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Error In The Financial Statements And Reporting

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Question:

(1) When finalising the financial statements for the year ended 30 June 2014 two significant errors were made and there is debate as to whether we should simply adjust the financial statements in the current year or change last year’s financial statements as well. The IT system of the company was installed 3 years ago at a cost of approximately $3.5 million and was estimated to last 10 years. However the latest technology advancements indicate that this was a very optimistic estimate and that the maximum life span of this equipment will probably be not more than 6 years in total with little or no residual value. It was also discovered in August 2014 that a machine worth $2.2 million purchased in January 2014 was erroneously written off to repairs and maintenance instead of being capitalised. 

Deberella the marketing director thinks we should just adjust this year’s figures to account for these problems but Peter indicated that it was slightly more complicated than that. Could you please give us some advice on this?
 

(2) A number of employees who work on our strategic management team have been with us for a number of years - at least 12 of them have been with us since the company commenced operations in 2006. In accordance with the Employee Bargaining Agreement (EBA) all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service. 

Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course we maintain a memorandum record of the number of days each employee is entitled to. Peter has indicated to us that he thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave – why not “stick with” recognising the expense when we pay for it? What do you think we should do and why? 

(3) Peter, the new financial controller, has also informed the board that the company will need to present a statement of cash flows with the financial statements in addition to those statements already being presented, which really attracted a lot of attention. Some of the directors thought it was a waste of time to present this statement as it was merely a summarised cash book. Others were of the opinion that it could be useful but didn’t quite know how they would use it. The structure of the statement of cash flows also came into question with one of the directors suggesting that we merely needed to “get a printout” of the cash account and attach it. Another said that we couldn’t just do that as we needed to show “operating, instigating and financing” cash flows in the statement. Could you please clarify this matter for us?

 

Answer:

Correction of error in the financial statements:

As per the requirements of the ASC 250, Accounting Changes and Error Corrections, any correction in the errors that have taken place during the previous year will not be considered to be the change in accounting. But reporting the correction of an error that has taken place during any of the previous year have to be included in the financial statements retrospectively. (IAS, 2015)

The section 2500 is concerned with the changes in the accounting and the correction of errors. The Internal accounting standard number 8 deals with the changes in the accounting estimates. Also, IAS 8.36 specifies that any change shall be charged to the income and expenditure account and the effect for all the previous years will take place in the income and expenditure statement of the current year. (IFRS, 2015)

 

As per ASC 250, requires that the changes in the prior periods financial statements would only and only be made when it is not impossible to determine the specific effects of the changes in the prior periods and then, if this is the case, then the concerned codification requires the application of the new principles of accounting to the balance of the assets and the liabilities. (EY, 2015)

When an error is corrected, the following conditions have to be met so as to restate the financial statements of the prior periods:

1. Showing the cumulative effects of all the periods that are prior as against those that were there during the beginning of the first period

2. Offsetting of the opening balances of the retained earnings account

3. Adjustments in the prior period’s financial statements. (Boundless, 2015)

Hence, keeping in mind the facts and the circumstances of the given case, the life of the equipment will be changed and the amount that has been wrongly changed to the repairs and maintenance account and charged in the income and expenditure statement.

The value of the equipment shall be added to it and depreciation shall be subtracted from the same. 

 

Accounting of the long service expense:

As per the AASB 30, accounting for the employee benefits and entitlements, the liabilities that are incurred in respect of the following are necessarily required to be expensed in the income and expenditure account:

1. Wages and salaries, annual leave and the sick leaves without considering the fact whether they have to be settled within the period of 6 months or not.

2. The other employee benefits and the entitlements that are expected to be settled within the period of 12 months and whether they will be measured at their nominal values.

All the employees’ entitlements shall be measured at the present value of the estimated future cash flows. The amounts have to be paid to the employees for the services that have been rendered by them to the employer. (ACE. NSW, 2015)

 

As per the AASB 119, any liability that is due and is scheduled to be paid within the next 12 months should be measured on the nominal basis. (DHHS, 2015)

All the expenses that are incurred during the regular course of the business are required to be included in the income and expenditure and the same have to be aggregated as against the revenues of the same period.

Importance of cash flow statement:

A cash flow statement deals with the various inflows and the outflows of the cash that takes place during the year.

 

The following are the reasons due to which the cash flow statement is important:

1. It helps in ascertaining the cash position of the company. If the company has the positive cash flows, only then, will the company be able to meet its liabilities.

2. This statement helps in ascertaining the various inflows and the outflows of the money in respect of a project

3. When the information has to be reported to the manager and the shareholders along with the creditor. This statement becomes necessary to be reproduced.

4. The company could go on to be low on cash even when it is earning losses since a huge amount of money may have been tied up in accounts receivables and inventory.(Boundless, 2015)

5. If the company has a huge outflow of money, then the statement will tell the owners the same since the owners would know after looking at it whether they are drawing too much cash from the business or not.

6. The preparation of a cash flow statement would lead the company avoid the bankruptcy.

7. The cash flow statement is divided into 3 parts and each of these parts will tell a different story altogether throwing light on the various flows of the cash.

8. The statement will tell the company about the various payment that have been made in respect of the loans and the interest on the loans.(SSH, CPA, 2015)

9. Cash flow statement will help the company in knowing the actual amount of cash that the company is holding and ensures that no default is made by the company in respect of loan repayments

10. When a loan is taken from the bank, the bank ascertains the cash flow position of the company. In case, the position of the company is not good, then no loan is given to the company.

Also, if the company prepares a cash flow statement, it will know where the cash is flowing away and whether it will be able to pay off the loan in the future or not. (Small business chron, 2015) 

 

 

References:

Ey.com, 'Advisory, Assurance, Tax, Transaction Services'. In, 2015, <https://www.ey.com> [accessed 25 January 2015].

Iasplus.com, 'ASC 250 — Accounting Changes and Error Corrections'. In, 2015, <https://www.iasplus.com/en-us/standards/fasb/presentation/asc250> [accessed 25 January 2015].

Ifrsclass.com, 'IFRS Financial Reporting Accounting Textbook by IFRSclass.com'. In, 2015, <https://ifrsclass.com/accounting-textbooks/ifrs-reporting/2500-accounting-changes-error-correction.htm> [accessed 25 January 2015].

'Importance of Cash Flow Accounting'. In, 2014, <https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/detailed-review-of-the-statement-of-cash-flows-14/cash-flow-accounting-89/importance-of-cash-flow-accounting-399-3721/> [accessed 25 January 2015].

'Overview of Statement Changes and Errors'. in , , 2014, <https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/special-topics-in-accounting-income-taxes-pensions-leases-errors-and-disclosures-15/making-changes-and-correcting-errors-94/overview-of-statement-changes-and-errors-406-1905/> [accessed 25 January 2015].

Small Business - Chron.com, 'Importance of Cash Flow to a Business'. In, 2015, <https://smallbusiness.chron.com/importance-cash-flow-business-57376.html> [accessed 25 January 2015].

Ssh-cpa.com, 'Importance of the Cash Flow Statement: Shepard Schwartz & Harris LLP'. In, 2015, <https://www.ssh-cpa.com/newsroom-publications-dont-overlook-the-cash-flow-statement.html> [accessed 25 January 2015].

www.ace.nsw.gov.au, 'Income and expenditure'. In, 2015, <https://www.ace.nsw.gov.au/images/files/stats/Publications/Informed%20and%20In%20control/Module%208%20trial.pdf> [accessed 25 January 2015].

www.dhhs.tas.gov.au, 'AASB 119'. In, 2015, <https://www.dhhs.tas.gov.au/__.../Financial_Accountability_Explanatory_Notes> [accessed 25 January 2015].

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