- 20 Marks
CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)
Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.
Question
LIKELY EFFECT LIMITED
Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.
According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.
The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:
| 2013 (N’M) | 2012 (N’M) | |
|---|---|---|
| Income tax expense | 24 | 21 |
| Profit after tax | 56 | 49 |
| Share capital | 50 | 50 |
Required:
(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)
(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)
(c) Analyze the effects of the change in accounting policy on periods before 2013. (8 Marks)
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