Contract modifications and variable consideration

IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here.

A contract modification arises when the parties approve a change in the scope and/or the price of a contract (eg a change order). In IFRS 15 this exercise is part of step 1 Identify the contract. The … Read more

Investments in Joint Ventures – Overview

An entity with joint control of an investee shall account for its investment in a joint venture using the equity method except when that investment qualifies for exemption in IAS 28.

The exemptions include: IAS 28 Investments in Joint Ventures – Overview

  • if the entity is a parent that is exempt from preparing consolidated financial statements by the scope exception in paragraphs 4(a) of IFRS 10 Consolidated Financial Statements; or
  • all of the following apply:
    1. the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the entity not applying the equity method;
    2. the entity’s
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Disclosures subsidiaries and NCI

IFRS 12 requires disclosures for each of an entity’s subsidiaries that have material non-controlling interests. Such disclosures assist users when estimating future profit or loss and cash flows (for example, by identifying the assets and liabilities that are held by subsidiaries, risk exposures of particular group entities, and those subsidiaries that have significant cash flows). The disclosures are as follows (new disclosures compared to the previous standard are in bold):

  • The subsidiary’s name
  • Its principal place of business (and country of incorporation, if different)
  • The proportion of ownership interests held by non-controlling interests
  • The proportion of voting rights held by noncontrolling interests, if different from the proportion of ownership interests held
  • The profit or loss allocated to non-controlling
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Change in accounting estimate

Change in accounting estimates (IAS 8 32 – 39) is an accounting rule which is easily explained in a few captions of bullet points, as follows.

Basics:

  • Use of estimates is an integral process of the accounting process.
  • Use of estimates is in line with matching concept and conservatism concept
  • Use of estimate is needed due to the inherent uncertainties in business activities
  • There is a need to revise the estimate due to changes in circumstances on which the estimate was based or as a result of new information, more experience or subsequent developments.

Examples of changes in accounting estimates include:

  • Changes in the estimate of the collectibility of trade debtors;
  • Changes in the estimate of useful lives or depreciation
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An error in previously issued financial statements

Adjustment of an error in previously issued financial statements is not an accounting change. Such errors include mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time financial statements were prepared.

– IN SHORT – Adjustments of accounting errors.An error in previously issued financial statements

  1. If detected in period error occurred correct accounts through normal accounting cycle adjustments.
  2. If detected in a subsequent period, adjust for effect of material errors by making prior-period adjustments directly to retained earnings balance for the years affected by those errors. lf the error relates to a year that is not presented in the financial statements, the retained earnings balance for the earliest year presented is adjusted. Also correct each
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Examples of adjustments of errors

When errors affecting income are discovered, careful analysis is necessary to determine the required action to correct the account balances. As indicated, most errors will be caught and adjusted prior to closing the books. The few material errors not detected until subsequent periods and those that have not already been counterbalanced must be treated as prior-period adjustments. See also ‘Types of errors‘.

The following sections describe and illustrate the procedures to be applied when error adjustments require prior-period adjustments. It is assumed that each of the errors is material. Errors that are discovered usually affect the income tax liability for a prior period. Amended tax returns are usually prepared either to claim a refund or to pay any Read more