Page 10 - 28. COMPILER QB - IND AS 8

Average remaining asset life (years) 7
Depreciation expense on existing property, plant and equipment
for 20X1-20X2 (new basis) (17,000 – 3,000)/7 2,000

From the start of 20X1-20X2, Blue Ocean group changed its accounting policy for depreciating property, plant
and equipment, so as to apply 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 Rs.
Increase the carrying amount of property, plant and equipment at the start of 6,000
the year (17,000-11,000)
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 (Rs.2,000 – Rs.1,500) 500
Reduce tax expense on depreciation (30%) 150

Q8 (April 21 – 5 Marks)

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 be considered to be correction of an error under Ind AS 8? Would the entity need to
present a third balance sheet?

SOLUTION
Ind AS 8 states as follows: “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 31st March, 20X2, the comparative amounts for the year ended 31st March 20X1 would be restated to
reflect the correct classification.

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