1. Topic 11: Statement of Comprehensive Income & Changes in Equity
Financial Accounting BFA201

2. Readings and references
Deegan Chapter 16
AASB 101 Presentation of Financial Statements
AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors

3. Learning Objectives To understand:
how profit or loss & total comprehensive income are calculated and disclosed in the financial statements of a reporting entity
how to apply AASB 101 to the Statement of Comprehensive Income & the Statement of Changes in Equity
how to apply AASB account for and disclose prior period errors and changes in accounting policy and changes in accounting estimates
Appreciate that the determination of the profits and total comprehensive income for a given period is heavily dependent upon both professional judgment and on the particular accounting model that has been adopted
Understand that an entity is required to produce both a statement of comprehensive income (which replaces the former income statement) and a statement of changes in equity (as well as a statement of financial position and statement of cash flows).

4. Statement of Comprehensive Income

5. Statement of Comprehensive Income
The statement of comprehensive income provides information regarding the financial performance of the entity for the reporting period
Income, expenses and other comprehensive income (e.g. movement in the revaluation surplus) are summarised in the statement of comprehensive income.

6. Measurement of profit Profit & Loss INCOME Revenue Expenses Gains
Income Statement
Income (AASB Framework): increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants
Expenses (AASB Framework): decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants
Also AASB Framework recognition criteria: it must be probable that any future economic benefit will flow to or from the entity; and the item must have a cost or value that can be measured reliably
Determination of income (revenues and gains) and expenses depends on the measurement models adopted currently we have a ‘mixed approach’, as various valuation approaches are used. Often disagreement about how certain expenses should be measured e.g. options provided to managers. Without any specific rules about a particular type of expense, different entities will record different expenses, with implications for profit. Where professional judgment is used, an entity should disclose assumptions made and the basis of those assumptions. Different accountants might determine different levels of profit or loss or total comprehensive income, but the various calculation could still be true and fair if they provide all relevant information and comply with applicable accounting standards
All discretion (and therefore, scope for professional judgement) relating to the expensing of some items has been removed e.g. all research expenditure is to be written off as incurred. The problem is that readers of financial statements cannot differentiate between entities. Timing of recognition of income or expenses can be important to managers

7. Measurement of profit Income Expense
AASB Framework recognition criteria
Determination of income and expenses may depend on the measurement model adopted
Professional judgement and disclosure of assumptions made in the exercise of professional judgement
Income (AASB Framework): increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity other than those relating to contributions from equity participants
Expenses (AASB Framework): decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants
Also AASB Framework recognition criteria: it must be probable that any future economic benefit will flow to or from the entity; and the item must have a cost or value that can be measured reliably
Determination of income (revenues and gains) and expenses depends on the measurement models adopted currently we have a ‘mixed approach’, as various valuation approaches are used. Often disagreement about how certain expenses should be measured e.g. options provided to managers. Without any specific rules about a particular type of expense, different entities will record different expenses, with implications for profit. Where professional judgment is used, an entity should disclose assumptions made and the basis of those assumptions. Different accountants might determine different levels of profit or loss or total comprehensive income, but the various calculation could still be true and fair if they provide all relevant information and comply with applicable accounting standards
All discretion (and therefore, scope for professional judgement) relating to the expensing of some items has been removed e.g. all research expenditure is to be written off as incurred. The problem is that readers of financial statements cannot differentiate between entities. Timing of recognition of income or expenses can be important to managers

8. Measurement of profit Recognising income and expenses Examples:
Revaluations
Prior period errors
Profit and Loss
Equity
Certain gains and certain expenses will not be taken into consideration in calculating a reporting entity’s ‘profit or loss’.
There are a number of accounting standards that specifically stipulate that certain expenses (such as those relating to the correction of prior period accounting errors) and certain gains (such as those relating to asset revaluations) are not to be included in the ‘profit or loss’ of the reporting period. So ‘profit or loss’ of an entity does not include all expenses and income recognised within the financial period.
As we will see within this lecture, a more comprehensive measure of financial performance is provided by a measure known as ‘total comprehensive income’ – it will include various gains and expenses that are not incorporated within ‘profit or loss’.
‘Total comprehensive income’—which is a relatively recently developed concept—includes both ‘profit or loss’ and ‘other items of comprehensive income’. We will define what we mean by ‘other items of comprehensive income’ later in this lecture.
Within a financial report, profit or loss is disclosed in the statement of comprehensive income (which replaces the ‘income statement’).
The format for the statement of comprehensive income is prescribed in AASB 101 Presentation of Financial Statements
AASB 101 requires entities to recognise all items of income and expense in a period in profit or loss unless a particular accounting standard requires or permits otherwise. Specifically: An entity shall recognise all items of income and expense in a period in profit or loss unless an Australian Accounting Standard requires or permits otherwise.
Some expenses and revenues are adjusted directly against equity e.g. prior period errors (AASB 108)

9. Measurement of profit
Certain gains and certain expenses will not be taken into consideration in calculating a reporting entity’s ‘profit or loss’.
There are a number of accounting standards that specifically stipulate that certain expenses (such as those relating to the correction of prior period accounting errors) and certain gains (such as those relating to asset revaluations) are not to be included in the ‘profit or loss’ of the reporting period.
So ‘profit or loss’ of an entity does not include all expenses and income recognised within the financial period.

10. Measurement of profit
A more comprehensive measure of financial performance is provided by a measure known as ‘total comprehensive income’ – it will include various gains and expenses that are not incorporated within ‘profit or loss’.
‘Total comprehensive income’—which is a relatively recently developed concept—includes both ‘profit or loss’ and ‘other items of comprehensive income’.
Within a financial report, profit or loss is disclosed in the statement of comprehensive income (which replaces the ‘income statement’).

11. Measurement of profit
The format for the statement of comprehensive income is prescribed in AASB 101 Presentation of Financial Statements
AASB 101 requires entities to recognise all items of income and expense in a period in profit or loss unless a particular accounting standard requires or permits otherwise.
Some expenses and revenues are adjusted directly against equity e.g. prior period errors (AASB 108)

12. Total Comprehensive Income
Measurement of profit
Profit and Loss
Expenses
Revenue
Gains
Total Comprehensive Income OR
Other comprehensive Income
Total comprehensive income has two components: Profit or loss & Other comprehensive income
The traditional profit measurement is no longer appropriate due to: Changes in the categorisation and labelling of financial statement elements; Reduced emphasis on matching.
Specific accounting standards require or permit components of ‘other comprehensive income’ that meet the AASB Framework’s definition of income or expense to be excluded from the calculation of ‘profit or loss’.
Nevertheless, they would be reflected in a measure of financial performance now referred to as ‘total comprehensive income’.
As the name would suggest, ‘total comprehensive income’, comprised of ‘profit or loss’ plus other gains and losses that are recorded directly in various equity accounts, is presented in a ‘statement of comprehensive income’.
Comprehensive income approach:
Profit includes all income and expenses as defined in the Framework.
It includes all changes in net assets (equity), other than transactions with owners.
The contents of the income statement are determined conceptually, rather than arbitrarily.
No income or expense items bypass the income statement.
The assessment of current performance and prediction of future performance may be more difficult.

13. Measurement of profit
Total comprehensive income has two components: Profit or loss and Other comprehensive income
The traditional profit measurement is no longer appropriate due to:
Changes in the categorisation and labelling of financial statement elements;
Reduced emphasis on matching.

14. Measurement of profit
Specific accounting standards require or permit components of ‘other comprehensive income’ that meet the AASB Framework’s definition of income or expense to be excluded from the calculation of ‘profit or loss’.
Nevertheless, they would be reflected in a measure of financial performance now referred to as ‘total comprehensive income’.
As the name would suggest, ‘total comprehensive income’ is comprised of ‘profit or loss’ plus other gains and losses that are recorded directly in various equity accounts, and is presented in a ‘statement of comprehensive income’.

15. Measurement of profit Comprehensive income approach:
Profit includes all income and expenses as defined in the Framework.
It includes all changes in net assets (equity), other than transactions with owners.
The contents of the income statement are determined conceptually, rather than arbitrarily.
No income or expense items bypass the income statement.
The assessment of current performance and prediction of future performance may be more difficult.

16. Statement of Comprehensive Income
Income and expense items must be presented as:
one Statement of Comprehensive Income OR two statements +
Statement of Comprehensive Income
Net Income
Foreign currency translation adj.
Unrealised holding gains/losses
Changes in the revaluation surplus
Other non-owner changes in equity
Less tax related to OCI
= Comprehensive Income
Income statement
Revenues
Expenses
Other gains & losses
= Income before tax
Income tax expense
Net Income
2 statements – 1 showing the components of profit and loss & second statement beginning with profit/loss and displaying the components of other comprehensive income. Includes items normally excluded from the P&L i.e. the all inclusive earnings
However, reporting entities have a choice when presenting information about their financial performance. They can either present a statement of comprehensive income which provides information about the entity’s profit or loss plus ‘other items of comprehensive income’, or they can separately provide both an income statement and a statement of comprehensive income.
AASB 101 para 7 defines ‘other comprehensive income’ as follows:
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards.

17. Statement of Comprehensive Income
Reporting entities have a choice when presenting information about their financial performance.
They can either present a statement of comprehensive income which provides information about the entity’s profit or loss plus ‘other items of comprehensive income’, or they can separately provide both an income statement and a statement of comprehensive income.
AASB 101 para 7 defines ‘other comprehensive income’ as follows:
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards.

18. Statement of Comprehensive Income: AASB 101
Para 82: As a minimum, the statement of comprehensive income must include amounts for:
Revenue
Finance costs
Share of profits of associates and joint ventures
Tax expense
Profit or loss on discontinued operations
Each component of other comprehensive income classified by nature
Income tax related to OCI (para 90)
Includes all items of income and expense unless an Accounting Standard requires otherwise
On face of the statement of comprehensive income - minimum disclosure requirements (para 82):
revenue
finance costs
share of profit or loss of associates and joint ventures
tax expense
post-tax profit or loss of discontinued operations

19. Statement of Comprehensive Income –
Presented as a single statement
Hence if we were to look only at profit or loss recorded in the statement of comprehensive income (or in a separate income statement) we would not get a full picture of all the expenses and income (as defined in the AASB Framework) that were recognised in the current period. A joint consideration of the period’s profit or loss, plus a consideration of items impacting ‘other comprehensive income’ allows us to more fully appreciate all the income and expenses of a financial period.
AASB 101 para 81B states that an entity should also disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period:
(a) profit or loss for the period attributable to:
(i) non-controlling interest, and
(ii) owners of the parent
(b) comprehensive income for the period attributable to:
But only need to note that now – you will be learning more about parent entities, controlling and non-controlling interest in BFA301

20. Statement of Comprehensive Income: AASB 101
If we were to look only at profit or loss recorded in the statement of comprehensive income (or in a separate income statement) we would not get a full picture of all the expenses and income (as defined in the AASB Framework) that were recognised in the current period.
A joint consideration of the period’s profit or loss, plus a consideration of items impacting ‘other comprehensive income’ allows us to more fully appreciate all the income and expenses of a financial period.

21. Income Expenses Gains Nature Function Presentation AASB 101 Material
Disclose nature & amount separately
Income
Revenue
(from ordinary activities)
Gains
Expenses
Nature
Function
Depreciation
Raw materials
Employee benefits
Cost of Sales
Cost of distribution
Cost of admin.
para 97 Material items & 99 – Expense analysis: Entities may choose a presentation format based on either: their nature or function
Entities must select the most relevant and reliable format
Classification by nature might involve expense categories such as: Depreciation; Purchases of raw materials; and Employee benefits
Classification by function might involve expense categories such as: Cost of sales; Cost of distribution; and Cost of administration
Items are NOT to be presented as Extraordinary items
Recognition of expenses: conventional practice has been to recognise expenses when the probability is less than 0.5, e.g. doubtful debts expense. Estimation is sometimes necessary when measuring expenses, e.g. depreciation.
Measurement of expenses –
Where expenses are paid by cash, the amount of the expense is the amount of cash paid.
Where expenses are an outflow of resources other than cash, the amount of the expense is the book value of the outflow.

22. Presentation AASB 101
Paragraph 97 where items of income or expense are material, an entity shall disclose their nature and amount separately
Paragraph 99 – Expense analysis: Entities may choose a presentation format based on either: their nature or function
Entities must select the most relevant and reliable format
Classification by nature might involve expense categories such as: Depreciation; Purchases of raw materials; and Employee benefits
Classification by function might involve expense categories such as: Cost of sales; Cost of distribution; and Cost of administration
Items are NOT to be presented as Extraordinary items

23. Statement of Comprehensive Income
1st form of analysis: nature of expense (para. 102)
Revenue xxxx xxxx
Other income xxxx xxxx
Changes in inventories of finished goods
and work in progress (xxxx) (xxxx)
Raw material and consumables used (xxxx) (xxxx)
Employee benefits expense (xxxx) (xxxx)
Depreciation and amortisation expense (xxxx) (xxxx)
Impairment of property, plant and equipment (xxxx) (xxxx)
Other expenses (xxxx) (xxxx)
Finance costs (xxxx) (xxxx)
Share of profit of associates xxxx xxxx
Profit before tax xxxx xxxx
Income tax expense (xxxx) (xxxx)
Profit for the year xxxx xxxxx
Other comprehensive income
Gains on property revaluation xxxx xxxx
Total comprehensive income for the year xxxx xxxx
Includes all items of income and expense unless an Accounting Standard requires otherwise
AASB101 The terms nature and function are not defined but para 102 & 103 discuss and illustrate examples of both options
In explaining the alternative presentation formats, AASB 101, paragraphs 102 and 103, state:
102. The first form of analysis is the ‘nature of expense’ method. An entity aggregates expenses within profit or loss according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs), and does not reallocate them among various functions within the entity. This method may be simple to apply because no allocations of expenses to functional classifications are necessary.

24. 2nd form of analysis: Function of expense/ ‘COS’ Method Para 103
Revenue xxx xxx
Cost of sales (xxx) (xxx)
Gross profit xxx xxx
Other income xxx xxx
Distribution costs (xxx) (xxx)
Administrative expenses (xxx) (xxx)
Finance costs (xxx) (xxx)
Profit before tax xxx xxx
Income tax expense (xxx) (xxx)
Profit for the year from continuing operations xxx xxx
Loss for the year from discontinued operations (xxx) (xxx)
Profit for the year xxx xxx
Other comprehensive income
Exchange differences on translating foreign operations xxx xxx
Available-for-sale financial assets (xxx) xxx
Cash flow hedges xxx xxx
Gains on property revaluation xxx xxx
Income tax relating to components of other comprehensive income xxx (xxx)
Other comprehensive income for the year, net of tax (xxx) xxx
Total comprehensive income for the year xxx xxx
103. The second form of analysis is the ‘function of expense’ or ‘cost of sales’ method and classifies expenses according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. At a minimum, an entity discloses its cost of sales under this method separately from other expenses. This method can provide more relevant information to users than the classification of expenses by nature, but allocating costs to functions may require arbitrary allocations and involve considerable judgment.

25. Presentation AASB 101
Recognition of expenses: conventional practice has been to recognise expenses when the probability is less than 0.5, e.g. doubtful debts expense.
Estimation is sometimes necessary when measuring expenses, e.g. depreciation.
Measurement of expenses –
Where expenses are paid by cash, the amount of the expense is the amount of cash paid.
Where expenses are an outflow of resources other than cash, the amount of the expense is the book value of the outflow.

26. Gross amount (before tax effects)
Tax on OCI
Income tax related to each component of ‘Other Comprehensive Income’ (OCI) must be shown as either: OR
List aggregate amount NOTES
of tax relating to OCI on to financial
Comprehensive Income statements
Statement
Gross amount (before tax effects)
Net:
(after tax effects)
As already indicated, ‘other comprehensive income’ is added to ‘profit for the year’ to give ‘total comprehensive income for the year’.
AASB 101 requires entities to disclose the amount of income tax relating to each component of ‘other comprehensive income’, either in the statement of comprehensive income, or in the notes to the financial statements.
Entities are permitted to present the components of ‘other comprehensive income’ either before tax effects (gross presentation) or after their related tax effects (net presentation).
This is confirmed by AASB 101, paragraph 91, which states:
An entity may present components of other comprehensive income either:
(a) net of related tax effects; or
(b) before related tax effects with one amount shown for the aggregate amount of income tax relating to those components.

27. Tax on OCI
‘Other comprehensive income’ is added to ‘profit for the year’ to give ‘total comprehensive income for the year’.
AASB 101 requires entities to disclose the amount of income tax relating to each component of ‘other comprehensive income’, either in the statement of comprehensive income, or in the notes to the financial statements.
Entities are permitted to present the components of ‘other comprehensive income’ either before tax effects (gross presentation) or after their related tax effects (net presentation).
This is confirmed by AASB 101, paragraph 91, which states:
An entity may present components of other comprehensive income either:
(a) net of related tax effects; or
(b) before related tax effects with one amount shown for the aggregate amount of income tax relating to those components.

28. Lecture Case Study – part 1
Refer to handout Complete the Statement of Comprehensive Income for Wattle Ltd using function of expense method.

30. Note 1: Sales Revenue:
Sales - $ less sales returns $25,000
Note 2: COGS:
COGS - $942,800 plus freight inward $6,000
Note 3: Other income:
Services revenue
270,000
Proceeds on sale of machinery
54,000
Carrying amount of machiney sold
-50,000
4,000
274,000
Note 4: Selling Expenses
Freight outwards
7,000
Advertising expense
10,000
Sales staff salaries
200,000
Sales staff vehicle expenses
16,000
Telephone expense
12,500
Depreciation of sales staff motor vehicles
30,000
Total Selling Expenses
275,500

31. Note 5: Administrative expenses
Administrative staff salaries expense
193,000
Depreciation - office furniture
12,000
Total Administrative Expenses
205,000
Note 6: Other Expenses
Rent expense
16,500
Rates expense
15,000
Insurance expense
20,000
Depreciation of machinery
18,000
Depreciation - buildings
25,000
Total Other Expenses
94,500
Note 7: Borrowing costs - Interest expense
1,200
Note 8: Revaluation of property
Building at cost
500000
Less accumulated depreciation
Carrying amount
375000
Fair Value as at 30/6/11
420000
Revaluation increment
45000

32. Changes in accounting estimates AASB 108
Para. 32 – estimates used e.g. bad debts, fair value of financial assets, useful lives of depreciable assets, warranty obligations (does not undermine reliability para. 33)
Para. 5 – changes in estimates arises from new information or new developments so are not correction of errors (and not change in accounting policy para. 35)

33. Changes in accounting estimates – recording
Para. 34 recognised prospectively by including in profit or loss in:
Period of the change, if the change affects that period only (eg prov for bad debts); or
The period of the change & future periods (eg change in useful life of depreciable asset)
If also affects assets and liabilities then need to adjust carrying amount in the period of the change (para. 37)

34. Lecture Example 1
30 June 2013, Topsy Ltd on further information decided to revise the useful life of machinery (purchased for $400,000 on 1 July 2010, depreciated on straight-line basis with no residual) from 8 years to 5 years. No depreciation recorded for current period.
Prepare journal entry to account for change in accounting estimate
Prepare appropriate supporting note as change had a material effect.

35. Solution Dr Depreciation 100,000 Cr Acc Deprec – machinery 100,000
Supporting note – change in accounting estimate:
As a result of the revision during the year of the est. life of the machinery from eight to five years, the depreciation charge will increase by $50,000 for the following three years.
400,000/8 = 50,000 p.a. Carrying value 30 June 2013 = 300,000 With life of 5 years, only has 3 years to go.
300,000/3 = 100,000 p. a.

36. Statement of Changes in Equity

37. Statement of Changes in Equity
Reconciles opening and closing equity
Provides details of each equity account:
Share capital
Retained profit
Revaluation surplus
Lists how each component is impacted by total comprehensive income
Eg. AASB108 errors or revaluation
Lists transactions with owners
Comparative information required
In addition to having to present a statement of financial position, a statement of comprehensive income, a statement of cash flows and supporting notes to its financial statements, an entity is also required to produce a statement of changes in equity.
The role of the statement of changes in equity is to provide a reconciliation of opening and closing equity, and also to provide details of the various equity accounts that are impacted by the period’s total comprehensive income.
It also provides information about the effects of transactions with owners in their capacity as owners (distributions and capital contributions).

38. Statement of Changes in Equity
AASB 101 para. 106 requires the preparation of a Statement of Changes in Equity
A statement of changes in equity shows:
Total comprehensive income for the period
For each equity component, effects of changes in accounting policies and correction of errors
For each component of equity, a reconciliation between beginning & end of period; separately disclosing changes from:
profit or loss;
other comprehensive income &
transactions with owners (contributions; distributions & ownership changes)
Discloses information about direct adjustments to equity (para 106):
Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interest;
Each component of equity subject to retrospective restatement as per AASB108
Owners changes in equity i.e. Amounts of capital transactions with equity holders (eg. new issues of shares, buybacks, dividends)
Reconciliation between carrying amount of each class of contributed equity; reserves and retained earnings at beginning and end with changes

39. Lecture Example 2: Statement of Changes in Equity preparation
The shareholders’ equity section of the balance sheet of Newton Ltd at 30 June 2010 was as follows:
2010
2009
Share capital
200,000
160,000
General reserve
50,000
40,000
Revaluation surplus
74,000
60,000
Retained earnings
170,000
494,000
420,000
Additional information
Newton Ltd issued shares at $2.50 each on 31 May 2010 for cash.
A transfer of $ was made from retained earnings to the general reserve
Net profit for the year was $
Dividends for the year comprised: interim dividend $50 000; final dividend provided $
Land was revalued to current fair value, resulting in the recognition of a gross revaluation increment of $ and a deferred tax liability of $6 000.
Prepare the statement of changes in equity of Newton Ltd for the year ended 30 June 2010 in accordance with AASB 101.

40. Statement of Changes in Equity
Solution
Newton Ltd
Statement of Changes in Equity
for the year ended 30 June 2010
Share capital
General reserve
Revaluation surplus
Retained earnings
Total equity
Balance at 1 July 2009
160,000
40,000
60,000
420,000
Changes in Equity for 2010
Total comprehensive income for the year
(net of tax)
14,000
130,000
144,000
Distributions to shareholders
(110,000)
Transfer to general reserve
10,000
(10,000)
Issue of share capital
Balance at 30 June 2010
200,000
50,000
74,000
170,000
494,000
There are a number of alternative formats for the statement of changes in equity:
This solution is set out in a columnar format.
As long as all the information in para 106 is on the face of the statement how it is set out is not an issue.

41. Lecture Case Study – part 2
Refer to handout Complete the Statement of Changes in Equity for Wattle Ltd.

42. Lecture Case Study - solution
WATTLE LTD
Statement of Changes in Equity
for the year ended 30 June 2011
Share capital
General reserve
Revaluation Surplus
Retained earnings
Total equity
Balance at 1 July 2010
887,000
5,000
80,000
140,000
1,112,000
Changes in Equity for 2011
Total comprehensive income for the year
31,500
181,300
212,800
Dividend declared - ordinary
(80,000)
Dividend declared - preference
(40,000)
Transfer to general reserve
10,000
(10,000)
Balance at 30 June 2011
15,000
111,500
191,300
1,204,800
1 July 2010 retained earnings not given: you need to work backwards from information given:
Trial Balance at 30/6/11 = Retained profits (after divs and reserve trf) =10,000 (balance) + ADD BACK 40,000 (Pref. divs) + 80,000 (ord. divs) + 10,000 (reserve transfer) = 140,000

43. Prior period errors AASB 108
Para. 5 prior period errors: omissions or misstatements in financial statements for prior periods arising from misuse of reliable information available at the time and could have been obtained and used (eg math mistakes, mistakes in applying policies, oversights, fraud).

44. Prior period errors - recording
Correction is excluded from profit or loss of the period in which it is discovered.
Adjust opening balance of retained earnings and restate comparative information.
Change in accounting estimates are not corrections of errors.

45. Lecture Example 3
During 2013 Mayhem Ltd discovered that payment to a supplier of $4,000 had been omitted in the 2012 financial statements. Tax rate is 30%. The following information has been supplied before incorporation of the error. Correct this in accordance with the requirements of AASB 108.

46. Mayhem Limited Abridged Statement of Comprehensive Income for the year ended 30 June 2013
2012
Profit before tax
28,500
35,400
Income tax exp
8,550
10,620
Profit for the year
19,950
24,780
If students are just provided with profit before tax for each year they should be able to calculate the rest.

47. Statement of Changes in Equity
Mayhem Limited
Statement of Changes in Equity
for the year ended 30 June 2013
Share capital
Retained earnings
Total
Balance at 30 June 2011
6,000
9,000
15,000
Profit for the year ending
30 June 2012 –
24,780
Distributions
      –
(3,000)
Balance at 30 June 2012
30,780
36,780
30 June 2013
19,950
       –
Balance at 30 June 2013
16,950
22,950

48. Solution Mayhem Limited Abridged Statement of Comprehensive Income for the year ended 30 June 2013
2012
Profit before tax
28,500
31,400
Income tax exp
8,550
9,420
Profit for the year
19,950
21,980

49. Statement of changes in equity
Solution
Mayhem Limited
Statement of changes in equity
for the year ended 30 June 2013
Share capital
Retained earnings
Total
Balance at 30 June 2011
6,000
9,000
15,000
Profit for the year as restated –
21,980
Distributions
      –
(3,000)
Balance at 30 June 2012
27,980
33,980
Profit for the year ending
30 June 2013
19,950
       –
Balance at 30 June 2013
16,950
22,950
BFA201_13

50. Solution cont.
Notes to the financial statements Note 2 Prior period error An amount due to a supplier was omitted during preparation of 2012 financial statements. The 2013 figures have been restated to take into account the omission. The effect of the restatement on those financial statements is summarised below. There is no effect on 2013 results.

51. Solution cont.
Effect on 2012 Increase in expenses (4,000) Decrease in income tax expense 1,200 Decrease in profit (2,800) Increase in accounts payable (4,000) Decrease in tax payable 1,200 Decrease in equity (2,800)

52. Example: Statement of Changes in Equity (with changes in accounting policy)
Cash Re-
Share Retained flow valuation
Capital earnings hedges surplus Total
($000) ($000) ($000) ($000) ($000)
Balance at 1/01/2011 xxx xxx xxx – xxx
Changes in
accounting policy – xxx – – xxx
Restated balance xxx xxx xxx – xxx
Changes in equity
for 2011
Dividends – (xxx) – – (xxx)
Total comprehensive
Income for the year – xxx (xxx) xxx xxx
Balance at
31 December xxx xxx (xxx) xxx xxx
for 2012
Issue of share capital xxx – – – xxx
income for the year – xxx (xxx) xxx xxx
Transfer to retained
earnings – xxx – (xxx) –
31 December xxx xxx (xxx) xxx xxx
When a change to accounting policy is made retrospectively, AASB 108 para. 22 requires adjustment to 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 has always been applied. If this is impractical then can start from current period, adjusting opening balances of each affected component of equity for that period.

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