Question

(C) ZAPRYL BHD is in the process to finalise its financial statements for the year ended 31 December 2019. Based on its current records, the profit before tax is RM3,200,000 (2018: RM3,000,000). However, the followings have been discovered:

(a) Sales invoices dated 24 December 2018 amounted to RM8,000 and 27 December 2019 amounted to RM10,000 were both fake.

(b) An investment property was purchased in January 2015 at a cost of RM2,000,000 with a useful life of 25 years and was accounted using the cost model. However, for the financial year 2019, the management decided to use the revaluation model whereby the fair value on 31 December 2019 is RM2,800,000 (2018 and 2017: RM2,500,000).

(c) A machinery which was purchased on 4 January 2015 at a cost of RM100,000 has been depreciated using the straight-line method for 10 years useful life with a residual value of RM10,000. Assessment revealed that the machine can be used for another three years with no changes in residual value.

Required:

(i) Classify each of the above events according to MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors.

(ii) Determine the effect of each of the above events on the profit before tax for the financial year ended 31 December 2018 and 2019 after the adjustments have been recorded.

Answer 1

a) 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.

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

Fake invoices shall be treated as Error and shall be adjusted retrospectively.

Error relating to year 2019 shall be adjusted in current financial year 2019 in statement of P&L at the end of 31/12/2019.

Error relating to Year 2018 shall be treated adjusted retrospectively. Since does not have any effect on Opening balances on 2018, there is no need to Balance sheet on 01/01/2018.

B) Change from cost model to fair value use model is permitted only for the More appropriate Presentation. It shall be treated as Changes in accounting Policies and shall be accounted retrospectively. And as it has the Effect on balances as on 1/1/18 ZAPRHY BHD shall prepare additionally Balance sheet as on 1/1/18.

Particulars	Cost Model	Revaluation Model
Cost of Machine	20,00,000.00	20,00,000.00
Depreciation on 2015	80,000.00	80,000.00
WDV as 0n 2015	19,20,000.00	19,20,000.00
Depreciation on 2016	80,000.00	80,000.00
WDV	18,40,000.00	18,40,000.00
Depreciation on 2017	80,000.00	80,000.00
WDV	17,60,000.00	17,60,000.00
Adjustment to CA		7,40,000.00
Revalued Balance	17,60,000.00	25,00,000.00
Depreciation on 2018	80,000.00	1,13,636.36
WDV	16,80,000.00	23,86,363.64
Adjustment to CA		1,13,636.36
Revalued Balance	16,80,000.00	25,00,000.00
Depreciation on 2019	80,000.00	1,19,047.62
WDV	16,00,000.00	23,80,952.38
Adjustment to CA		4,19,047.62
Revalued Balance	16,00,000.00	28,00,000.00

C) A change in accounting estimate is an adjustment of the carrying amount of an asset or the amount of the periodic consumption of an asset, Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections. The effect of change in an accounting estimate shall be recognized prospectively by including it in profit or loss.

WDV as on 01/01/2019= 100000- (100000*4) = 60000

Depreciate the 60000 using newly estimated life = 3 years

Deprecation for 2019 = 20000 shall be debited to statement of P& L account.

Impact on Statement of Profit and Loss

Adjustment	Dec-19	Dec-18
Profit before Adjustments	32,00,000.00	30,00,000.00
A)	-8,000.00	-10,000.00
B)	-4,19,047.62	-1,13,636.36
C)	-20,000.00	-
Profit after adjustments	27,52,952.38	28,76,363.64