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IAS 34Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIAS 34L3 · Advanced

Change in accounting policy and change in estimate: restatement of interim periods, significance and information in the annual notes

7 documents10 tasks≈ 75 min
0 / 13 items completed
Standards
IAS 34 — Interim Financial Reporting
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Norvane SA (fictitious entity), a maker of household appliances, closes its accounts on 31 December and publishes reports for the first, second and third quarters, with no separate report for the fourth. On 1 September 20X6, it decides to change the cost formula of its finished goods inventories. You prepare the third-quarter report, which restates the two previous quarters, then the annual closing, in which an estimate of a warranty provision changes significantly in the fourth quarter.

Your assignment

Characterise each of the two changes and say what the standard requires for the interim periods; judge, class by class, whether the change in policy is restated; compute the restated results of the first two quarters; judge the significance of the effect against the data of the interim periods; compute the effect of the change in estimate in the fourth quarter and record the provision expense of the quarter; state the information to give in the annual notes; present the effect of the entry; conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

7 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Norvane SA (fictitious entity) makes household appliances; it closes its accounts on 31 December and publishes reports for the first three quarters; its functional currency is the euro. Case conventions: amounts in EUR; results are pre-tax results; case convention (pedagogical assumption, not attributed to the standard): management uses an internal threshold of 4% of the pre-tax profit of the period to judge that an effect is significant; the entry is illustrative and uses a generic provision expense account and a generic provision account; whether the change in policy is voluntary belongs to the IAS 8 course.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Published result of the first quarter€360,000.00
Published result of the second quarter€440,000.00
Effect of the new formula in the first quarter (decrease)€18,000.00
Effect of the new formula in the second quarter (decrease)€22,000.00
Forecast annual pre-tax profit€1,600,000.00
Internal threshold of management (case convention)4%
Revised annual amount of the provision€300,000.00
Initial annual estimate of the provision€270,000.00
Amount recognised in the first three quarters€225,000.00
Result of the fourth quarter before the change€500,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort7

  • Company profile and case conventions

  • Decision to change the inventory cost formula

  • Published results and effect of the new formula on finished goods

  • Spare parts: data available

  • Warranty provision: estimate of the fourth quarter

  • Request of the audit committee

  • Quote for painting the offices

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      10 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        What is the nature of each of the two changes and what does the standard provide for the interim periods?

      2. Task 2Professional judgement

        Is the change in cost formula restated for finished goods and for spare parts?

      3. Task 3Calculation

        Compute the restated result of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the restated result of the first quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Calculation

        Compute the restated result of the second quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the restated result of the second quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Professional judgement

        Is the effect of the change in policy significant against the data of the interim periods?

      6. Task 6Calculation

        Compute the effect of the change in estimate of the provision in the fourth quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the effect of the change in estimate of the provision in the fourth quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Journal entries

        Record the warranty provision expense of the fourth quarter, including the effect of the change in estimate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Record the warranty provision expense of the fourth quarter, including the effect of the change in estimate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      8. Task 8Analysis

        What information is to be given in the annual notes on the two changes?

      9. Task 9Effects on the financial statements

        What is the effect of the entry on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      10. Task 10Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 13).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 34 §43