Accounting for Changes in Estimates

This assignment focuses on applying AASB 108 to a scenario involving Spark Ltd. Students need to calculate depreciation expense under revised assumptions about the useful life and residual value of equipment. The task also includes disclosing the change in estimate according to AASB 108 guidelines within financial statements.

Solution-1(a) – Defining an asset
Australian Accounting Standard Board framework for Preparation and Presentation of Financial
Statements defines asset as any tangible or intangible resource occurred due to some past events, having
future economic benefits and within the control of the entity. Future economic benefit refers to the ability
to generate potential cash inflows or revenue for the entity.
As per my understanding, an asset is a resource which is valuable, can be measured in money terms and
belongs to me. Valuable means I can use it to purchase something or can exchange it for some items or
can generate income by using it. Example of assets includes cash, receivables, machinery or any other
tangible or intangible asset.
Solution-1(b) – recognition criteria’s for recognizing an asset
As per para 83 of AASB’s framework for the Preparation and Presentation of Financial Statements, an
asset should be recognized in the financial books when it becomes certain that the asset will have some
future economic benefit and it is established reliably that the asset has some associated cost with it or in
other words it can be measured in monetary terms.
As per my understanding, the asset should be recognized when I will feel that the asset is useful for me
and I can establish its purchase price or cost. For example, if I have purchased a computer for my
business, than it has future benefits for me as I can use it in my business and can generate revenues from
it and its cost is reliably available with me, i.e. the purchase price paid to the computer seller is the value
or cost for that computer.
Solution-1(c) – Explaining the recognition of the given assets
 the franchise agreement – should be recognized in the statement of financial position as
an asset because the franchise agreement has future benefit for the Wilson Pty Ltd. Since,
this agreement gives the exclusive right to the company to run and operate the shops
resulting in revenue.
 the employees – should not be recognized in the statement of financial position as an
asset. Because employees are paid for the services performed by them for the company.
They are paid for the period they have worked, so there is no future economic benefit.
hence, the employees cost is not recognized as an asset.
 the restaurant premises - should not be recognized in the statement of financial position
as an asset as the amount paid towards rent by the company is for the current period and
does not involve any future economic benefits or future durability.
 the equipment and fixtures and fittings - should be recognized in the statement of
financial position as an asset as they satisfies the recognition criteria of recognizing the
asset. As these equipment and fixtures and fittings are to be used in the business and will
result in revenue for the entity. So, they have future economic benefits and their cost can
be reliably measured.

 the advertising costs - should not be recognized in the statement of financial position as
an asset. Because the advertising cost paid is for the promotion of the company and this
cost belongs to the past periods and hence does not have any future economic benefits.

Solution-2 (a) – Preparation of Statement of Profit & Loss and Other Comprehensive Income
Scorpio Ltd
STATEMENT OF PROFIT & LOSS AND OTHER COMPREHENSIVE INCOME
For the year ended on 30 June, 2017
(Amount in $ '000)
Particulars For the year ended
30 June, 2017
Revenue:
Sales 540,000
Less: Cost of goods sold 310,000
Gross Profit 230,000
Add: Other income
Gain on sale of financial assets 4,000
Other income 16,000 20,000
Less: Expenses
Occupancy expense 45,000
Distribution expense 55,000
Administration expense 50,000
Other operating expenses 22,500
Finance costs 27,500 200,000
Profit before tax 50,000
Less: Tax expense 15,000
Profit after tax 35,000
Profit after tax from continuing operations 35,000
Loss for the year from discontinued operations (5,000)
Profit for the period 30,000
Other comprehensive income (OCI)
(A) Items that may be reclassified subsequently to profit or loss
Unrealised gains on cash flow hedges 13,000
Income tax effect on unrealised gains (4,000)
Loss on exchange differences on translation of foreign operations (6,500)
Income tax effect on loss on exchange differences 2,000
4,
500
(B) Items that will not be reclassified subsequently to profit or loss
Gain from revaluation of property, plant and equipment 20,000

Income tax effect on revaluation (6,000)
Loss from remeasurement of defined benefit superannuation plan (7,500)
Income tax effect on defined benefit 2,000
8,
500
(C) Reclassification Adjustments
Derecognition of financial asset earlier recognised in OCI (4,000)
Income tax effect on above 1,000 (3,000)
Total other comprehensive income 10,000
Total comprehensive income for the period 40,000
Solution-2 (b) – Explaining reclassification adjustment
The reclassification adjustment in the above statement of profit and loss and other comprehensive income
is to derecognize the gain on financial asset of $4,000 from OCI and recognizing it in the statement of
profit and loss account along with the related income tax of $1000.
This adjustment is required as per the requirements of AASB framework for Preparation and Presentation
of Financial Statements. As per the statement, the de-recognition of financial asset should be made in the
statement of profit and loss at amortized cost. Since, at the time of fair valuation the gain on valuation
was recognized in the earlier years in other comprehensive income and in the current year on de-
recognition the gain is again recorded in the statement of profit and loss, so to remove this ambiguity the
gain recorded in earlier years is reduced from current year OCI.

Solution-3(a) – Treatment of change in asset’s useful life and residual value
No, Spark Ltd. is not correct in treating the change in useful life and residual value of the machine as the
correction in the prior period errors. Because as per para 32 of AASB 108, “Accounting Policies, Changes
in Accounting Estimates and Errors”, the change in useful life of an asset and reassessment of its residual
value is an change in estimate and is not an prior period error, as these are taken on the basis of
judgements, available information and experience and can vary from industry to industry and asset to
asset.
The treatment of change in estimates as per para 36 of AASB 108 is to record such changes prospectively
in the books. meaning thereby changes should be recorded in the current period and in the future periods.
Solution-3(b) – Calculating the amount of depreciation for the year ending
a. 30 June, 2015
Depreciation expense = (cost – residual value)/ useful life = (400,000-40,000)/10 = $ 36,000
b. 30 June, 2016
Depreciation expense = (Carrying value – revised residual value)/ revised useful life =
(256,000-46,000)/6 = $ 35,000
Particulars Amount ($)
Cost of Equipment 400,000
Less: Depreciation expense
30 June 2012 - 2015 144,000
Carrying value as on 1 July 2015 256,000
Revised Residual value 46,000
Revised Useful life 6
c. 30 June, 2017
Depreciation expense = (Carrying value – revised residual value)/ revised useful life =
(256,000-46,000)/6 = $ 35,000
Solution-3(c) – Disclosures of AASB 108 in financial statements
Para 39 of AASB 108 “Accounting Policies, Changes in Accounting, Estimates and Errors”, states that
the disclosure for change in estimates should include
(i) the nature and of change in accounting estimate on the current year and future years, if there.
(ii) the amount of change in accounting estimate on the current year and on the future years, if
there.

Solution-3(d) – Note disclosure in financial statements
The appropriate note disclosure for Spark Ltd’s financial statements for the year ended 30 June 2016 is:
During the year, management decided to review the useful life and residual value of the equipment and
decided to change the useful life and residual value as the equipment as they are still in good shape and
use. The revised estimates are as below:
(a) Revised useful life of the equipment - six years
(b) Revised residual value - $46,000
The financial impact of above change in estimate is that
(a) the useful life of equipment is increased from 5 years to 6 years i.e. by 1 year
(b) residual value has been increased from $40,000 to $46,000 i.e. by $6000.
As a result, the depreciation expense has been reduced by $1000 for the year ended on 30 June, 2016
and for the coming next 5 years.

References:
Aasb.gov.au (2018). Framework for the Preparation and Presentation of Financial Statements. Retrieved
from: http://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf
Aasb.gov.au (2018). Presentation of Financial Statements. Retrieved from:
http://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf
Aasb.gov.au (2018). Accounting Policies, Changes in Accounting Estimates and Errors. Retrieved from:
http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPmay11_07-11.pdf