policy is retrospectively adjusted in profit

before tax as the period-specific effects are available. In the calculation of taxable income,
the period-specific effect that is included in profit before tax should first be excluded from
profit before tax, before the cumulative effect is taken into account.

SOLUTION:

1. Change in accounting policy

During the year the company changed its accounting policy in respect of the valuation of
inventory from the last-in, first-out method to the first-in, first-out method. This change
was necessary to ensure that the company complies with International Financial
Reporting Standards (IFRS). The change in policy was accounted for retrospectively and
comparative amounts have been appropriately restated.

The effect of this change is as follows:

20.10 20.09 1/1/20.09
1 Jan 20.09:
R R R Adjust the opening
Decrease in cost of sales - balance of each
(50 000 – 48 000); (48 000 – 40 000) 2 000 8 000 affected component
Increase in income tax expense - of equity for the
earliest prior period
(2 000 x 28%); (8 000 x 28%) (560) (2 240) presented:
Increase in profit 1 440 5 760 - Prior period:
31 Dec 20.09.
Opening balance of
Increase in inventory 50 000 48 000 40 000
prior period:
Increase in current tax liability/SA 1 Jan 20.09
Revenue Service (50 000 x 28%) (14 000) - -
Increase in deferred tax liability
(48 000 x 28%);(40 000 x 28%) - (13 440) (11 200)
Increase in equity 36 000 34 560 28 800
Adjustment to retained earnings at
the beginning of 20.09 28 800
(40 000 x 72%)

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NOTE:
For prior periods the carrying amount of inventory is based on the first-in, first-out method
and the tax base of inventory is based on the last-in, first-out method, resulting in
temporary differences for deferred tax purposes. Therefore, the deferred tax line item in
the statement of financial position and the statement of profit or loss and other
comprehensive income are restated for the comparative periods.

However, in the current period both the carrying amount and the tax base of inventory are
based on the first-in, first-out method of inventory valuation and therefore there is no
temporary difference for deferred tax purposes.
Calculation of deferred tax relating only to inventory:

Deferred tax
Deferred tax
Carrying Tax Temporary balance
movement
amount base difference Dr/(Cr)
Dr/(Cr)
@28%
R R R R R
20.08 230 000 190 000 40 000 (11 200) 11 200
20.09 344 000 296 000 48 000 (13 440) 2 240
20.10 355 000 355 000 – – (13 440)

Both the cumulative and period-specific effect for all comparative periods are available,
therefore the change in accounting policy can be applied retrospectively. Retrospective
application requires a new accounting policy to be applied to transactions as if that policy
has always been applied.

The following journal entries should be prepared to record the change in accounting policy:

Please note: The following current and deferred tax journals relate only to the tax implications of inventory.

Dr Cr
1 October 20.08 R R
Inventories (SFP) 40 000
Deferred tax (SFP) 11 200
Retained earnings (Equity) 28 800
Restate the earliest period presented for the cumulative effect of the
change in accounting policy
30 September 20.09
Inventories (SFP) 8 000
Cost of sales (P/L) 8 000
Restate the period specific effect of the change in accounting policy for 20.09

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How would this differ if SARS had re-opened the previous year's tax
assessment?
Note, it is unlikely that they will re-open this. If SARS re-open this then the CA and TB for
20.08 and 20.09 will be equal and there will be no TD.
In the deferred tax calculation, the CA is based on the NEW accounting policy.
If SARS re-open this then the TB will change to the amount as per the NEW accounting
policy.
The difference in deferred tax for 20.08 and 20.09 in the original example is due to the fact
that SARS did not re-open the prior year assessments.

If the prior year assessments were re-opened in the Change in accounting policy the effect
would be taken into account on 1/1/20.09 relating to the R40 000.
Increase in current tax liability of R11 200 will be disclosed. The effect on equity remains the
same though.
The major difference is the fact that the amount payable to SARS will be adjusted.

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EXAMPLE 2: Change in Accounting Policy (Source: UNISA FAC 4861/106 2017 Amended)

The newly appointed accountant of Takeout Ltd (Takeout), a company listed on the
Johannesburg Stock Exchange, accounted for the following items which occurred during the
financial year ended 31 December 20.17 as follows:

Inventory

During the current financial year ended 31 December 20.17, the accounting policy for the
assignment of cost to inventory was changed from the first-in-first-out formula to the
weighted average formula, since management was of the opinion that the financial
statements will provide reliable and more relevant information when the weighted average
formula is applied.

The newly appointed accountant adjusted the financial statements for the current and
previous financial years to account for the change in accounting policy retrospectively.
Since it was not possible for the accountant to determine the weighted average cost of the
inventory at 31 December 20.16 and prior periods, the newly appointed accountant used
estimated values.

You are the newly appointed audit clerk of TAKEOUT and need to advise the newly
appointed accountant on the accounting treatment of the above-mentioned matters.

REQUIRED:
Advise the newly appointed accountant of TAKEOUT Ltd on the correct accounting
treatment of the mentioned items in accordance with IAS 8 Accounting policies, Changes in
Accounting Estimates and Errors in the financial statements of TAKEOUT Ltd for the financial
year ended 31 December 20.17.

SOLUTION:

Please find below my explanation of the correct accounting treatment thereof:

Change in measurement of inventory to weighted average method

According to IAS 8.14(b) and entity shall change an accounting policy if the change results in
the financial statements providing reliable and more relevant information about the effects
of transactions, other events or conditions on the entity’s financial position, financial
performance or cash flows.

TAKEOUT Ltd may therefore change their accounting policy with regard to the assignment of
cost to inventory, since it will result in reliable and more relevant information.

According to IAS 8.19(b) a voluntary change in accounting policy will be applied

retrospectively. Hence it is correct for TAKEOUT Ltd to adjust the prior period balances to
reflect the new cost assignment formula.

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However, IAS 8.23 indicates that a change in accounting policy will be applied
retrospectively, except to the extent that it is impracticable to determine the period-specific
effects or the cumulative effect of the change.

According to IAS 8.24-25 when it is impracticable to apply an accounting policy

retrospectively (as indicated above), the new accounting policy is applied prospectively from
the earliest date practicable.
Since the weighted average value of inventory at 31 December 20.16 and prior periods are
not known, it is not possible to determine the cumulative effect on 1 January 20.18.
Accordingly, it is not possible to account for the change in accounting policy retrospectively;
hence the change in accounting policy will be applied prospectively, from the earliest date
practicable.

The closing inventory on 31 December 20.17 will be valued on the weighted average basis,
while the opening inventory on 1 January 20.17 will be valued on the first-in; first-out
method. No adjustment will be made against the opening balance of retained earnings on 1
January 20.17

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EXAMPLE 3: Change in estimate (Source: UNISA FAC 4863/103 2016 adapted)

Robbo Ltd manufactures and sells Robot machine toys and its year end is 31 December.
Robbo has 1 000 000 shares in issue.

1) Taking into account several factors, the directors of the company decided on 31
December 20.11 to change the accounting policy in respect of the valuation of
inventory. Robbo Ltd previously valued inventories using the first-in-first-out method,
but now changed the policy to the weighted average method, since it will result in a
more relevant and reliable presentation of the value of inventory. No journals have been
passed to account for this change in accounting policy.

The inventory values as at 31 December, based on the two methods of valuation, were
as follows (before taking into account any provision for obsolete inventory):

Basis 20.11
R
First-in-first-out method 251 111
Weighted average method 293 000

The SARS will not re-open the previous years’ assessments, but will accept the new
accounting policy for the current year for tax purposes.

2) Due to plans by the engineers to use a new range of parts in the manufacturing process
of the Robbos, the directors decided on 31 December 20.11 to increase the provision for
obsolete inventory from 8% to 10% to provide for parts that are currently included in
inventory that will become obsolete when the new range of parts are introduced. No
journals have been passed to account for this change from 8% to 10%.

REQUIRED:

1) Calculate the provision for obsolete inventory balance at 31 December 20.11

SOLUTION:

Change in accounting estimate (Provision for obsolete inventory)

Provision for obsolete inventory after change in accounting policy [C1] 23 440
Change in estimate from 8% to 10% (23 440 x 10%/8%) 29 300
Increase in provision for obsolete inventory 5 860

C1
R293 000 x 8% = 23 440

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EXAMPLE 4: Error (Source: UNISA FAC 4861/106 2017 Amended)

The newly appointed accountant of BAW Ltd (BAW), a company listed on the Johannesburg
Stock Exchange, accounted for the following items which occurred during the financial year
ended 30 June 20.17 as follows:

Change in residual value of Taxi-fleet

When the newly appointed accountant processed the depreciation for the current financial
year, it came to his attention that the previous accountant used the incorrect residual value
to calculate the depreciation on BAW’s fleet of Taxis' which is three years old. The
accountant obtained the residual values (retail value of vehicles after five years) from the
dealer with acquisition of the fleet, however he used the residual value given for petrol
engines instead of using the residual value given for diesel engines. All vehicles in BAW’s
fleet have diesel engines.

The cumulative effect of using the incorrect residual value is material to BAW’s financial
statements.

The newly appointed accountant recalculated the depreciation using the correct residual
value for diesel engines and disclosed the correction in the notes to the financial statements
as a change in accounting estimate. The correction will affect the current and future
financial years.

REQUIRED:
Advise the newly appointed accountant of BAW Ltd on the correct accounting treatment of
the mentioned items in accordance with IAS 8 Accounting policies, Changes in Accounting
Estimates and Errors in the financial statements of BAW Ltd for the financial year ended 30
June 20.17.

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SOLUTION:

Please find below my explanation of the correct accounting treatment thereof:

Change in residual values of Taxi-fleet

IAS 8.34 refers –

An estimate may need revision if changes occur in the circumstances on which the estimate
was based or as a result of new information or more experience. By its nature, the revision
of an estimate does not relate to prior periods and is not the correction of an error.

The change which is necessary to make with regard to the residual value of the Taxi-fleet is
not because of changes in the circumstances on which the estimate was based or as a result
of new information (the information was available in prior periods) or more experience, the
change in residual value can therefore not be treated as a change in estimate.

The correct residual value was available to the previous accountant at the date it was
initially used. The incorrect residual value was mistakenly applied; hence applying the
correct residual value will be a correction of an error.

It has been indicated that the error is material and that the error occurred three years ago,
hence IAS 8.42 and 42(b) will be applicable

IAS 8.42 - An entity shall correct material prior period errors retrospectively in the first set of
financial statements authorised for issue after their discovery by:

IAS 8.42(b) if the error occurred before the earliest prior period presented, restating the
opening balances of assets, liabilities and equity for the earliest prior period presented.

BAW Ltd should therefore correct the error retrospectively. The opening balances for
accumulated depreciation and retained earnings should be restated for the earliest prior
period presented.

There is also no limitation on the retrospective restatement as indicated in IAS 8.43, since
the information to calculate the correct depreciation is available.

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FAQ:
What will the effect be on the current and deferred tax should SARS re-open a prior year
assessment relating to an error?

SCENARIO [Question 1-3] IAS 8

Canva SA Ltd ("Canva SA') manufactures modern canvases in different sizes, which is made
of cotton, along with polyvinyl chloride (PVC). Canva SA distribute these canvases to all
major retail stores in South Africa.

The profit before tax as reflected in the draft statement of profit or loss and other
comprehensive income of Canva SA for the financial years ended 31 December 20.19 and
31 December 20.18 respectively was as follows:

20.19 20.18
R R
Profit before tax 2 159 300 1 235 000

Additional information
The following items have not yet been accounted for in the above-mentioned draft
statement of profit or loss and other comprehensive income of Canva SA Ltd:

The board of directors decided on 31 December 20.19, after completing the draft statement
of profit or loss and other comprehensive income, to change the accounting policy with
respect to the inventory valuation from the first-in, first-out method to the weighted
average method in order to give a fairer presentation of the financial position and operating
results due to fluctuations in inventory prices.

Inventory is valued as follows using both methods:

20.17 20.18 20.19
R R R
First-in, first-out method 80 600 171 600 293 800
Weighted average method 87 100 217 620 342 550

The SA Revenue Service will not re-open the previous years' tax assessments as a result of
this new method of valuation of inventory, but the new policy will be accepted for tax
purposes from 20.19.

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1. During the current year, the accountant found a batch of sales invoices which was
not processed due to misfiling, with a sales value of R110 000 (excluding VAT)
relating to the financial year ended 31 December 20.18. The sales invoices were filed
in the order pending file instead of the sales invoice file. However, the cost of sales
associated with these invoices was taken into account in 20.18. The effect thereof is
considered material on the financial statements and the SA Revenue Service has
re-opened the 20.18 assessment as a result of this error.
2. The current tax rate of 28% has remained unchanged for the past five years.
3. Deferred tax is provided for on all temporary differences using the statement of
financial position approach.

REQUIRED:

QUESTION 1
Calculate the current tax expense for the year end 31 December 20.18 for Canva SA Ltd.

R376 600

QUESTION 2
Assume the deferred tax liability at 31 December 20.18 in the statement of financial position of
Canva SA Ltd were R11 066. Calculate the income tax expense for the year end 31 December 20.19
in the financial statements of Canva SA Ltd.

R605 368

QUESTION 3
Calculate the deferred tax asset or liability in terms of the information provided of Canva SA Ltd for
the year ended 31 December 20.19. Your calculation should be based on the SoFP method.
Zero

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SOLUTION

CHANGE IN ACCOUNTING POLICY

During the financial year, the company changed its accounting policy on the valuation of inventories from the first-
in, first-out method to the weighted average method. This change was necessary to give a fairer presentation of the
financial position and operating results due to fluctuations in inventory prices. This change in policy was accounted
for retrospectively and comparative amounts have been appropriately restated.

The effect of the change is as follows: 20.19 20.18 1/1/20.18

Decrease in cost of sales 2,730 39,520

Increase in taxation expense (764) (11,066)
Increase in profit 1,966 28,454

Increase in inventory 48,750 46,020 6,500

Increase in current tax due (13,650)
Increase in deferred tax liability (12,886) (1,820)
Increase in equity 35,100 33,134 4,680

Increase in retained earnings beginning of year 33,134 4,680

CALCULATION
Effect of the change in accounting policy 20.17 Difference 20.18 Difference 20.19
Inventory
New method 87,100 217,620 342,550
Old method (80,600) (171,600) (293,800)
Increase in profit due to increase in inventory 6,500 39,520 46,020 2,730 48,750
Tax effect (1,820) (11,066) (12,886) (764) (13,650)
4,680 28,454 33,134 1,966 35,100

PRIOR PERIOD ERROR

A batch of sales invoices relating to the financial year ended 31 December 20.18 was not
processed due to misfiling. The sales invoices were filed in the order-pending file instead of the
sales invoice file. The comparative figures have been appropriately restated. The effect of the
correction on the results of 20.18 is as follows:
20.18
Increase in revenue 110,000
Increase in current tax expense (90 000 x 28%) (30,800)
Increase in profit 79,200

Increase in accounts receivable 110,000

Increase in current tax due (90 000 x 28%) (30,800)
Increase in equity 79,200

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INCOME TAX EXPENSE The SA Revenue Service will not re-open the previous years' tax
assessments, therefore we need to add the total increase of R48
Current tax expense 20.19 20.18 750 in 20.19

Profit before tax (given) 2 159 300 1 235 000

Increase in profit before tax resulting from The effect thereof is considered material on the financial
increase in closing inventory 48 750 statements and the SA Revenue Service has re-opened the 20.18
assessment as a result of this error.
Correction of error 110 000
Taxable income 2 208 050 1 345 000
Current tax i n 20.19 i ncrea s e wi th R13 650 (R48 750 x 28%) of whi ch R11 066
ha s a l rea dy been provi ded for a s deferred tax i n 20.17 & 20.18 yea rs .
Current tax expense @28% 618 254 376 600 Q1 Deferred tax i n the P/L i s now credi ted (revers ed) to bri ng the tax expens e
i n the P/L i n l i ne wi th the profi t before tax.
Deferred tax TD movement (Cr to P/L) (12 886) 11 066 (Dr to P/L)
Income tax expense (P/L amount) Q2 605 368 387 666 20.17
DT in P/L is debited in 20.17 with R1 820, which resulted 6 500
in an opening retained earning sadjsutment in 20.18 of (1 820)
R6 500 - R1 820 = R4 680 (calc in tab 1)
Deferred tax CA TB TD DT 4 680
20.17 NEW OLD 20.18
Inventory 87 100 80 600 6 500 (1 820) DTL DT in P/L is debited in 20.18 with R11 066, which brought the total
1 820 DT expens e (Dr to P/L) provision for deferred tax in 20.18 to R12 886 [SFP].
20.18 NEW OLD 20.19
Inventory 217 620 171 600 46 020 (12 886) DTL In 20.19, the SA Revenue Services taxes the entity on the total
11 066 DT expens e (Dr to P/L) increase in the profit as part of the current tax because the
20.19 NEW NEW previous years' assessment have not been reopened.
Inventory 342 550 342 550 - - Q3
(12 886) DT expens e (Cr to P/L)

The SA Revenue Service will not re-open the previous years' tax assessments as If the SA Revenue Servi ce re-opened the previ ous yea rs ' tax
a result of this new method of valuation of inventory, but the new policy will be a s s es s ments , then the CA wi l l equa l the TB a nd there wi l l be
accepted for tax purposes from 20.19. NO deferred tax recogni s ed.

If the SA Revenue Servi ce does NOT a ccept the new i nventory va l ua tion method,
then the tax ba s e of the cl os i ng i nventory for 20.19 wi l l be the OLD methods
va l ue of R293 800, res ul ting i n a DEFERRED TAX to be crea ted i n terms of the
tempora ry di fference.

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What are the different disclosure requirements when I need to disclose a note relating to
an error, change in accounting policy or change in accounting estimate?

Retrospective Application

Is applying a new accounting policy to transactions, other events

and conditions as if that policy had always been applied

CHANGE IN ACCOUNTING POLICY

THEORY: IAS 8.22: Subject to paragraph 23 [impracticable], when a change in accounting policy is
applied retrospectively in accordance with paragraph 19(a) or (b), the entity shall adjust the opening
balance of each affected component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new accounting policy had
always been applied.

CHANGE IN ACCOUNTING POLICY

The company changed its accounting policy during the year in respect of the valuation of inventory
from the weighted average method to the first-in-first-out method. This change was affected as it will
result in a more relevant and reliable presentation of the value of inventory.

The opening balance of retained earnings at the beginning of the 20.20 financial year was adjusted
while the comparative amounts were restated accordingly.

The effect of the change in accounting policy on the results for 20.20 and 20.21 is as follows:
*Yearend: 31 August
Comparative
Adjust the opening balance
amounts were
of each affected component of equity
restated.
for the earliest prior period
presented

20.21 20.20 1 Sept 20.19

Decrease in cost of sales XXX XXX
Increase in income tax expense (XXX) (XXX)
Increase in profit XXX XXX

Increase in inventory XXX XXX XXX

Increase in deferred tax asset/ XXX (XXX) (XXX)
(Increase in deferred tax liability)
Increase in tax payable (XXX) - -
Increase in equity XXX XXX AA

Adjustment against retained earnings on 1 September 20.9 (IAS 8.29(d)) AA

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Retrospective Restatement

Correcting the recognition, measurement and disclosure of amounts of

elements of FS AS IF a prior period error had never occurred

PRIOR PERIOD ERROR

THEORY: IAS 8.42: Subject to par 43 [impracticable], an entity shall correct MATERIAL prior period
errors retrospectively in the first set of financial statements authorised for issue after their
discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred;
OR
(b) if the error occurred before the earliest prior period presented, restating the opening balances
of assets, liabilities and equity for the earliest prior period presented.

PRIOR PERIOD ERROR

Scenario: Error was identified in 20.21 financial period.

The error relates to the correction in respect of the VAT amount which was incorrectly included in
other expenses in 20.20 and not claimed as input VAT in 20.20.

The comparative amounts have been appropriately adjusted.

The effect of the correction of this error on the results of 20.20 is as follows:
*Yearend: 31 August
20.20 1 Sept 20.19
Decrease in other expenses XXX
Increase in income tax expense (XXX)
Increase in profit XXX

Increase in VAT input account XXX

Increase in tax payable (XXX)
Increase in equity XXX
Adjustment against retained earnings at 1 September 20.19 -
(IAS 8.49(c)) (see comment below)

The disclosure required in terms of IAS 8.49(c) in the note for the prior period error above is not
necessary as the error does not affect the opening balance of retained earnings (the error only
affects the financial year ended 31 August 20.20).

The disclosure required in terms of IAS 8.49(c) has been included in the note above as a reminder of
the disclosure required for prior period errors.

The change in accounting policy is calculated and the comparative amounts are
restated BEFORE the change in accounting estimate is recognised.

If there is a change in accounting policy, an error and change in estimate in a

scenario you will following the following steps:
STEPS:
1. Apply change in accounting policy
2. Update Comparative amounts restate due to error
3. Apply change in accounting estimate

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CHANGE IN AN ACCOUNTING ESTIMATE

THEORY:
The effect of a change in an accounting estimate, other than a change to which paragraph 37
applies, shall be recognised prospectively by including it in profit or loss IN:
Identify if this should
be included in the
(a) the period of the change, if the change affects that period only; CURRENT YEAR
OR
(b) the period of the change [CURRENT] and future periods, if the change affects both.

To the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount
of the related asset, liability or equity item in the period of the change.

Prospective recognition of the effect of a change in an accounting estimate means that the
change is applied to transactions, other events and conditions from the date of the change in
estimate.
*Yearend: 31 August

CHANGE IN AN ACCOUNTING ESTIMATE

20.21 20.20
NOTES FOR THE YEAR ENDED XXX

Profit before tax

The following items are included in profit before tax:
Income
- XXX XXX XXX
Expenses
- XXX XXX XXX

Included in XXX is a change in estimate regarding the XXXX. DETAILS OF THE CHANGE IN
ESTIMATE The effect of the change in estimate is a decrease/increase in profit of XXX AND
FUTURE EFFECT (IAS 8.39).

DIFFERENT CHANGE IN ESTIMATE SCENARIOS:

Year end: 31 August 20.21

- Useful life of asset was changed on 31 August 20.21 = use NEW useful life to calculate
depreciation for the year end 31 August 20.21 [CY].
- Useful life of asset was changed on 1 September 20.20 = use NEW useful life to calculate
depreciation for the year end 31 August 20.21.

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