KS Academy Ind AS 8

Ind AS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

1. Can an entity voluntarily change one or more of its accounting policies?

Solution
A change in an accounting policy can be made only if the change is required or permitted by
Ind AS 8. As per Ind AS 8, an entity shall change an accounting policy only if the change:
a. is required by an Ind AS; or
b. 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.

Ind AS 8 states that the users of financial statements need to be able to compare the financial
statements of an entity over time to identify trends in its financial position, financial
performance and cash flows. Therefore, the same accounting policies are applied within each
period and from one period to the next unless a change in accounting policy meets one of the
above criteria.

Ind AS 8 lays down two requirements that must be complied with in order to make a
voluntary change in an accounting policy. First, the information resulting from application of
the changed (i.e., the new) accounting policy must be reliable. Second, the changed accounting
policy must result in ―more relevant‖ information being presented in the financial statements

Whether a changed accounting policy results in reliable and more relevant financial
information is a matter of assessment in the particular facts and circumstances of each case. In
order to ensure that such an assessment is made judiciously (such that a voluntary change in
an accounting policy does not effectively become a matter of free choice), Ind AS 8 requires an
entity making a voluntary change in an accounting policy to disclose, inter alia, ―the reasons
why applying the new accounting policy provides reliable and more relevant information

2. Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 20 X1-20X2. During the
financial year 20X2-20X3, it relocated the office to a new building and leased the said
building to a third party. Following the change in the usage of the building, Entity ABC
reclassified it from PPE to investment property in the financial year 20X2-20X3. Should
Entity ABC account for the change as a change in accounting policy?

Solution:
Ind AS 8 provides that the application of an accounting policy for transactions, other events
or conditions that differ in substance from those previously occurring are not changes in
accounting policies.

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As per Ind AS 16, ̳property, plant and equipment‘ are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and

(b) are expected to be used during more than one period.”

As per Ind AS 40, ̳investment property‘ is property (land or a building—or part of a

building—or both) held (by the owner or by the lessee as a right -of-use asset) to earn rentals
or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or

(b) sale in the ordinary course of business.”

As per the above definitions, whether a building is an item of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held by
the entity. It is thus possible that due to a change in the purpose for which it is held, a
building that was previously classified as an item of property, plant and equipment may
warrant reclassification as an investment property, or vice versa. Whether a building is in the
nature of PPE or investment property is determined by applying the definitions of these terms
from the perspective of that entity. Thus, the classification of a building as an item of property,
plant and equipment or as an investment property is not a matter of an accounting policy
choice Accordingly, a change in classification of a building from property, plant and
equipment to investment property due to change in the purpose for which it is held by the
entity is not a change in an accounting policy.

3. Whether change in functional currency of an entity represents a change in accounting

policy?
Solution :
Ind AS 8 provides that the application of an accounting policy for transactions, other events
or conditions that differ in substance from those previously occurring are not changes in
accounting policies.
As per Ind AS 21, ̳functional currency‘ is the currency of the primary economic environment
in which the entity operates.
Ind AS 21 list factors to be considered by an entity in determining its functional currency. It
is recognised that there may be cases where the functional currency is not obvious. In such
cases, Ind AS 21 requires the management to use its judgement to determine the functional
currency that most faithfully represents the economic effects of the underlying transactions,
events and conditions.
Ind AS 21 specifically notes that an entity‘s functional currency reflects the underlying
transactions, events and conditions that are relevant to it. Accordingly, once determined, the
functional currency is not changed unless there is a change in those underlying transactions,

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events and conditions. Thus, functional currency of an entity is not a matter of an accounting
policy choice.
In view of the above, a change in functional currency of an entity does not represent a
change in accounting policy and Ind AS 8, therefore, does not apply to such a change. Ind AS
21 requires that when there is a change in an entity‘s functional currency, the entity shall
apply the translation procedures applicable to the new functional currency prospectively
from the date of the change.
4. An entity developed one of its accounting policies by considering a pronouncement of an
overseas national standard-setting body in accordance with Ind AS 8. Would it be
permissible for the entity to change the said policy to reflect a subsequent amendment in
that pronouncement?
Solution
In the absence of an Ind AS that specifically applies to a transaction, other event or condition,
management may apply an accounting policy from the most recent pronouncements of
International Accounting Standards Board and in absence thereof those of the other standard
-setting bodies that use a similar conceptual framework to develop accounting standards. If,
following an amendment of such a pronouncement, the entity chooses to change an
accounting policy, that change is accounted for and disclosed as a voluntary change in
accounting policy. As such a change is a voluntary change in accounting policy, it can be ma
de only if it results in information that is reliable and more relevant (and does not conflict
with the sources in Ind AS 8).
5. Whether an entity can change its accounting policy of subsequent measurement of
property, plant and equipment (PPE) from revaluation model to cost model?
Solution:
Ind AS 16 provides that an entity shall choose either the cost model or the
revaluation model as its accounting policy for subsequent measurement of an entire class of
PPE.
A change from revaluation model to cost model for a class of PPE can be made only if it
meets the condition specified in Ind AS 8, i.e. the change results in the financial statements
providing reliable and more relevant information to the users of financial statements. For
example, an unlisted entity planning IPO may change its accounting policy from revaluation
model to cost model for some or all classes of PPE to align the entity‘s accounting policy
with that of listed markets participants within that industry so as to enhance the
comparability of its financial statements with those of other listed market participants within

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the industry. Such a change – from revaluation model to cost model is not expected to be
frequent.
Where the change in accounting policy from revaluation model to cost model is considered
permissible in accordance with Ind AS 8, it shall be accounted for retrospectively, in
accordance with Ind AS 8.
6. Whether an entity is required to disclose the impact of any new Ind AS which is issued
but not yet effective in its financial statements as per Ind AS 8?
Solution
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors, states as follows:
“When an entity has not applied a new Ind AS that has been issued but is not yet effective,
the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the possible impact that
application of the new Ind AS will have on the entity‘s financial statements in the period of
initial application.”
Accordingly, it may be noted that an entity is require d to disclose the impact of Ind AS
which has been issued but is not yet effective.
7. Whether a change in inventory cost formula is a change in accounting policy or a change in
accounting estimate?
Solution
As per Ind AS 8, accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. Further, Ind
AS 2, ̳Inventories‘, specifically requires disclosure of ̳cost formula used‘ as a part of disclosure
of accounting policies adopted in measurement of inventories.
Accordingly, a change in cost formula is a change in accounting policy.
8. An entity changed in 2012 its accounting policy respect to valuation of its inventory from
FIFO to weighted average cost formula. This being a voluntary change, it has to be applied
retrospectively. The entity had commenced operation in 2006. No record of earlier years are
available as a virus attack on server in 2012 had wiped off all past records. It is not possible
to recreate the records. Show the effect of accounting policy change.
Answer:
As per Ind AS 8 Accounting Policies should be retrospectively applied unless it is
impracticable. In the given case, the virus attack in 2012 makes it impracticable to determine
the cumulative effect prior to 2012. Hence the entity should apply weighted average formula
for 2012 only and explain the reason for impracticability for the prior years

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9. An entity has presented certain material liabilities as non-current in its financial statements
for periods upto 31st March, 20X1. While preparing annual financial statements for the year
ended 31st March, 20X2, management discovers that these liabilities should have been
classified as current. The management intends to restate the comparative amounts for the
prior period presented (i.e., as at 31st March, 20X1). Would this reclassification of liabilities
from non-current to current in the comparative amounts be considered to be correction of
an error under Ind AS 8? Would the entity need to present a third balance sheet?
(ICAI – RTP May 2020)
Solution
As per Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements. Financial statements do not comply with Ind
AS if they contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity‘s financial position, financial performance or cash flows.
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue. However, material errors are sometimes not discovered
until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of liabilities from non -current to current
would be considered as correction of an error under Ind AS 8. Accordingly, in the financial
statements for the year ended 31st March, 20X2, the comparative amounts as at 31st March,
20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements, if, inter alia, it
makes a retrospective restatement of items in its financial statements and the restatement has
a material effect on the information in the balance sheet at the beginning of the preceding
period.
Accordingly, the entity should present a third balance sheet as at the beginning of the
preceding period, i.e., as at 1st April, 20X0 in addition to the comparatives for the financial
year 20X0-20X1.
10. A carpet retail outlet sells and fits carpets to the general public. It recognizes revenue when
the carpet is fitted, which on an average is six weeks after the purchase of the carpet. It then
decides to sub-contract the fitting of carpets to self-employed fitters. It now recognizes
revenue at the point-of-sale of the carpet. Whether this change in recognising the revenue is
a change in accounting policy as per the provision of Ind AS 8?
Answer:

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This is not a change in accounting policy as the carpet retailer has changed the way that the
carpets are fitted. Therefore, there would be no need to retrospectively change prior period
figures for revenue recognized.
11. An entity was only trading in construction equipment. The revenue of sale of equipment is
recognised when the control is transferred as per Ind AS 115. It now gets a project to
construct a highway. For this activity it wants to adopt percentage completion method
under Ind AS 115. Is the treated as a change in accounting policy?
Answer:
In the given case, an entity is entering into a new business i.e. construction of highway and
hence the application of percentage completion method is a new policy applied to new
transaction and hence cannot be treated as a change in accounting policy.
12. When is an entity required to present a third balance sheet as at the beginning of the
preceding period?
Answer:
As per Ind AS 1, Presentation of Financial Statements, an entity shall present a third balance
sheet as at the beginning of the preceding period in addition to the minimum comparative
financial statements required of the standard if:
it applies an accounting policy retrospectively, makes a retrospective restatement of items in
its financial statements or reclassifies items in its financial statements; and  the retrospective
application, retrospective restatement or the reclassification has a material effect on the
information in the balance sheet at the beginning of the preceding period
13. During 20X2, Delta Ltd., changed its accounting policy for depreciating property, plant and
equipment, so as to apply much more fully a components approach, whilst at the same time
adopting the revaluation model. In years before 20X2, Delta Ltd.‘s asset records were not
sufficiently detailed to apply a components approach fully. At the end of 20X1,
management commissioned an engineering survey, which provided information on the
components held and their fair values, useful lives, estimated residual values and
depreciable amounts at the beginning of 20X2. However, the survey did not provide a
sufficient basis for reliably estimating the cost of those components that had not previously
been accounted for separately, and the existing records before the survey did not permit
this information to be reconstructed.
Delta Ltd.‘s management considered how to account for each of the two aspects of the
accounting change. They determined that it was not practicable to account for the change to
a fuller components approach retrospectively, or to account for that change prospectively
from any earlier date than the start of 20X2. Also, the change from a cost model to a

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revaluation model is required to be accounted for prospectively. Therefore, management

concluded that it should apply Delta Ltd.‘s new policy prospectively from the start of 20X2.
Additional information:
(i) Delta Ltd.‘s tax rate is 30%
(ii) Property, plant and equipment at the end of 20X1:
Cost Rs. 25,000
Depreciation Rs. 14,000
Net book value Rs. 11,000
(iii) Prospective depreciation expense for 20X2 (old basis) Rs. 1,500
(iv) Some results of the engineering survey:
Valuation Rs. 17,000
Estimated residual value Rs. 3,000
Average remaining asset life 7 years
Depreciation expense on existing property, plant and equipment for 20X2 (new
basis) Rs. 2,000
You are required to prepare relevant note for disclosure in accordance with Ind AS 8.
Answer:
Extract from the notes:

From the start of 20X2, Delta Ltd., changed its accounting policy for depreciating property,
plant and equipment, so as to apply much more fully a components approach, whilst at the
same time adopting the revaluation model. Management takes the view that this policy
provides reliable and more relevant information because it deals more accurately with the
components of property, plant and equipment and is based on up-to-date values. The policy
has been applied prospectively from the start of 20X2 because it was not practicable to
estimate the effects of applying the policy either retrospectively, or prospectively from any
earlier date. Accordingly, the adoption of the new policy has no effect on prior years. The
effect on the current year is to increase the carrying amount of property, plant and equipment
at the start of the year by Rs.6,000; increase the opening deferred tax provision
by Rs. 1,800; create a revaluation surplus at the start of the year of Rs. 4,200; increase
depreciation expense by Rs. 500; and reduce tax expense by Rs. 150.

14. During the year ended 31 March, 20X2, Blue Ocean group changed its accounting policy for
depreciating property, plant and equipment, so as to apply components approach fully,
whilst at the same time adopting the revaluation model.
In years before 20x1-20X2, Blue Ocean group's asset records were not sufficiently detailed
to apply a components approach fully. At the end of 31st March, 20x1, management

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commissioned an engineering survey, which provided information on the components held

and their fair values, useful lives, estimated residual values and depreciable amounts at the
beginning of 20X1-20X2.
The results are shown as under:
Property, plant and equipment at the end of 31st March, 20X1
Cost 25,000
Depreciation (14,000)
Net book value 11.000
Depreciation expense for 20X1-20X2 (on old basis) 1,500
Some results of the engineering survey:
Valuation 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7
However, the survey did not provide a sufficient basis for reliably estimating the cost of
those components that had not previously been accounted for separately, and the existing
records before the survey did not permit this information to be reconstructed.
The board of directors considered how to account for each of the two aspects of the
accounting change. They determined that it was not practicable to account for the change to
a fuller components approach retrospectively, or to account for that change prospectively
from any earlier date than the start of 20X1-20X2.
Also, the change from a cost model to a revaluation model is required to be accounted for
prospectively. Therefore, management concluded that it should apply Blue Ocean group's
new policy prospectively from the start of 20X1-20X2.
Blue Ocean group's tax rate is 30 per cent.
Compute the impact of change in accounting policy related to change in carrying amount of
Property, Plant & Equipment under revaluation method and impact on taxes based on the
basis of information provided. Show the impact of each item affected on financial
statements by the analysis of stated issue. [MTP May 2020]
Answer:
As per Ind AS 8 'Accounting Polices, Accounting Estimates and Errors, prospective
application of a change in accounting policy has to be done since retrospective application is
not practicable

Property, plant and equipment at the end of 31st March, 20X2:

As per the engineering survey:
Valuation of PPE 17,000

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Estimated residual value 3,000

Average remaining asset life (year) 7
Depreciation expense on existing PPE for 20X1 - 20X2 2,000
(new basis) (17,000-300)/7

From the start of 20X1-20X2, Blue Ocean group changed its accounting policy for depreciating
property, plant and equipment, so as to ply components approach, whilst at the same time
adopting the revaluation model. Management takes the view that this policy provides reliable
and more relevant information because it deals more accurately with the components of
property, plant and equipment and is based on up-to-date values.
The policy has been applied prospectively from the start of the year 20X1-20X2 because it was
not practicable to estimate the effects of applying the policy either retrospectively or
prospectively from any earlier date. Accordingly, the adoption of the new policy has no effect
on prior years,
The impact on the financial statements for 20X1-20X2 would be as under:
Particulars
Increase the carrying amount of property, plant and equipment at the start of the year (17,000-
11,000) 6,000
Increase the opening deferred tax provision (6,000 x 30 %) 1,800
Create a revaluation surplus at the start of the year (6,000-1,800) 4,200
Increase depreciation expense by (*2,000-1,500) 500
Reduce tax expense on depreciation (30%) 150
15. Is change in the depreciation method for an item of property, plant and equipment a
change in accounting policy or a change in accounting estimate?
Answer:
As per Ind AS 16, Property, Plant and Equipment, the depreciation method used shall reflect
the pattern in which the asset‘s future economic benefits are expected to be consumed by the
entity. The depreciation method applied to an asset shall be reviewed at least at each financial
yea r-end and, if there has been a significant change in the expected pattern of consumption of
the future economic benefits embodied in the asset, the method shall be changed to reflect the
changed pattern. Such a change is accounted for as a change in an accounting estimate in
accordance with Ind AS 8. As per the above, depreciation method for a depreciable asset has
to reflect the expected pattern of consumption of future economic benefits embodied in the
asset. Determination of depreciation method involves an accounting estimate and thus
depreciation method is not a matter of an accounting policy. Accordingly, Ind AS 16 requires

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a change in depreciation method to be accounted for as a change in an accounting estimate,

i.e., prospectively.
16. An entity charged off certain expenses as finance costs in its financial statements for the
year ended 31st March, 20X1. While preparing annual financial statements for the year
ended 31st March, 20X2, management discovered that these expenses should have been
classified as other expenses instead of finance costs. The error occurred because the
management inadvertently misinterpreted certain facts. The entity intends to restate the
comparative amounts for the prior period presented in which the error occurred (i.e., year
ended 31st March, 20X1). Would this reclassification of expenses from finance costs to other
expenses in the comparative amounts will be considered as correction of an error under Ind
AS 8? Would the entity need to present a third balance sheet?
(ICAI – RTP May 2020)
Answer:
As per Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements. Financial statements do not comply with Ind
AS if they contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity‘s financial position, financial performance or cash flows.
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue. However, material errors are sometimes not discovered
until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of expenses from finance costs to other
expenses would be considered as correction of an error under Ind AS 8. Accordingly, in the
financial statements for the year ended 31 st March, 20X2, the comparative amounts for the
year ended 31st March, 20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements if, inter alia, it
makes a retrospective restatement of items in its financial statements and the restatement has
a material effect on the information in the balance sheet at the beginning of the preceding
period.
In the given case, the retrospective restatement of relevant items in statement of profit and
loss has no effect on the information in the balance sheet at the beginning of the preceding
period (1st April, 20X0). Therefore, the entity is not required to present a third balance sheet.
17. While preparing the annual financial statements for the year ended 31st March, 20X3, an
entity discovers that a provision for constructive obligation for payment of bonus to

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selected employees in corporate office (material in amount) which was required to be

recognised in the annual financial statements for the year ended 31st March, 20X1 was not
recognised due to oversight of facts. The bonus was paid during the financial year ended
31st March, 20X2 and was recognised as an expense in the annual financial statements for
the said year. Would this situation require retrospective restatement of comparatives
considering that the error was material?
Answer:
As per Ind AS 8, errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements. Financial statements do not comply with Ind
AS if they contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity‘s financial position, financial performance or cash flows.
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue. However, material errors are sometimes not discovered
until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
As per Ind AS 1, an entity shall present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements if, inter alia, it
makes a retrospective restatement of items in its financial statements and the retrospective
restatement has a material effect on the information in the balance sheet at the beginning of
the preceding period.
In the given case, expenses for the year ended 31st March, 20X1 and liabilities as at 31st March,
20X1 were understated because of non-recognition of bonus expense and related provision.
Expenses for the year ended 31st March, 20X2, on the other hand, were overstated to the same
extent because of recognition of the aforesaid bonus as expense for the year. To correct the
above errors in the annual financial statements for the year ended 31st March, 20X3, the entity
should:
(a) restate the comparative amounts (i.e., those for the year ended 31st March, 20X2) in the
statement of profit and loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April,
20X1) wherein it should recognise the provision for bonus and restate the retained earnings
18. While preparing interim financial statements for the half -year ended 30th September, 20X1,
an entity notes that there has been an under - accrual of certain expenses in the interim
financial statements for the first quarter ended 30th June, 20X1. The amount of under
accrual is assessed to be material in the context of interim financial statements. However, it
is expected that the amount would be immaterial in the context of the annual financial

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statements. The management is of the view that there is no need to correct the error in the
interim financial statements considering that the amount is expected to be immaterial from
the point of view of the annual financial statements. Whether the management‘s view is
acceptable?
Answer:
Ind AS 8, inter alia, states that financial statements do not comply with Ind AS if they contain
either material errors or immaterial errors made intentionally to achieve a particular
presentation of an entity‘s financial position, financial performance or cash flows.
As regards the assessment of materiality of an item in preparing interim financial
statements, Ind AS 34, Interim Financial Statements, states as follows:
“While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might result
from non-disclosure. The overriding goal is to ensure that an interim financial report includes
all information that is relevant to understanding an entity‘s financial position and
performance during the interim period.”
As per the above, while materiality judgements always involve a degree of subjectivity, the
overriding goal is to ensure that an interim financial report includes all the information that is
relevant to an understanding of the financial position and performance of the entity during
the interim period. It is therefore not appropriate to base quantitative assessments of
materiality on projected annual figures when evaluating errors in interim financial statements.
Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in relation to interim period data.
19. ABC Ltd has an investment property with an original cost of Rs. 1,00,000 which it
inadvertently omitted to depreciate in previous financial statements. The property was
acquired on 1st April, 20X1. The property has a useful life of 10 years and is depreciated
using straight line method. Estimated residual value at the end of 10 year is Nil. How
should the error be corrected in the financial statements for the year ended 31st March,
20X4, assuming the impact of the same is considered material? For simplicity, ignore tax
effects.
Answer:

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The error shall be corrected by retrospectively restating the figures for financial year 20X2-
20X3 and also by presenting a third balance sheet as at April 1, 20X2 which is the beginning of
the earliest period presented in the financial statements.
20. ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior
to the change, inventory was valued using the first in first out method (FIFO). However, it
was felt that in order to match current practice and to make the financial statements more
relevant and reliable, a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
• 31st March, 20X1 - Increase of Rs. 10 million
• 31st March, 20X2 - Increase of Rs. 15 million
• 31st March, 20X3 - Increase of Rs. 20 million
Profit or loss under the FIFO valuation model are as follows:

20X2-20X3 20X1-20X2
Revenue 324 296
Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58
Retained earnings at 31st March, 20X1 were Rs. 423 million
Present the change in accounting policy in the profit or loss and produce an extract of the
statement of changes in equity in accordance with Ind AS 8.
Answer:
Profit or loss under weighted average valuation method is as follows:

X20X2-20X3 20X1-20X2 (Restated)

Revenue 324 296
Cost of goods sold (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63

Statement of changes in Equity (extract)

Retained Retained earnings

earnings (Original)
At 1st April, 20X1 423 423
Change in inventory valuation policy 10 -
At 1st April, 20X1 (Restated) 433 -
Profit for the year 20X1-20X2 63 58
At 31st March, 20X2 496 481

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Profit for the 20X2-20X3 73 68

At 31st March, 20X3 569 549

21. An entity starts a business in July 2005. The business was small in nature and therefore the
entity did not follow any specific accounting standards for valuation of inventory. Over the
decade the entity flourishes, becomes a big company and decided to apply Ind AS 2 on
inventories from the financial year 2016-2017. It decided to follow the weighted average
method for valuation of inventory. Now following questions will arise.
i. Shall entity do such valuation retrospectively or prospectively?
ii. What is meant by retrospective application?
iii. If it is to be applied as if it was applied from July 2005, then what about the accounts
already presented? Does entity need to change all the accounts?
iv. How would the effect be given?
Answer:
i. It will depend upon whether the company is following the standard as per the new
guidelines of institute or is it applying voluntarily? In the above case, the entity itself is
taking the decision to apply the standard and therefore it will be treated as voluntary
application. If it falls under voluntary application then, the Ind AS 8 states that the
policy should be applied retrospectively.
ii. As per definition, retrospective application assumes that the policy had always been
applied. It does not state any specific period. 'Had always been applied indicates that
policy was applied right from the day 1, i.e. from July 2005.
iii. The entity is not supposed to change the accounts which are already presented
However, it needs to give the effect of the change in policy while presenting the
accounts for the year in which new policy is adopted. In the current case, the new
policy is adopted from the F.Y. 2016-2017. Therefore, the effect will be given to the
concerned items, in the financial statements of F.Y. 2016-2017.
iv. Ind AS 8 states that 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.
22. Continuing the above question, assume that company might be following the weighted
average method of valuation of stack right from July 2X05. In reality, company might have
applied other methods like specific Identification, LIFO or FIFO etc. Company might have
changed also the method during the period as it was not following any specific standard at
that time. However, now, in F.Y. 2X16-2X17, the company decided to follow Ind AS and
accordingly decides the weighted average method of valuation. Analyse

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Answer:
The company needs to calculate the closing inventory of every year since 2X05-2X06 assuming
that it was following the said method from day 1.
This will change the figure of gross profit and net profit as Inventory valuation will make
direct impact on the profits of the company. Net profits will affect the equity as well.
Similarly, the closing balances of inventory from year to year will also change. Thus, company
will make the calculations from the year 2X05-2X06 to 2X15-2X16.
The provisions further state that company will adjust the opening balances of equity and other
related amounts for the earliest prior period presented. It means, if company is presenting the
accounts for F.Y. 2X16-2X17, it need to give comparative figures for F.Y. 2X15-2X16 also.
Therefore, the earliest prior period presented will be F.Y. 2X15-2X16 in the above mentioned
case. Thus the net effect on profit of last 11 years (from F.Y. 2X05-2X06 to F.Y. 2X15-2X16) will
be adjusted through the equity and inventory balances of the year 2X15-2X16.
Thereafter the new policy will be continued and every year the valuation of inventory will be
done using weighted average method.
23. A company owns several hotels and provides significant ancillary services to occupants of
rooms. These hotels are, therefore, treated as owner-occupied properties and classified as
property, plant and equipment in accordance with Ind AS 16. The company acquires a new
hotel but outsources entire management of the same to an outside agency and remains as a
passive investor. The selection and application of an accounting policy for this new hotel in
line with Ind AS 40. Is this a change in accounting policy?
Answer:
It is not a change in accounting policy simply because the new hotel rooms are also let out for
rent. This is because the way in which the new hotel is managed differs in substance from the
way other existing hotels have been managed so far.
24. An entity has classified as investment property, an owner occupied property previously
classified as part of property, plant and equipment where it was measured after initial
recognition applying the revaluation model. Ind AS 40 on investment property permits
only cost model. The entity now measures this investment property using the cost model. Is
this a change In accounting policy
Answer:
This is not a change in accounting policy.
25. In 20X3-20X4, after the entity's 31 March 20x3 annual financial statements were approved
for issue, a latent defect in the composition of a new product manufactured by the entity
was discovered (that is, a defect that could not be discovered by reasonable or customary
inspection). As a result of the latent defect the entity incurred 100,000 in unanticipated costs
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for fulfilling its warranty obligation in respect of sales made before 31 March 2013. An
additional Rs.20,000 was incurred rectify the latent defect in products sold during 20X3-
20X4 before the defect was detected and the production process rectified, Rs.5,000 of which
relates to items of inventory at 31 March 20X3. The defective inventory was reported at cost
Rs.15,000 in the 20X2-20x3 financial statements when its selling price less costs to complete
and sell was estimated at Rs.18,000. The accounting estimates made in preparing the 31
March 20x3 financial statements were appropriately made using all reliable information
that the entity could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements
Analyse the above situation in accordance with relevant Ind AS
(ICAI - RTP May 2021)
Answer:
Ind AS 8 is applied in selecting and applying accounting pollicles, and accounting for changes
in accounting policies, changes in accounting estimates and corrections of prior period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset. This change in accounting
estimate is an outcome of the assessment of the present status of, and expected future benefits
and obligations associated with, assets and liabilities. Changes in accounting estimates result
from new information or new developments and, accordingly, are not corrections of errors
Further, the effect of change in an accounting estimate, shall be recognised prospectively by
including it in profit or loss in: (a) the period of the change, if the change affects that period
only; or (b) the period of the change and future periods, if the change affects both.
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
that :
(a) was available when financial statements for those periods were approved for Issue; and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31 March 20X3 or before.
the financial statements were approved for issue, so understatement of the warranty provision

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Rs.1,00,000 and overstatement of inventory Rs.2,000 (Note 1) in the 31 March 20X3 financial
statements are not a prior period errors.
The effects of the latent defect that relate to the entity's financial position at 31 March 20X3 are
changes in accounting estimates.
In preparing its financial statements for 31 March 20X3, the entity made the warranty
provision and inventory valuation appropriately using all reliable information that the entity
could reasonably be expected to have obtained and had taken into account the same in the
preparation and presentation of those financial statements.
Consequently, the additional costs are expensed in calculating profit or loss for 20X3-20X4.
Working Note:
Inventory is measured at the lower of cost (i.e Rs.15,000 and fair value less costs to complete
and sell (i.e Rs.18,000~orlginally estimated minus Rs.5,000 costs to rectify latent defect) =
Rs.13,000.
26.
a. During 20X2, Beta Ltd. discovered that some products that had been sold during 20X1
were incorrectly included in inventory at March 31, 20X1 at Rs.6,500. The sale have been
correctly recorded.
b. Beta’s accounting records for 20X2 show sales of Rs. 1,04,000, cost of goods sold is
Rs.86,500 (including Rs. 6,500 for the error in opening inventory), and income taxes of
Rs. 5,250.
c. The sales have been correctly recoded for 2011.
i. In 20X1, Beta Ltd. reported:
1. Sales of Rs. 73,500
2. Cost of goods sold of Rs. 53,500
3. Profit before income taxes of Rs. 20,000
4. Income taxes of Rs. 6,000
5. Profit of Rs. 14,000
ii. 20X1 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs.
34,000.
iii. Beta’s income tax rate was 30 per cent for 20X2 and 20X1. It had no other income or
expenses.
iv. Beta Ltd. had Rs. 5,000 of share capital throughout, and no other components of equity
except for retained earnings. Its shares are not publicly traded and it does not disclose
earnings per share.

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You are required to prepare relevant extract from the statement of profit and loss and
statement of changes in equity. Also what should be disclosed in the notes?

Answer:

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