Answer to Question #122012 in Accounting for Theophilus Agyei

Question

The following material matters are under discussion:
a. After the balance sheet date one of the company ’s factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The company’s going concern status is not affected.
b. One of the company’s buildings was revalued during the year. The directors are uncertain as to how the revaluation surplus should be included in the financial statements.
c. The draft financial statements for the entity for the year ended 30 June 2015 have been prepared. A final review of the draft reveals an overvaluation of the closing inventory of GHS 200,000 at 30 June 2014. Further investigation shows that there was an overvaluation at 30 June 2013 of GHS 120,000
Explain how each of these matters should be dealt with, stating in each case the relevant accounting standard.

Answer 1

a) After the balance sheet date one of the company ’s factories was seriously damaged by fire. Insurance will only cover part of the loss suffered. The company’s going concern status is not affected.

The damage by fire of one of the companies constitutes an event after the balance sheet date. They are significant financial events that occur after the preparation of the balance sheet but before the financial statements are issued. According to IAS 10, the fie event does not affect the firm's going concern and is thus a non-adjusting entry. the firm should only make a disclosure by providing it in a note.

b. One of the company’s buildings was revalued during the year. The directors are uncertain as to how the revaluation surplus should be included in the financial statements.

As per IAS 16, “Property, Plant and Equipment” an entity may choose either the revaluation of the cost models. Revaluation surpluses that ensue should be recognized under the "other comprehensive income and accumulated in equity statement." However, the recognition should only be conducted if it is not correcting a prior revaluation decrease while the revaluation decreases should be recognized under the profit and loss accounts.

c. The draft financial statements for the entity for the year ended 30 June 2015 have been prepared. A final review of the draft reveals an overvaluation of the closing inventory of GHS 200,000 at 30 June 2014. Further investigation shows that there was an overvaluation at 30 June 2013 of GHS 120,000

As per IAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors” the errors can be classified as a prior period error which needs to be corrected using a retrospective statement. For instance, in the current case, the closing inventory should be adjusted upwards by GHS 320,000 as at 30 June 2015 while also increasing the closing inventory in the comparative financial statement for 30 June 2014 by GHS 320,000.