Question

Accounting policies

At a meeting on 16 June 2019, the directors of Swan Ltd decided to change the company’s accounting policy in regard to research and development expenditure. In previous years, research and development expenditure had been capitalized and amortized over 3 years. In line with this policy, $75 000 was capitalized on 1 January 2018. The new policy is to write off all research and development to expense when incurred. During the year ended 30 June 2019, the company spent a further $62 000 on research and development which was capitalized on 1 January 2019. Research and development expenditure is allowable as a deduction for tax purposes when incurred.

Required

Prepare any note disclosures required by AASB 108/IAS 8 in respect of the change in accounting policy. Show all workings.

Answer 1

IAS 8.29 of IFRS dealt with the voluntary changes in Accounting Policies.

IAS 8.29 is reproduced in original below:

When a voluntary change in accounting policy has an effect on the current period or any prior period, and would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, has the entity disclosed:

a. the nature of the change in accounting policy;

b. the reasons why applying the new accounting policy provides reliable and more relevant information;

c. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:

i. for each financial statement line item affected; and

ii. if IAS 33 applies to the entity, for basic and diluted earnings per share;

d. the amount of the adjustment relating to periods before those presented, to the extent practicable; and

e. if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied?

Note: Financial statements of subsequent periods need not repeat these disclosures.

So, Based on above standard, following note disclosures are needed by Swan Limited.

Note Disclosures to the Financial Statements for the year ending on 30 June 2019

a) The Company Changed the treatment of Revenue & Development expenditure from Capitalizing & Amortizing to complete writing off in the year of incurrance from the Accounting period ending 30 June 2019.

b) This change provides for dislosure of full expenditure, eliminates uncertainities of future benefits of this expenditure and less bonus obligations based on the real income.

No impact on Tax liability as the expenditure is allowed on incurrance basis.

c) The change results into following adjustments:

For period ending 30 June, 2019, no adjustment needed as Complete amount of $62,000 of Capitalitalised research & development expenditure is written of to the Income Statement based on new policy.

Opening balances of Retained Earnings is reduced by $50,000 & Capitalized R&D Expenditure account is decreased by $50,000.

IAS 33 is not applicable.

d)

For period ending 30 June, 2018

Amount capitalized on 1 January 2018 - $75,000

Amortized on 30 June 2018 - $25,000

Remaining Balance - $50,000

As per changed policy following adjustments to the line items in 2018:

Research & Development Expenditure - Increased by $50,000

Retained Earnings - Reduced by $50,000

Capitalized R&D Expenditure - $0

Above note disclosures are not required in subsequent accounting periods.

Note: Clause(e) of standard 8.29 can not be commented as insufficient information.