Page 6 - 28. COMPILER QB - IND AS 8

In the given case, the retrospective restatement of relevant items in the statement of profit and loss has no
effect on the information in the balance sheet at the beginning of the preceding period (1 April 20X1).
Therefore, the entity is not required to present a third balance sheet.

Q4 (RTP May 21 & Also Newly Added in ICAI May 22 Module)

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 Rs. 100,000 in unanticipated costs for fulfilling its warranty obligation in respect of sales
made before 31 March 20X3. An additional Rs. 20,000 was incurred to 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.
SOLUTION

Ind AS 8 is applied in selecting and applying accounting policies, 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 accounts 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 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
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