151. A lessee's IFRS 16 right-of-use asset for a retail unit was initially measured, at lease commencement several years ago, without including a material rent-free incentive period the landlord had granted as an inducement; the lease incentive was instead recognised entirely as a credit to the income statement in the single period it was actually enjoyed rent-free, rather than being deducted from the right-of-use asset's initial measurement and spread systematically over the lease term as IFRS 16 requires. This is discovered several years later. How should it be corrected?

A) Corrected by increasing the lease liability alone in the current period, with no adjustment to the right-of-use asset or any prior period's depreciation
B) No correction is required, since a rent-free period is considered economically equivalent to the income statement credit originally recognised, regardless of the specific accounting mechanics IFRS 16 prescribes
C) Corrected retrospectively as a material IAS 8 prior period error, restating the right-of-use asset's initial measurement (reduced by the lease incentive) and the resulting depreciation charge for each affected prior period, and reversing the incorrect one-off income statement credit originally recognised in the rent-free period, since IFRS 16's own already-clear requirement to include lease incentives in the initial measurement was simply misapplied, not a matter of subsequent changed circumstances
D) Corrected prospectively only, adjusting the right-of-use asset's remaining carrying amount from the current period's opening balance, with prior periods' depreciation and the original income statement credit left unrestated

Correct: C difficult IAS 8/IFRS 16 - lease incentive excluded from right-of-use asset initial measurement, retrospective correction

IFRS 16 requires a lease incentive (such as a rent-free period) to be deducted from the right-of-use asset's initial measurement at commencement and effectively spread over the lease term through the resulting depreciation pattern, not recognised as a one-off income statement credit in the period the incentive happens to be enjoyed; failing to apply this already-clear initial measurement requirement is a mistake, not a change in estimate, and is corrected retrospectively, restating the right-of-use asset's initial measurement and the resulting depreciation charge for each affected prior period, and reversing the incorrect one-off credit originally recognised.

152. An exporter's back-to-back export letter of credit bill discounting arrangement (whereby the exporter's bank advances cash against an export bill receivable before its maturity) was originally derecognised (treated as a sale of the receivable) several years ago on the assessment that the bank held no recourse to the exporter; a review of the ORIGINAL banking facility agreement - available and unambiguous throughout - reveals the bank did, in fact, hold meaningful recourse to the exporter for non-payment by the importer's bank, meaning the derecognition should never have occurred and the arrangement should instead have been accounted for as a secured borrowing from inception. How should this be corrected upon discovery?

A) No correction is required, since export bill discounting arrangements are, by market convention, always treated as an outright sale regardless of the actual specific recourse terms in the facility agreement
B) Corrected retrospectively as a material IAS 8 prior period error - since the bank's actual recourse terms were already clear and available in the original facility agreement throughout, and the original assessment simply misapplied those known terms - reinstating the export bill receivable (net of amounts genuinely collected) and recognising a secured borrowing liability for the cash advanced by the bank, with the related finance cost restated through profit or loss for each affected prior period
C) The correction is limited to adding a disclosure note describing the bank's recourse rights, with no adjustment to any primary financial statement figures for any period
D) Corrected prospectively only, reinstating the receivable and recognising the secured borrowing liability from the current period's opening balances, with no restatement of prior periods during which the receivable remained wrongly derecognised

Correct: B difficult IAS 8/IFRS 9 - export bill discounting wrongly derecognised despite known recourse terms, retrospective correction reinstating secured borrowing

As with any other financial asset derecognition assessment based on an agreement's own actual terms, where the original banking facility agreement's recourse terms were already clear and available at the time of the original transaction, and the original assessment simply misapplied those known terms (concluding no recourse when meaningful recourse in fact existed), this is a mistake applying already-available information - a genuine IAS 8 error; it is corrected retrospectively, reinstating the export bill receivable and recognising a secured borrowing liability (with the associated finance cost restated through profit or loss) for each affected prior period, as if the correct with-recourse assessment had been applied from inception.

153. A company reported retained earnings of CU 1,000,000, all distributable, and paid a dividend of CU 600,000 after the financial statements were approved. It then discovers that unrecorded expenses overstated the prior year's profit by CU 700,000, leaving only CU 300,000 of distributable profit before the dividend. How is this accounted for?

A) Restate the prior year for the CU 700,000 error; the CU 600,000 dividend stays a distribution (leaving a CU 300,000 deficit), and recovering the unlawful excess is not recognised unless virtually certain
B) The CU 600,000 dividend is reversed and a CU 300,000 receivable from shareholders is recognised immediately, because the excess over distributable profit is recoverable by law
C) The prior year is restated by CU 700,000 and the dividend is reduced retrospectively to CU 300,000, so the amount actually distributed matches the corrected distributable profit, so that no unlawful excess remains outstanding
D) The CU 700,000 is charged to the current year's profit with no restatement, because the dividend has already been paid and the prior period cannot be reopened

Correct: A difficult IAS 8 / IAS 37 - prior period error affecting distributable profit, dividend legality and contingent recovery

The overstated profit is a material prior period error and is corrected retrospectively by restating the comparatives (CU 700,000 less retained earnings). The dividend was actually paid, so it remains a distribution in equity, leaving a deficit of 1,000,000 - 700,000 - 600,000 = CU 300,000, and the shortfall in distributable profit raises legal issues for directors and shareholders. A right to recover the unlawful excess is a contingent asset and is not recognised until recovery is virtually certain. Reversing the dividend or reducing it retrospectively would misrepresent what was paid.

154. At 31 December 20X5 an entity accrued CU 18,000 for electricity (debit expense, credit accruals), which was correct. In January 20X6 the supplier's CU 18,000 invoice was paid and debited to electricity expense, but the opening accrual was never released. The error is found while preparing the 20X6 financial statements. What correction is made?

A) Make no correction, because the surplus accrual will reverse automatically in 20X7, leaving the cumulative expense across the two years correct, and the 20X6 accounts are left as reported
B) Debit accruals CU 18,000 and credit other income CU 18,000, because the unreleased accrual is a gain that arises when the invoice is paid, recognised in the 20X6 income statement
C) Debit accruals CU 18,000 and credit electricity expense CU 18,000 in the 20X6 ledgers, because the 20X6 expense is overstated and the 20X5 financial statements were correct
D) Restate the 20X5 comparatives and debit accruals CU 18,000 with a credit to opening retained earnings, because the accrual originated in the prior year, with the comparative profit also restated

Correct: C difficult Correction of errors - accrual brought forward not reversed, double charge corrected within the current period

The 20X5 accrual was right. The mistake arose in 20X6, when the payment was charged to expense without releasing the accrual, so 20X6 expense is overstated and accruals are overstated, both by CU 18,000. Because the error is discovered before the 20X6 statements are authorised, it is corrected directly in the 20X6 records (debit accruals, credit expense), and no prior period restatement arises. Crediting other income or retained earnings misclassifies the correction, and waiting until 20X7 would leave 20X6 materially misstated.

155. An asset (cost CU 600,000, depreciated at 20% a year straight line) was sold on 31 December 20X4 and removed from the ledger, but not from the asset register. The register's automatic depreciation run therefore posted CU 120,000 in each of 20X5 (comparative) and 20X6 (current year) to the depreciation expense and accumulated depreciation. The error is found at 31 December 20X6. What is the correction?

A) Debit accumulated depreciation CU 120,000 and credit 20X6 depreciation expense CU 120,000 only, because depreciation charged in the previous year cannot be adjusted once the accounts are issued
B) Debit accumulated depreciation CU 240,000, credit depreciation expense CU 120,000 for 20X6 and credit opening retained earnings CU 120,000, with the 20X5 comparative restated
C) Debit accumulated depreciation CU 240,000 and credit 20X6 depreciation expense CU 240,000, because the whole error is corrected in the current period's profit or loss
D) Debit accumulated depreciation CU 240,000 and credit opening retained earnings CU 240,000, because depreciation recorded on a disposed asset is entirely a prior period item

Correct: B difficult IAS 8 / IAS 16 - depreciation charged on a disposed asset, split of the correction between comparative and current periods

The register kept depreciating a disposed asset, so CU 120,000 of 20X5 and CU 120,000 of 20X6 depreciation is spurious and accumulated depreciation is overstated by CU 240,000. The 20X5 portion is a prior period error, corrected by restating the comparative and crediting opening retained earnings (CU 120,000), while the 20X6 portion is credited to the current year's depreciation expense. Putting all the correction through 20X6, or all through opening retained earnings, misstates the periods affected.

156. An entity revalued a building in 20X1, creating a revaluation surplus of CU 1,200,000. The extra depreciation from the revalued amount, compared with depreciation on original cost, is CU 40,000 a year. The entity has never transferred this amount from the revaluation surplus to retained earnings, and its policy discloses this. In 20X6 a reviewer proposes restating the previous five years. What is the correct response?

A) No restatement is needed: the transfer is permitted but not required, so the consistent policy is not an error, and the surplus is transferred, at the latest, on derecognition of the asset
B) Treat the omission as an error but apply the correction prospectively from 20X6 only, because the impracticability exception applies to a transfer between components of equity
C) Restate the previous years by debiting revaluation surplus CU 200,000 and crediting retained earnings, because the standard requires an annual transfer and its omission is an error
D) Debit revaluation surplus CU 40,000 and credit the current year's profit or loss, with CU 160,000 corrected in opening retained earnings, because the transfer is a realisation of income

Correct: A difficult IAS 16 / IAS 8 - optional transfer of the revaluation surplus to retained earnings is not an error

The revaluation surplus may be transferred to retained earnings as the asset is used, but this is permitted, not required, so not transferring it is a policy choice rather than a mistake. No restatement arises, and the transfer is made directly within equity, never through profit or loss, at the latest when the asset is derecognised. Calling the omission an error, running the amount through profit or loss, or invoking impracticability all misapply IAS 8 and IAS 16.

157. An entity (functional currency CU) recorded a USD 200,000 payable at a rate of 108 on purchase in the prior year. It was not retranslated at the prior year end (closing rate 112), and the current year end rate is 118, when the entity retranslated it from 108, recognising a loss of CU 2,000,000 in the current year. The prior year omission is material. What correction is required?

A) Debit opening retained earnings CU 800,000 and credit the payable CU 800,000, because the liability was understated at the prior year end and must be increased
B) Make no correction because the closing liability of CU 23,600,000 is right and the cumulative loss across the two years is unchanged, so the timing between them is immaterial, and a disclosure note is sufficient
C) Restate the prior year for an exchange loss of CU 800,000 (debit opening retained earnings) and credit the current year's exchange loss CU 800,000, leaving a current-year loss of CU 1,200,000
D) Debit opening retained earnings CU 2,000,000 and credit the current year's exchange loss CU 2,000,000, because the whole loss belongs in the prior year when the rate first moved

Correct: C difficult IAS 8 / IAS 21 - monetary item not retranslated at a prior year end, restating the comparative exchange loss

A foreign currency monetary item is retranslated at the closing rate each year, so the prior year should have recognised (112 - 108) x USD 200,000 = CU 800,000 of loss, and the current year only (118 - 112) x 200,000 = CU 1,200,000. The error shifted CU 800,000 of loss into the current year. It is corrected by restating the prior year (debit opening retained earnings) and crediting the current year's loss by CU 800,000. The closing liability (118 x 200,000) is already correct, so no change is made to it, and the cumulative total does not justify leaving the periods misstated.

158. A contractor recognises revenue over time on a CU 12,000,000 contract using costs incurred as a percentage of total expected costs of CU 9,000,000. Costs incurred to date are CU 5,400,000, which include CU 1,500,000 of materials delivered to site but not yet installed. The materials are not distinct goods and the conditions for recognising them at zero margin are not met. What is the correct cumulative revenue and the overstatement?

A) Cumulative revenue of CU 7,200,000 (60%) is correct, because all costs incurred, including materials purchased for the contract, represent progress towards completion
B) Cumulative revenue should be CU 6,240,000 (3,900,000/7,500,000 = 52%), so revenue was overstated by CU 960,000 compared with CU 7,200,000 at the 60% cost-to-cost measure
C) Cumulative revenue should be CU 7,740,000 (6,240,000 plus the CU 1,500,000 of materials at cost), so revenue was understated by CU 540,000 under the original measure
D) Cumulative revenue should be CU 5,200,000 (43.3%), so revenue was overstated by CU 2,000,000, as the uninstalled materials are excluded from costs incurred but not from total costs

Correct: B difficult IFRS 15 / IAS 8 - measure of progress for a performance obligation satisfied over time, uninstalled materials excluded

In a cost-based progress measure, costs that do not depict transfer of control, such as uninstalled materials that are not distinct, are excluded from both costs incurred and total expected costs: progress = (5,400,000 - 1,500,000)/(9,000,000 - 1,500,000) = 52%, giving revenue of CU 6,240,000. At 60% revenue was CU 7,200,000, overstated by CU 960,000. Excluding the materials only from the numerator understates progress, and adding them at cost is available only if the specific conditions, not met here, are satisfied.

159. Last year's closing inventory (all sold this year) included CU 180,000 of abnormal wastage and CU 90,000 of storage costs incurred after production was complete and not needed before a further production stage. The inventory costing error is material and is found before this year's financial statements are authorised. What is the correction?

A) Reduce this year's profit by CU 270,000 and make no change to last year, because the inventory was sold this year and the error is therefore a current-year cost
B) Restate last year's profit and closing inventory down by CU 270,000, with no effect on this year's profit, because cost of sales was correctly calculated for the current year, since the inventory was sold at cost
C) Restate last year by CU 180,000 only, because abnormal wastage is excluded from inventory cost while storage costs are an acceptable element of the cost of inventory
D) Restate last year: reduce closing inventory and profit by CU 270,000 (both costs are expensed when incurred); this year's profit rises by CU 270,000 as cost of sales falls by the same amount

Correct: D difficult IAS 2 / IAS 8 - abnormal costs and unqualified storage costs in inventory, two-period effect of the correction

Abnormal waste, and storage costs not necessary before a further production stage, are excluded from inventory cost and expensed when incurred. Including CU 270,000 overstated last year's closing inventory and profit, and as the inventory was sold this year, this year's cost of sales was overstated by the same amount. The comparatives are restated downward by CU 270,000 and this year's profit increases by CU 270,000. Charging the amount only to this year would leave last year misstated, and the storage costs here do not qualify for inclusion.

160. At the prior year end an entity provided CU 1,800,000 for current tax. The final assessment this year was CU 2,050,000. CU 190,000 of the CU 250,000 shortfall arose because the tax authority disallowed an expense that management had reasonably treated as deductible, and CU 60,000 from an arithmetical slip in the original computation, which management considers immaterial. How is the CU 250,000 treated?

A) CU 250,000 is debited directly to retained earnings, because tax relating to prior periods is an equity item and does not pass through the income statement
B) All CU 250,000 is a prior period error and the comparatives and opening retained earnings are restated, because the original provision was wrong by that amount
C) CU 190,000 is charged to this year's tax expense and CU 60,000 is restated against last year, because every arithmetical slip in a tax computation must be restated, leaving profit unaffected by the correction
D) All CU 250,000 goes to this year's tax expense as a prior period adjustment, with no restatement, as the estimate change and the immaterial slip do not warrant restating comparatives

Correct: D difficult IAS 12 / IAS 8 - adjustment of prior period current tax, change in estimate versus immaterial error

Differences between the tax originally estimated and the final amount are normally recognised as part of current tax expense in the period of resolution; it is a change in estimate. The CU 60,000 arithmetical slip is an error, but because it is immaterial it also does not require retrospective restatement and is corrected in the current period. Restating the whole amount, restating only the slip, or debiting equity would all depart from the materiality threshold and from the requirement to present tax adjustments in profit or loss.

161. On 1 January of year 1 a lessor leased an asset (cost and fair value CU 1,000,000, no residual value) for five years at CU 263,797 a year in arrears, an implicit rate of 10%. The lease transfers substantially all risks and rewards, but the lessor treated it as an operating lease: rental income CU 263,797 and straight-line depreciation CU 200,000 in year 1. The error is material. What is the effect of correcting year 1?

A) Year-1 profit is unchanged at CU 63,797 and only the classification within the statement of financial position changes, because the lease cash flows are the same under either classification
B) The asset (carrying amount CU 800,000) is derecognised and a lease receivable of CU 836,203 recognised; year-1 profit rises by CU 36,203 (finance income CU 100,000 against the CU 63,797 previously recognised)
C) Year-1 profit falls by CU 163,797, because rental income of CU 263,797 is replaced by finance income of CU 100,000 and depreciation is not affected by the correction
D) Year-1 profit rises by CU 163,797 and a receivable of CU 836,203 is recognised, because the principal element of the rental receipt is income under a finance lease

Correct: B difficult IFRS 16 / IAS 8 - lessor classification error, finance lease treated as operating lease and its retrospective correction

As a finance lease, the lessor derecognises the asset and recognises a net investment of CU 1,000,000, accrues finance income at 10% (CU 100,000 in year 1), and reduces the receivable by the CU 263,797 receipt to CU 836,203. Under the incorrect treatment, year-1 profit was 263,797 - 200,000 = CU 63,797, so the correction increases it by CU 36,203, and net assets rise by 836,203 - 800,000 = CU 36,203. Ignoring the change, counting principal as income, or leaving depreciation in place all produce wrong profit effects.

162. An investor's equity-accounted associate had a carrying amount of CU 400,000 at the start of year 1. The investor's share of the associate's year-1 loss was CU 700,000 and it recognised it in full, showing a negative investment of CU 300,000 as a liability, although it has no legal or constructive obligation to fund the associate. In year 2 its share of the associate's profit was CU 250,000. What is the correct treatment?

A) Year-1 loss limited to CU 400,000 (investment nil, no liability), CU 300,000 unrecognised; the year-2 profit share of CU 250,000 is not recognised, leaving CU 50,000 of unrecognised losses
B) Year-1 loss is limited to CU 400,000, and the year-2 profit of CU 250,000 is recognised as income, leaving an investment of CU 250,000 because the loss limit is only for the first year, with the earlier unrecognised amount ignored
C) Year-1 loss is limited to CU 400,000 and the CU 300,000 excess is written off to retained earnings, with the year-2 profit of CU 250,000 recognised in full as income
D) Year-1 loss of CU 700,000 is retained, with the CU 300,000 negative investment shown as a liability, and the year-2 profit raises the investment to a negative CU 50,000

Correct: A difficult IAS 28 / IAS 8 - equity method losses limited to the carrying amount of the interest, correction of excess losses recognised

Under the equity method, an investor stops recognising its share of further losses once the investment is reduced to zero, unless it has incurred legal or constructive obligations or made payments for the associate. Recognising the CU 300,000 beyond zero was an error. Year-1 recognition is CU 400,000, with CU 300,000 unrecognised. Later profits are recognised only after they exceed the unrecognised losses, so the year-2 CU 250,000 is not recognised and CU 50,000 of unrecognised losses remains. The loss is not taken to retained earnings, and the limit does not expire.

163. A 75%-owned subsidiary sold goods to its parent last year at cost plus 25% mark-up for CU 1,000,000; CU 400,000 of them (at transfer price) were in the parent's closing inventory, and all were sold outside the group this year. The consolidation did not eliminate the unrealised profit last year, and the omission is material. What is the correction to last year's consolidated figures?

A) Make no restatement, because the goods were sold outside the group this year and the unrealised profit has therefore reversed itself, so the cumulative effect is nil
B) Reduce closing inventory and consolidated profit by CU 80,000 (400,000 x 25/125), with CU 60,000 borne by the owners of the parent and CU 20,000 by non-controlling interest
C) Reduce closing inventory and profit by CU 80,000, all borne by the owners of the parent, because the parent is the party holding the inventory and bears the unrealised profit
D) Reduce closing inventory and profit by CU 100,000 (400,000 x 25%), with CU 75,000 borne by the parent's owners and CU 25,000 by non-controlling interest, applying the mark-up to the transfer price

Correct: B difficult IFRS 10 / IAS 8 - unrealised profit on intragroup sales by a subsidiary, elimination omitted and restated

Unrealised profit in closing inventory is 400,000 x 25/125 = CU 80,000 (a mark-up of 25% is 20% of the transfer price). Because the subsidiary made the sale, the adjustment is shared between the owners of the parent (75% = CU 60,000) and non-controlling interest (25% = CU 20,000). The error reversed itself in the following year, but IAS 8 still requires the misstated comparative to be restated. Applying 25% directly to the transfer price, or charging it all to the parent, gives the wrong amounts.

164. A subsidiary, 80% owned by the parent, paid a dividend of CU 500,000 in the year: CU 400,000 to the parent and CU 100,000 to non-controlling interest. The parent's CU 400,000 dividend income was left in consolidated profit or loss. The subsidiary's own profit is also consolidated, and the error is material. What is the effect of the correction?

A) Eliminate CU 500,000 from consolidated profit, because the dividend paid by the subsidiary, including the non-controlling interest's share, is an intragroup transfer
B) Eliminate the CU 400,000 and also reduce net assets by CU 400,000, because the dividend income was never received from outside the group and its cash must be removed
C) Make no correction, because dividend income received by the parent is realised income of the group and is correctly presented in consolidated profit or loss
D) Eliminate the CU 400,000 dividend income against the subsidiary's dividend in equity; consolidated profit falls by CU 400,000 but total equity is unchanged

Correct: D difficult IFRS 10 / IAS 8 - elimination of intragroup dividend income on consolidation

A dividend paid by a subsidiary to its parent is an intragroup transfer. The parent's dividend income (CU 400,000) is eliminated against the subsidiary's dividend, which is deducted within equity, so consolidated profit is reduced by CU 400,000 but retained earnings after dividends and net assets are unchanged. The CU 100,000 paid to non-controlling interest is a distribution to outside owners, reducing their interest, and is not eliminated. Eliminating CU 500,000 or net assets overstates the correction, and leaving the income double counts the subsidiary's profit.

165. A travel intermediary recognised CU 40,000,000 of customer bookings as revenue and CU 36,000,000 of amounts paid to airlines and hotels as cost of sales. It does not control the services before they transfer to customers, bears no inventory risk and earns a 10% commission, so it is an agent. The error is material. What is the correction?

A) Restate revenue to the CU 4,000,000 commission and reduce cost of sales by CU 36,000,000, with no effect on profit or equity, applying the correction retrospectively to the comparatives
B) Reduce revenue by CU 36,000,000 and charge the CU 36,000,000 against retained earnings, because the overstatement of revenue is a prior period error with no profit element
C) Restate revenue to CU 36,000,000 and leave cost of sales unchanged, because the amounts paid to suppliers are the only element which the entity can reliably measure
D) Make no correction, because the error has no effect on profit or net assets and therefore cannot be material under IAS 8, whatever the size of the revenue overstatement

Correct: A difficult IFRS 15 / IAS 8 - principal versus agent, gross revenue recognised in error and retrospective correction

An agent recognises revenue as the net commission it earns (10% x CU 40,000,000 = CU 4,000,000), not the gross billings. Recognising gross overstates revenue and cost of sales by CU 36,000,000 each, with no effect on profit or equity, and the correction is applied retrospectively. A misstatement can be material even with no profit effect, since it distorts the key line of revenue, and netting only one side or charging equity would misstate profit or equity.

166. A group's policy is weighted average cost. Since acquisition at the start of last year, a wholly owned subsidiary has valued its inventory on FIFO and no consolidation adjustment was made. The FIFO inventory exceeded weighted average cost by CU 70,000 at the end of last year and by CU 120,000 at the end of this year. The error is material. What is the correction?

A) Reduce this year's profit by CU 120,000 and leave last year unchanged, because the difference is first identified in the current year and the comparatives are not adjusted
B) Make no adjustment, because the subsidiary's own policy is acceptable in its individual financial statements and need not be aligned in the consolidated financial statements
C) Reduce last year's profit by CU 120,000 and leave this year unchanged, because the difference at the later date existed from acquisition and belongs to the earlier year
D) Reduce last year's closing inventory and profit by CU 70,000, and reduce this year's profit by CU 50,000, taking this year's closing inventory down by CU 120,000 in total

Correct: D difficult IFRS 10 / IAS 8 - uniform accounting policies on consolidation, inventory formula not aligned and corrected retrospectively

Consolidated financial statements must use uniform accounting policies for like transactions, so the subsidiary's inventory must be restated to the group's weighted average basis. The cumulative difference of CU 70,000 at the end of last year reduces last year's profit and inventory; the further CU 50,000 (120,000 - 70,000) reduces this year's profit, taking closing inventory down by CU 120,000. Charging everything to one year misallocates the profit effect, and allowing different policies in the group's statements contravenes the consolidation requirement.

167. On 28 December of last year an entity invoiced CU 3,000,000 (cost CU 2,100,000) for goods held in its own warehouse under a bill-and-hold arrangement, and recognised the revenue. The goods were not separately identified, could be used to fill other orders, and were not ready for transfer to the customer, who took delivery on 15 January this year. The error is material. What is the correction?

A) Make no correction, because the goods were invoiced and legal title passed to the customer, so revenue is correctly recognised at the invoice date of last year
B) Reverse the sale last year and recognise it this year, but leave the CU 2,100,000 of inventory out of last year's restated statement of financial position, because the goods are not owned
C) Reverse revenue CU 3,000,000, cost of sales CU 2,100,000 and the receivable in last year (profit down CU 900,000, inventory restored CU 2,100,000), then recognise the sale on delivery this year
D) Reverse only the CU 900,000 of profit last year and leave revenue and cost of sales as reported, because the gross amounts net to nothing in respect of the whole contract

Correct: C difficult IFRS 15 / IAS 8 - bill-and-hold arrangements not meeting the criteria, revenue recognised too early and restated

A bill-and-hold sale is recognised before delivery only if the reason for it is substantive, the goods are identified separately as the customer's, are ready for physical transfer, and the entity cannot use them or redirect them. Here those conditions are not met, so control passed only on delivery on 15 January. Last year's revenue (CU 3,000,000) and cost of sales (CU 2,100,000) are reversed, profit falling by CU 900,000, the receivable is removed and inventory restored; the sale is recognised this year. Invoicing alone does not transfer control.

168. In Year 2 an entity finds that employer contributions of 5% on the Year 1 payroll of CU 2,400,000 were never accrued or paid. The contributions will be tax deductible when paid, the tax rate is 25%, and the effect is material. What is the restatement of Year 1?

A) Profit falls by CU 90,000 net of tax, a liability of CU 120,000 is added, and a deferred tax asset of CU 30,000 is recognised
B) Profit falls by CU 90,000, a liability of CU 90,000 is added, because the tax relief reduces the amount owed to the pension fund
C) Profit falls by CU 120,000, a liability of CU 120,000 is added, and no tax effect is recognised until the amount is paid
D) The CU 120,000 is charged in Year 2 profit as a catch-up, and the Year 1 comparatives are left as they were originally published

Correct: A difficult IAS 19.51, IAS 8.42, IAS 12.24

Contributions are an expense of the year in which the employees' service is given (IAS 19.51). Omitting them is a material prior period error, so Year 1 is restated retrospectively (IAS 8.42): expense 5% x 2,400,000 = CU 120,000 and a liability of the same amount. Tax relief on payment gives a deferred tax asset of 120,000 x 25% = CU 30,000, so profit falls by CU 90,000 net. The liability to the fund is not reduced by tax relief.

169. An entity recognised royalty income only when received. The licensee reports sales quarterly and pays a month later, so Q4 royalties of CU 45,000 for Year 1 were recognised in Year 2. The Year 2 Q4 royalties of CU 50,000 were also left to Year 3. The Year 1 effect is material. How is the error corrected?

A) No restatement is made, because the net effect over the two years of CU 5,000 is below the materiality threshold
B) Year 2 revenue is increased by CU 50,000 and the Year 1 comparatives are left unchanged, because the error was found in Year 2
C) Year 1 revenue and receivables are restated up by CU 45,000, and Year 2 revenue is increased by a net amount of CU 5,000
D) Year 1 and Year 2 revenue are both restated up by CU 45,000, because the same quarter of royalties was omitted in each year

Correct: C difficult IFRS 15.B63, IAS 8.41-42

Royalties are recognised as the licensee's sales occur (IFRS 15.B63). Year 1 revenue was understated by CU 45,000 and Year 2 contained that CU 45,000 but lacked its own Q4 CU 50,000, so Year 2 is understated by 50,000 - 45,000 = a net CU 5,000. Because the Year 1 error is material, materiality is judged on each period affected, so Year 1 must be restated (IAS 8.42), and a small net effect in Year 2 does not remove the need.

170. At the end of Year 1 inventory was carried at its cost of CU 400,000, although its net realisable value was CU 340,000. All of it was sold in Year 2 at its net realisable value. Ignoring tax, how is the error corrected in the Year 2 financial statements?

A) Year 1 inventory and profit are restated down by CU 60,000, and Year 2 profit is unchanged from the amount originally reported
B) Year 1 inventory and profit are restated down by CU 60,000, and Year 2 profit is also lower by CU 60,000 as a result
C) Year 1 inventory and profit are restated down by CU 60,000, and Year 2 profit is higher by CU 60,000 than previously reported
D) The CU 60,000 is written off in Year 2 cost of sales, and the Year 1 comparatives are not restated because the goods were sold

Correct: C difficult IAS 2.9, 2.28-34, IAS 8.42

Inventory is measured at the lower of cost and net realisable value (IAS 2.9), so the CU 60,000 write-down belonged in Year 1. Omitting it is a prior period error, corrected by restating Year 1: inventory and profit fall by CU 60,000 (IAS 8.42). In Year 2 the opening inventory is now CU 340,000, so cost of sales is CU 60,000 lower and Year 2 profit is CU 60,000 higher than previously reported. The error was a timing error and cancels over the two years.

171. At the year end the entity recorded a sale of CU 80,000 (cost CU 60,000) for goods sent to a retailer on sale or return. The retailer may return them until 15 January and had not decided. Control has not passed. What is the effect of correcting the error on the year-end figures?

A) Profit falls by CU 60,000, receivables fall by CU 80,000 and inventory rises by CU 20,000, since only the cost is reversed
B) Nothing is corrected, because the retailer is likely to keep the goods and so the sale is probable to stand when the option lapses
C) Profit falls by CU 80,000, receivables fall by CU 80,000, and inventory is unchanged because cost of sales was correct
D) Profit falls by CU 20,000, receivables fall by CU 80,000 and inventory rises by CU 60,000, as the sale and its cost are reversed

Correct: D difficult IFRS 15.31, B77-B78, IAS 8.42

Where the customer may return goods and the entity retains the risks, control has not passed, and revenue is not recognised until the retailer's acceptance or the return period lapses (IFRS 15.B77-B78). The sale of CU 80,000 and the cost of sales of CU 60,000 are reversed: receivables fall by 80,000, inventory is restored at cost of 60,000, and profit falls by 80,000 - 60,000 = CU 20,000.

172. In Year 1 a revaluation gain of CU 300,000 on land was credited to profit or loss as other income. The land is carried under the revaluation model. When the error is corrected in Year 2, how are the Year 1 comparatives restated?

A) Profit falls by CU 300,000 and other comprehensive income rises by CU 300,000, with total comprehensive income unchanged
B) Profit falls by CU 300,000 and the gain is removed, which reduces total equity by CU 300,000 as well, because there was no gain
C) Profit falls by CU 300,000 and the amount is credited directly to retained earnings, as no gain arises in the reserve
D) Profit and other comprehensive income are both unchanged, because the gain was real and classification is a presentation matter

Correct: A difficult IAS 16.39, IAS 8.42, IAS 1.7

A revaluation increase on an asset under the revaluation model is recognised in other comprehensive income and accumulated in the revaluation surplus, unless it reverses a previous loss in profit or loss (IAS 16.39). Crediting profit was an error of classification, corrected by moving CU 300,000 from profit to OCI (IAS 8.42). Total comprehensive income and equity are unchanged, but profit and earnings per share are restated downwards.

173. In Year 1 the entity paid a final dividend of CU 200,000 and debited it to administrative expenses. The error is material. Ignoring tax, how are the Year 1 comparatives restated?

A) Profit rises by CU 200,000 and total equity rises by CU 200,000, because the dividend was never paid to shareholders
B) Profit rises by CU 200,000, and the dividend is shown in the statement of changes in equity, with total equity unchanged
C) Profit rises by CU 200,000 and the dividend is shown as other comprehensive income, because it is a distribution of reserves
D) Profit is unchanged and total equity falls by CU 200,000, because the dividend has to be a liability until the next year

Correct: B difficult IAS 32.35, IAS 1.107, IAS 8.42

Dividends to equity holders are distributions, recognised directly in equity and not as expenses (IAS 32.35; IAS 1.107). Charging the dividend to administrative expenses understated profit by CU 200,000. The restatement removes the expense and records the dividend in the statement of changes in equity, so profit and earnings per share rise while retained earnings and total equity are the same as before.

174. Goodwill of CU 900,000 arose in a business combination at the start of Year 1 and was amortised over 10 years, CU 90,000 a year for Years 1 to 3. In Year 4 the entity finds that this was an error. No impairment exists. What is the restated goodwill at the end of Year 3, and what is the effect on retained earnings at the start of Year 3?

A) Goodwill is CU 810,000, and retained earnings at the start of Year 3 rise by CU 90,000, as only the Year 1 charge was an error
B) Goodwill is CU 630,000, and retained earnings are unchanged, because amortisation already charged is a change in estimate
C) Goodwill is CU 900,000, and retained earnings at the start of Year 3 rise by CU 270,000 for all three years' amortisation
D) Goodwill is CU 900,000, and retained earnings at the start of Year 3 rise by CU 180,000, for two years of amortisation

Correct: D difficult IAS 36.10, 36.54, IFRS 3.B63, IAS 8.42

Goodwill acquired in a business combination is not amortised but tested for impairment at least annually (IAS 36.10 and 36.54; IFRS 3.B63). The amortisation of 3 x 90,000 = CU 270,000 is an error, so goodwill is restated to CU 900,000. Retained earnings at the start of Year 3 are affected by the two earlier charges, 2 x 90,000 = CU 180,000, and the Year 3 comparative profit rises by CU 90,000 (IAS 8.42).

175. On 1 October Year 1 the entity received CU 360,000 for annual subscriptions covering 12 months from that date and recognised all of it as Year 1 revenue. The year end is 31 December. How is the error corrected?

A) Year 1 revenue is reduced by CU 360,000, with the whole amount treated as a deposit until the subscription period ends
B) Year 1 revenue is unchanged, because cash received for services is revenue when it is received and cannot be deferred
C) Year 1 revenue is reduced by CU 270,000 and a contract liability of CU 270,000 is recognised at the end of Year 1
D) Year 1 revenue is reduced by CU 90,000 and a contract liability of CU 90,000 is recognised at the end of Year 1

Correct: C difficult IFRS 15.35(a), 15.106, IAS 8.42

Subscription revenue is earned as the service is provided over time (IFRS 15.35(a)). At 31 December three of the twelve months have elapsed, so Year 1 revenue is 360,000 x 3/12 = CU 90,000 and the remaining CU 270,000 is a contract liability. Recognising all on receipt overstated Year 1 revenue and profit by CU 270,000, and the comparatives are restated (IAS 8.42). Year 2 revenue is correspondingly higher.