SOLUTION MFRS108

1) Name the 3 specific areas prescribes in MFRS108.

1) Changes in accounting polices
2) Changes in accounting estimates
3) Errors

2) An accounting policy are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
An accounting estimate is an estimation used in the application of accounting policies.

3) Examples of changes in accounting estimates:

1. Useful life of plant and equipment for depreciation purposes;
2. Residual value of plant and equipment;
3. Useful life of intangible assets, including whether the assets have an indefinite life
or a finite life;
4)
i. True
ii. True
iii. True
iv. True
v. True

5) Retrospective application means applying a new accounting policy as if that policy had
always been applied. When an entity applies the change retrospectively the entity
must 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 must be presented as if the new accounting policy had always been applied.

Prospective application means:

a) applying the new accounting estimate to transactions or events occurring after
the date the estimate is changed; and
b) recognising the effect of the change in the current and future periods affected by
the change but not recognising the effect in comparative information presented
for any earlier period.
6)
i. retrospective
ii. as required by the transitional provisions of that Standard; if not specified then
retrospective
iii. prospective
iv. the amount is immaterial and so may be ignored or corrected in the current year.
v. retrospective; retrospective application is required unless impracticable to do so

7) (Check with Q.8 Why not 10 -6)

i.
 In January 2011, there is a change of estimate occurred.
 The change in the useful life from 10 years to 6 years is a change of estimate.
 The adjustment should be applied prospectively in the period of change (current year
2011) and future periods (if the change affects future year)

 Adjustment in year 2011- changes in estimates

Dr Depreciation 10,100
Cr Accumulated depreciation 10,100
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 SOLUTION MFRS108

Carrying amount 1 January 2011 40,400

Current year depreciation [2011] [10,100]
Carrying amount 31 December 2011 30,300

Calculation:
Initial cost as at 1 January 2009 50,000
Accumulated depreciation
2009 – [50,000-2,000]/10yrs - 4,800
2010 - - 4,800 9,600
Carrying amount 31 December 2010 40,400

Depreciation for year ended 31 December 2011

= 40,400/[6-2] yrs 10,100

ii.
 In January 2011, there is a change of estimate occurred.
 Here, there is a change of method of depreciation. Although there is a change of
depreciation policy from straight line method to reducing balance method it is
accounted as a change of estimate.
 The retained earnings should be adjusted prospectively in the period of change
[current year2011] and future periods[if the change affects future years]

 Journal entries for year 2011

Dr Depreciation 912,500
Cr Accumulated depreciation 912,500

Carrying amount 1 January 2011 3,650,000

Current year depreciation 2011 912,500
Carrying amount 31 December 2011 2,737,500

Depreciation 2011 [3,650,000 x 0.25] 912,500

Calculation:
Initial cost 1 January 2008 5,000,000
Accumulated depreciation:
2008 [5,000,000- 500,000]/10 yrs 450,000
2009 450,000
2010 450,000 1,350,000
Carrying amount 31 December 2010 3,650,000

iii.
 If error discovered in year 2010, the current period error should be encounted as a
year end adjustment.
 If error discovered in year 2011, the prior period error should be encounted
retrospectively and the error must be adjusted to the opening balance of retained
earnings.

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 SOLUTION MFRS108

 Error discovered in 2010: Journal entry to correct the current period error
Dr Account payable 100,000
Cr Salaries 100,000

 Error discovered in 2011: Journal entry to correct the prior period error

Dr Account payable 100,000

Cr Retained earnings 100,000

iv.
 As at 30 June 2011, the prior period loss should be adjusted retrospectively and the
loss must be adjusted to the opening balance of retained earnings, and the current
year loss is written off against the currrent year’s profit.

 Journal entry in 2011

Dr Retained earnings [3/4*1,000,000] 750,000

Dr Net profit [1/4*1,000,000] 250,000
Cr Account receivable 1,000,000

Extract from Statement of Changes in Equity

Retained earnings as at 1 July 2010 20,000,000
Prior year adjustment:
Prior year error [750,000]
Restated balance as at 1 July 2010 19,250,000

8)

 There is a change of the useful life of the copy machine. So the issue here is a
change of estimates.
 Adjustment is made prospectively to the SOPL.
 The previous depreciation was calculated RM1,000 per year.
 As at 1 July 2009, the carrying amount of the copy machine was RM9,000. The
current year depreciation is adjusted to be RM3,000.
 Journal entries :

Dr Depreciation 3,000
Cr Accumulated depreciation 3,000

Alternative answer:

9,000 = 3,000
(10 - 7)

9)
i.
 A change in estimate. It is only change in useful life but the depreciation method still
the same
 The accounting adjustment should be prospective. At end of accounting period 2010
the should be charged to the SOPL amounted RM14,000.

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 SOLUTION MFRS108

 The depreciation expenses for each year is RM100,000/10 years. That is RM10,000
for each year.
 Therefore the total depreciation expenses charged for year 7, year 8 and year 9 are
RM30,000 and the new carrying amount RM100,000-RM30,000 is RM70,000.
 At end of accounting period 2010, new depreciation expenses of RM70,000/5yrs,
RM14,000 have to be charge to the SOPL for year ended 30/12/10.
 The new carrying amount in the financial position is RM56,000 [RM100,000 –
RM30,000-RM14,000]
ii.
 According to MFRS 108, since the error was realised at end of accounting period year
ended 30/6/2010 that is a prior error
 The retained earnings should be adjusted retrospectively.
 An amount of RM1,400,000 were not charged to the SOPL for the year ended
30/6/2009.
 The opening balance of the retained earnings have to be adjusted. The unprovided
depreciation of building is measured as follows;

Depreciation =[Cost of building – Scrape value] / Useful life

=[RM30,000,000 – RM 2,000,000] / 20 years = RM1,400,000
 The opening balance of the retained earnings for year end 30/6/2010 must be
reduced by RM1,400,000.
 The retained earnings brought forward RM45,000,000 will be reduced by the after tax
effect which will be RM1,400,000 less 25% = RM1,050,000

Adjustment: Opening retained earnings RM45,000,000

Less Prior error 1,050,000
New opening retained earnings RM43,950,000

The building will be disclosed as follows,

30/6/2010 30/6/2009
RM RM
Building (cost) 30,000,000 30,000,000
Less accumulated depreciation [2,800,000] [1,400,000]
Carrying amount 27,000,000 28,600,000
10)
i.
 The element related to the above statement is ‘prior year error’.
 Depreciation was not provided when the plant was available for use in 2001 to 2009.
 Complying the MFRS 108, the accounting adjustment is made retrospectively by
reducing the opening balance of retained earnings by RM4,500,000 (RM10,000,000 x
5% x 9 years).
 Depreciation of RM500,000 has to be made in the current year.
 Consequently, the carrying amount of the plant will decrease.
 Write off retained earnings and current year depreciation
Dr Retained earnings 4,500,000
Dr Depreciation 500,000
Cr Accumulated depreciation 5,000,000

 Adjustment of opening retained earnings

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 SOLUTION MFRS108

Retained earnings as at 1/1/2010 45,000,000

Less Prior year errors [4,500,000*0.75] [ 3,375,000]
New retained earnings as at 1/1/2010 41,625,000

 Non current asset as at 31/12/2010

Plant (cost) 10,000,000
Less Accumulated depreciation 5,000,000
Carrying amount 5,000,000

ii.
 The element related to the above statement is a change in useful life is ‘a change in
estimate’.
 Complying with MFRS 108 the accounting adjustment should be made prospectively.
The previous depreciation was RM100,000 per year.
 The total accumulated depreciation for year 7, year 8 and year 9 were RM300,000.
As at 1 January 2010, the carrying amount of the machine was RM600,000
[RM900,000 – RM300,000].
 The current year depreciation is adjusted to be RM295,000 [(RM600,000 – RM10,000)
÷ 2 years]

 Current year depreciation

Dr Depreciation 295,000
Cr Accumulated depreciation 295,000

 Non current asset as at 31/13/2010

Machinery (cost) 900,000
Less Accumulated depreciation 595,000
Carrying amount 305,000

iii.
 The element related to the above statement is’ prior year error’. – The overstated
closing inventories of the previous year would have overstated the previous year
earnings.
 Complying with the MFRS 108 the accounting adjustment has to be made
retrospectively for the previous year’s error by decreasing the opening balance of
retained earnings and adjusting the current year inventoryby RM200,000.

 Write off retained earnings

Dr Retained earnings 200,000
Cr Inventory 200,000

 Adjustment of opening retained earnings

Retained earnings as at 1/1/2010 45,000,000
Less Prior year error [200,000*0.75] [150,000]
New retained earnings as at 1/1/2010 44,850,000

11)

i.
 Prior year error.

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 SOLUTION MFRS108

 Adjustment is made retrospectively for the previous year’s error in which the
revaluation surplus was credited as income.
 The restated opening balance of retained earnings will decrease and the surplus
credited to the revaluation reserve as per MFRS116 Property, plant and equipment.
 Write off retained earnings
Dr Retained earnings 1,750,000
Cr Asset revaluation reserve fund 1,750,000

ii.
 Prior year error.
 Adjustment is made retrospectively for the previous year’s loss in which the opening
balance of retained earnings will be decreased.
 The current year loss will be accounted as a current year expense
 Write off retained earnings and charge current year expenses
Dr Retained earnings 1,600,000
Dr Operating expenses 400,000
Cr Account payable 2,000,000
12)

a.
 This is a prior year error.
 The error should be accounted retrospectively.
 The losses from fraud should be adjusted to the retained earnings brought forward.
 Journal entries:
RM’000 RM’000
DR SOPL - Losses due to fraud 975
CR Retained earnings 975
b.
 This refers to change in accounting estimate.
 The adjustments need to be done prospectively.
 The depreciation charged for year 2014 would be RM150,000 ([RM1 million –
400,000] / 4 years).
 Journal entries:

DR Depreciation ([RM1 million – 400,000] / 4 years) 150

CR Acc. Depreciation 150

13)

Accounting treatment:
 The transportation cost of RM10,000 and import duties of RM25,000 should be
capitalised and added to the cost of the machinery.

 Since there is a prior period error, adjustment should be made retrospectively.

 The retained earnings b/f should be adjusted, by adding RM35,000 (RM10,000 +

RM25,000) and deducting RM3,500 (35,000/10) for the depreciation.

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 SOLUTION MFRS108