In this assignment my responsibilities includes to identify the errors in Gamma Industries Ltd accounts. Make references as per relevant IAS the treatments for that and different accounting concepts. Finally my task is to identify and make suggestion for the accountant of the company with references to relevant standards.
The objective of IAS2 is to prescribe the accounting treatment for inventories. As per IAS 2 Inventory are stated at lower of cost and net realizable value.
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.
As per consistency concept transactions and valuation methods are treated in the same way from year to year. Users of accounts can, therefore, make more important comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
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Therefore company do not comply with IAS 2 and either with consistency concept, as company has changed its valuation policy for valuing inventory form FIFO to LIFO which is no longer allowed, as he has change the accounting policy with out proper discloser so company would not comply with consistency concept.
Accountant need to change inventory valuation back to FIFO or to weighted average method with proper discloser regarding change in accounting policy. So that user of financial statement can easily understand the changes took place.
According to IAS 16 depreciation amount will be allocated over the estimated useful life of the asset. The residual value and useful life of the asset should be reviewed at least annually and if there is change in estimate from prior period, such change is accounted for as the change in estimates as per IAS 8.
As per IAS 18 the effect of a change in an accounting estimate will be recognized prospectively by including it in profit or loss in:
The period of the change, if the change affects that period only, or
the period of the change and future periods, if the change affects both periods.
As per IAS 18 company must need to make discloser for such change.
The nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact.
According to consistency concept transactions and valuation methods are treated in the same way from or period to period. Users of accounts can, therefore, make comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change.
As company has change its estimate in current year but fail to make proper discloser as required by the IAS 18, beside this company also fail to comply with the with consistency concept in preparing the financial statements.
Accountant need to make proper discloser in the accounts regarding the change in current period and resultant effect in coming future, as per IAS 18 explained above.
Nominal Account Posting
Accountant do not follow the Reliability concept for preparation, as he fail to prepare cash book which will then be compared with bank reconciliation in order to identify out standing lodgments and un presented cheque. Preparing nominal activity from the Bank statement in order not to make bank reconciliation Accountant also fail to comply with Matching principle Which states that revenue and expenses should be recognized for the period to which it relates, if he continue doing this all of un presented cheques that is not presented in bank for encashment do not record in current year financial statement.
Therefore accountant need to comply with matching concept and prepare cash book and do bank reconciliation to identify and make a reliable presentation of unpresented and outstanding lodgments.
Director Current Account
Landlord bought gift for her wife costing 10 pound recorded in financial statement as receivable, there is again discloser problem as well as question do arise on reliability of the financial statement. Accountant should correct it by preparing drawings account or director current account to record all transaction that relates to him. However the amount in immaterial but discloser requirement as per IAS 1 will go wrong.
Always on Time
Marked to Standard
On the other hand rent owed is wrongly recoded as account payable, which does not comply with IAS 1 and even do not comply with accrual concept.
Accountant should correct this by recording it as expense for the period by following IAS 1 together with accrual concept, and reduce the account payable account by the amount of rent. And make notes to the account for this.
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclose in the notes to the financial statements to allow users to understand their nature, timing and amount.
Provision: a liability of uncertain timing or amount.
present obligation as a result of past events
settlement is expected to result in an outflow of resources (payment)
According to IAS 37 an entity must recognise a provision if, and only if:
A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
Payment is probable ('more likely than not'), and
The amount can be estimated reliably.
Accountant fail to comply with IAS 37 as the possibility of payment is probable as a result of past event, and possibility of the payment is material as company fail to adopt health and safety issue. And also fail to comply with discloser requirement. There fore accountant should have to make provision for 20000 pound as the probability of outcome is high and record it as making best estimate of it and record as liability in balance sheet making discloser to the accounts, and make description of uncertainty, probability and estimate under notes to the accounts.
Accruals concept explains that income and expenses must be matched with for the period it relates, whether or not revenues and expenses has actually received or paid. Income statement and balance sheet are prepared on Accruals concept rather than on Prudence concept which explain sales and expenses will only recognized when it is realized, in simple word on cash basis.
Accountant made an error not to book electricity expenses for the last quarter until it was actually paid or bill not received until 29 Jan 2010. This treatment is totally incorrect treatment and against the accruals concept or matching concept.
Accountant should have to make amendments for it as to book expenses in income statement for December and record prepayment for the 2 months which falls outside the current period. Prepayment should show under current assets which will realize in coming period. This way accountant follows the accruals concept as well as Consistency in presentation. Discloser must be given under notes to the account about amount of prepayment and how it is calculated so financial statement show true and fair view as per IAS 1 and user of financial statement can rely on discloser and reliability of financial discloser.
Accounting treatments for the error made by the accountant of Gamma Industries Ltd in preparing company financial statement and recommendation as per IAS and different accounting concepts. Accountant should have to make changes as per IAS and Accounting concepts so that accounts shows fair view and understandable by the user of the Accounts.