CP-03 (Reporting financial performance)

Question 1

Retrospective

Answer 1

When a new accounting policy is adopted, it is applied retrospectively if it means applying the new policy to all prior periods as if it had been in effect from the start, according to IFRS 8.

🔹 When Is Retrospective Application Used?
Change in Accounting Policy:
As per IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, retrospective application is required unless it’s impracticable.
Correction of Prior Period Errors:
Requires retrospective restatement to correct errors in previously issued financial statements.
IFRS Adoption or Transition:
Often requires retrospective application of standards (e.g., applying IFRS 15 to revenue in previous years).

🔹 Example:
Suppose in 2025, a company changes its depreciation method from straight-line to reducing balance. If this change is a change in estimate, it is prospective.
But if it’s a correction of an error (e.g., wrong method applied), then it must be retrospectively adjusted in past financials.

Question 2

Prospective

Answer 2

Prospective application means that a change is applied from the date of the change onward, without adjusting past financial statements.

🔹 When Is Prospective Application Used?
Change in Accounting Estimate:
As per IAS 8, changes in estimates (like useful life of an asset, bad debt provision, etc.) are applied prospectively.
Certain IFRS Standard Applications:
Some standards allow or require prospective treatment for ease or practicality (e.g., some leases under IFRS 16).

🔹 Examples of Prospective Application
Change in Depreciation Method (Estimate):
*From 1 Jan 2025, a company changes from straight-line to reducing balance method.
*No adjustment to past depreciation; the new method is applied from 2025 onward.
Provision for Doubtful Debts
*If a company changes its estimation technique for bad debts, it applies the new method going forward, not retroactively.

Question 3

Change in accounting estimate

Answer 3

Accounting estimates are amounts in financial statements that are not directly observable but require estimation due to measurement uncertainty.
Changes in estimates are adjustments to the carrying amount of an asset or liability resulting from reassessing future benefits or obligations, which are recognized prospectively.

🔹 Examples of Accounting Estimates:
Depreciation — Estimating useful life and residual value of fixed assets.
Provision for Doubtful Debts — Estimating uncollectible receivables.
Inventory Obsolescence — Estimating losses due to outdated or unsellable stock.
Warranty Liabilities — Estimating future product repair/replacement costs.
Fair Value Estimates — For assets, liabilities, or investments when no active market exists.

Question 4

IFRS 5
Non-current Assets Held for Sale and
Discontinued Operations

Answer 4

> > Non-current asset as held for sale is that it is highly probable that it will be finally sold within 12 months of classification.
A non-current asset held for sale is measured at the lower of carrying amount and fair value less costs to sell. The effect is that if fair value less costs to sell is lower than the carrying amount of the asset, then the loss is recognised at the time the decision is made to dispose of the asset, not when the disposal actually takes place.

Question 5

IAS 21
The Effects of Changes in Foreign Exchange Rates

Answer 5

• Exchange gains and losses arise when there is a change in the exchange rate that is applied on initial recognition and on settlement/retranslation of a transaction carried out in a foreign currency.
• At the end of a reporting period, monetary foreign currency assets and
  liabilities must be retranslated into the local or ‘functional’ currency of the reporting entity.