Accounting Policies, Estimates, and Errors SECTION 10 Accounting Policies, Estimates, and Errors

#1 Question #1 True or False: Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

TRUE Changes in accounting estimates are adjustments to the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset that results from the assessment f the present status of, and expected future benefits and obligations associated with, assets and liabilities. Prior period errors are omissions from, and misstatements in the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information.

#2 True or False: If the IFRS for SMEs does not specifically address a transaction, other events or condition, an entity’s management shall refer to the most recent pronouncements of other standard-setting bodies.

FALSE Section 10.6 says: If the IFRS for SMEs does not specifically address a transaction, other events or condition, an entity’s management shall use its judgment in developing and applying an accounting policy subject to relevance and reliability.

#3 If the IFRS for SMEs does not specifically address a transaction, other event or condition, what is the most authoritative source in developing and applying an accounting policy?

#3 The requirement and guidance in the IFRS for SMEs dealing with similar and related issues The requirements and guidance in full IFRS dealing with similar and related issues The definition, recognition criteria and measurement of asset, liability, income and expense and Section 2 (Concepts and Pervasive Principles) Most recent pronouncement of other standard-setting bodies

A FOR SMEs: (descending) IFRS for SMEs dealing with similar and related issues Definitions, recognition, criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2-Concepts and Pervasive Principles The requirements and guidance in full IFRS dealing with similar and related issues FOR FULL IFRS:(descending) Full IFRS dealing with similar and related issues Definitions, recognition, criteria and measurement concepts for assets, liabilities, income and expenses from the Conceptual Framework Most recent pronouncements of other standard-setting bodies, other accounting literature and accepted industry practices to the extent that these do not conflict with the concepts in IFRS.

#4 True or False: The entity shall select and apply its accounting policies consistently for all similar transactions, other events and conditions.

FALSE Section 10.7 states an exception: “unless this IFRS specifically requires or permits categorization of items for which different policies may be appropriate.”

#5 True or False: An entity shall change an accounting policy only if it is required by changes to the IFRS.

FALSE Section 10.8 cites two instances: Is required by changes to the IFRS for SMEs Results in the F/S providing reliable aand more relevant info about the effects of transactions, other events or conditions on the entity’s B/S, I/S or C/F.

#6 True or False: The application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring is considered a change in accounting policy.

FALSE Section 10.9 says: The application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring is NOT a change in accounting policy.

#7 True or False: The application of a new accounting policy that did not occur previously or were not material is a change in accounting policy.

FALSE Section 10.9 says: The application of a new accounting policy that did not occur previously or were not material is NOT a change in accounting policy.

#8 True or False: A change to the cost model when a reliable measure of fair value is no longer available for an asset that the IFRS for SMEs would otherwise require or permit to be measured at fair value is NOT a change in accounting policy.

TRUE Section 10.9 says: A change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that this IFRS would otherwise require or permit to be measured at fair value is NOT a change in accounting policies.

#9 True or False: Changes in accounting policies should always be effected retrospectively.

FALSE Section 10.11 cites 3 instances: FOR CHANGES REQUIRED BY IFRS: according to transitional provisions of the amended IFRS for SMEs if an entity has elected to follow IAS 39 (FI recognition and Measurement), according to transitional provisions of the amended IFRS FOR VOLUNTARY CHANGES Retrospectively Section 10.12 says: “When it is impracticable,…., the entity shall apply the new acctg policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, WHICH MAY BE THE CURRENT PERIOD…”

#10 True or False: If the IFRS allows a choice of accounting treatment for a specified transaction or other event or condition and an entity changes its previous choice, it is not a change in accounting policy.

FALSE Section 10.10 says: If this IFRS allows a choice of accounting treatment (including the measurement basis) for a specified transaction or other event or condition and an entity changes its previous choice, that is a change in accounting policy.

#11 True or False: When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting policy.

FALSE Section 10.15 says: When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.” (PRUDENCE)

#12 True or False: The entity need not follow a requirement in the IFRS for SMEs if the effect of doing so would not be material.

TRUE If the IFRS for SMEs specifically addresses a transaction, other event or condition, an entity shall apply this IFRS. Exception: -If the effect of doing so would not be material

#13 True or False: An entity can only implement a change in accounting estimate if it will affect F/S line items in future periods

FALSE Section 10.16 cites two instances: during the period of change during the period of change AND FUTURE PERIODS, if the change affects both.

#14 Prior period errors include the effects of the following except: Mistakes in applying accounting policies Oversights of facts Fraud None of the above

D Section 10.20 says: Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretation of facts, and f

#15 Which of the following is not needed to be disclosed in a change of accounting policy?

#15 The nature of the change The amount of adjustment relating to periods before those presented, to the extent possible An explanation if it is impracticable to determine the amount to be disclosed None of the above

D SECTION 10 ACCOUNTING POLICIES, ESTIMATES and ERRORS Change in Acctg Policy Change in Acctg Estimate Prior Period Error Nature of the change Amount of the adjustment for each line item to the extent practicable Effect of the change on assets, liabilities, income and expense for the current period Amount of correction for each line item for each period presented Amount of the adjustment relating to periods before those presented, to the extent practicable Effect of change in one or more future periods, if practicable The amount of correction at the beginning o the earliest prior period presented, to the extent possible Explanation if it is not practicable to determine the amounts to be disclosed -- Explanation if it is not practicable to determine the amounts

Basic Financial Instruments SECTION 11 Basic Financial Instruments

#1 True or False: When accounting for financial instruments, the entity has the choice to use section 11 and 12 of the IFRS for SMEs in full or IAS 39 in full.

False The entity does have a choice of what accounting policy to use but if they decide to use IAS 39, they may do so only with regards to recognition and measurement. As per disclosures, the entity should still use section 11 and 12.

#2 The following are accounted for as basic financial instruments, except: a. A receivable recognized for long-term loans made to another entity. b. Cash purchase of another entity’s ordinary shares. c. Cash purchase of another entity’s convertible preference shares. d. None of the above.

C According to section 11.8 and 11.11, investments in convertible preference shares do not fall under the definition of basic financial instruments. This is under Section 12. Other examples include cash, demand deposits, A/R, A/P, N/R, N/P, L/R, L/P, B/P and investments in nonputtable and nonconvertible shares

#3 Which of the following is not a characteristic of a basic debt instrument? a. Its return could be fixed, variable or a mix of both as long as if the rate is variable, it is based on a quoted or observable rate b. It does not contain a contractual provision that could result in the holder losing principal in current or prior periods c. Its contractual provisions to prepay are contingent to future events d. It contains no conditional returns except its variable return or prepayments not contingent to future events.

C Aside from C, all are characteristics of a basic debt instrument. C is wrong because contractual provisions to prepay should not be contingent on future events.

#4 The following financial statements will be measured at the transaction price plus transaction costs, except: a. A receivable recognized for goods sold. b. A loan received from a bank. c. Receivable for item sold on a two-year interest free credit. d. Receivable from sale of goods in which is deferred beyond normal business terms.

D When payment is deferred beyond normal business transactions, it is considered as a financing transaction. Financing transactions can also be instruments financed at a non-market interest rate. In these cases, initial measurement is the present value of future payments discounted at the market rate of interest for a similar debt instrument.

#5 Which of the following is true? a. The amortized cost of a financial asset is net of the amount at which the financial asset is measured at initial recognition . b. Financial asset that have no stated interest rate are initially measured at an undiscounted amount. c. Effective interest rate method does not include allocation of the interest income or interest expense. d. None of the above.

A B is wrong because financial assets and liabilities that have no stated interest are measured at amortized cost if the instrument is noncurrent. The statement becomes true, however, for current assets and liabilities. C on the other hand is wrong because the method is precisely a method of allocating interest income and expense. As you know, amortized cost is computed as the measurement at initial recognition subtracted by loan repayments and impairment and added/subtracted by cumulative amortization.

#6 Which of these statements is true? a. All kinds of debt instruments, whether as a financial asset or liability, are measured at amortized cost. b. All investments in nonputtable and nonconvertible preference/ordinary shares held for trading are measured using FVTPL c. The firm has a choice to measure investments in debt as FVTPL, AFS or HTM according to the purpose of the firm. d. None of the above.

B Not all kinds of debt instruments are measured at amortized cost as current debt instruments are measured at its undiscounted carrying cost. Also, investments in debt could not be measured as FVTPL or AFS. Lastly investments in either debt or equity cannot be classified as AFS unless the entity adapts IAS 39 as its accounting policy. This is one of the two main differences between the IFRS for SMEs and the full IFRS.

#7 True or False. For an instrument measured at amortized cost, the impairment loss is the difference between the asset’s carrying amount and the present value of estimated cash flows discounted at the asset’s current effective interest rate.

False As we learned in 114, impairment is measured by the estimated cash flows discounted at the asset’s original effective interest rate.

#8 True or False. Reversal of an impairment loss shall result in carrying amount that exceeds what the carrying amount would have been had the impairment not previously been recognized.

False Again as we learned in 114, reversal of an impairment result should not exceed what the carrying amount would have been had the impairment not previously been recognized.

#9 For instruments measured at cost less impairment, impairment loss is the difference between the carrying amount and the a. current market value b. best estimated selling price c. present value of contingent cash flows discounted at the current market rate of return for a similar asset d. present value of estimated cash flows discounted at the current market rate of return for a similar asset

B In the full IFRS, instruments measured at cost less impairment, impairment loss is the difference between the carrying amount and the present value of estimated cash flows discounted at the current market rate of return for a similar asset. But for IFRS for SMEs, the only requirement is that impairment loss be the difference between the carrying amount and the best estimated selling price.

#10 True or False. If an entity revises its estimates of payments or receipts, the entity shall adjust the carrying amount of the financial asset or financial liability by discounting cash flows at the current market rate and recognize the adjustment as income or expense in profit or loss at the date or revision.

False Even if the asset is not impaired but the entity revises its estimates of payments or receipts, the original effective interest rate should still be used.

#11 The following cases warrant a derecognition of the financial asset, except: a. Contractual rights to cash flow are settled b. The entity transfers to another party only some of the risks and rewards of ownership but control for such was not transferred. c. Entity transfers substantially all of the risks and rewards of ownership. d. None of the above.

B As the entity still retains some of the risks and rewards of ownership, the entity should retain the asset as its own. Only when control of such asset to another party has been transferred and the other party has the practical and unilateral ability to sell the asset in its entirety to an unrelated 3rd party without needing to impose additional restrictions can the entity derecognize the asset but still recognize any separate rights and obligations retained or created in the transfer.

#12 An entity shall disclose the following for financial instrument transfers that does not qualify for derecognition, except: a. The nature of the risks and rewards of ownership to which the entity remains exposed. b. Nature of the assets. c. The carrying amounts of the assets and of any associated liabilities that the entity continues to recognize. d. None of the above

D All 3 must be disclosed.

#13 An entity is concerned that one of its customers will not be able to make all principal and interest payments due on a loan in a timely manner because the customer is experiencing financial difficulties.  The entity and the customer negotiate a restructuring of the loan.  The entity expects that the customer will be able to meet its obligations under the restructured terms.  In which of the following restructuring cases will the entity not recognize an impairment loss?

#13 a. Customer B will pay the full principal amount of the original loan five years after the original due date, but none of the interest due under the original terms. b. Customer B will pay the full principal amount of the original loan on the original due date but with interest at a lower interest rate than the interest rate inherent in the original loan. c. Customer B will pay the full principal amount of the original loan five years after the original due date and all interest accrued during the original loan term, but no interest for the extended term. d. Customer B will pay the full principal amount of the original loan five years after the original due date and all interest, including interest for both the original term of the loan and the extended term.

D An impairment loss should be recognised in cases (a)–(c) as the present value of the future principal and interest payments discounted at the loan’s original effective interest rate will be lower than the carrying amount of the loan.   In case (d), even though the timing of payments has changed, the lender will receive interest on interest, and the present value of the future principal and interest payments discounted at the loan’s original effective interest rate will equal the carrying amount of the loan.  Therefore, there is no impairment loss.

#14 An entity bought 50 non-puttable ordinary shares in a listed company on the market for cash of $500, and incurred $10 of broker transaction fees. The journal entry on initial recognition of the investment includes? Dr. Investment in Equity 510 Dr. Investment in Equity 500 Dr. Investment in Debt 510 Cr. Investment in Debt 500

B Dr Investment in equity instruments 500 Dr Transaction costs. 10 B Dr Investment in equity instruments 500 Dr Transaction costs 10 Cr  Cash 510 The entity initially recognises an investment in equity instruments at the price paid which is $500. For financial instruments that are measured at fair value through profit or loss after initial recognition, transaction costs are recognised as expenses when they are incurred.  In other words, transaction costs are not taken into account when determining the amount to recognized initially.

#15 On 15 December 20X1 an entity provided services to a customer and charged the customer $200 with payment due within 60 days.  At the entity’s financial year end (31 December 20X1) the customer has not yet paid the amount due. At what amount should the receivable be recognized on Dec 31? a. 0 b. 200 c. 180 d. 100

B The entity initially recognised a trade receivable at $200.  The trade receivable is a current asset and there is no hidden financing transaction.  Therefore, assuming the customer is expected to pay the full amount shortly after the year-end (and hence there is no impairment), on subsequent measurement at 31 December 20X1 the trade receivable would continue to be measured at the undiscounted amount of the cash expected to be received

SECTION 13 Inventories

#1 Inventories are assets Held for sale in the ordinary course of business In the process of production for sale In the form of materials or supplies to be consumed in the production process or in rendering of services All answers are correct

D Inventories are assets Held for sale in the ordinary course of business In the process of production for sale In the form of materials or supplies to be consumed in the production process or in rendering of services

#2 True or False: An entity shall measure inventories at the lower of cost and estimated selling price.

False An entity shall measure inventories at the lower of cost and estimated selling price less costs to complete and sell. The difference of this with full IFRS is that IFRS for SMEs does not include extensive guidance on net realisable value.

#3 The cost of inventory shall comprise all of the following costs, except Cost of purchase Cost of conversion Selling costs Other costs incurred in bringing the inventory to its present location and condition

C Selling costs are recognized as expenses in the period in which they are incurred. Other items that are excluded from the cost of inventories and recognized as expenses are: 1. abnormal amounts of wasted materials, labour or other production costs 2. storage costs unless those costs are necessary during the production process before a further production stage Also, Borrowing costs are recognized as an expense, while in full IFRS, borrowing costs are included in the cost of inventories under limited circumstances as identified by IAS 23.

#4 The cost of purchase of inventory does not include Trade discounts, rebates and other similar items Purchase price Import duties and taxes Freight, handling and other costs directly attributable to the acquisition of goods

A Purchase price , import duties and taxes, and freight costs are included in the costs of purchase of inventory. While trade discounts, rebates and other similar items are deducted from the costs of purchase.

#5 The costs of conversion of inventory include all of the following except Costs directly related to the units of production, such as direct labor Systematic allocation of fixed production overhead Systematic allocation of variable production overhead Systematic allocation of administrative overhead

D The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Administrative overheads that do not contribute to bringing the inventories to their present location and condition are recognized as expense

#6 Fixed production overheads include all of the following except Indirect materials and indirect labor Depreciation of factory building Maintenance of factory equipment Cost of factory management and administration

A Indirect materials and indirect labor are more of variable costs

#7 The allocation of fixed factory overhead to the cost of conversion is based on Normal capacity of the production facilities Actual use of the production facilities Either the normal capacity or actual use of the production facilities Relative sales value method

A An entity shall allocate fixed production overheads to the costs of conversion on the basis of the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity.

#8 This costing method is appropriate for inventories that are segregated for a specific project and inventories that are not ordinarily interchangeable Specific identification Standard cost Relative sales price Net realizable value

A An entity shall measure the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects by using specific identification of their individual costs.

#9 The costs of inventory of a service provider include all of the following except Labor and other charged against costs of personnel directly engaged in providing the service Profit margin factored into the price charged against the customer by the service Compensation of supervisor personnel directly engaged in providing the service Attributable overhead incurred in providing the service

B Costs of inventory of service provider consists primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred. Also, the cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers.

#10 True or False: An entity is required to assess at the end of each reporting period whether any inventories are impaired.

True An entity is required to assess at the end of each reporting period whether any inventories are impaired, ie the carrying amount is not fully recoverable. In such case the entity needs to recognise an impairment loss.

#11 An entity shall disclose the following regarding inventories except the amount of inventories recognised as an expense during the period. total fair value of inventories at the end of reporting period total carrying amount of inventories pledged as security for liabilities. All of the above should be disclosed

B An entity shall disclose the following regarding inventorie 1. the accounting policies adopted in measuring inventories, including the cost formula used. 2. the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity. 3. the amount of inventories recognised as an expense during the period. 4. impairment losses recognised or reversed in profit or loss in accordance with Section 27. 5. total carrying amount of inventories pledged as security for liabilities.