IAS 8 question - change in accounting policy or accounting estimate or error?

[Pratik Doshi]

Question on IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

One of my manufacturing client has been providing to P & L for inventory based on the aging of the inventory (for e.g. 50% of the cost if the stock is older than 2 years and 100% if it is older than 3 years, they book in P & L as provision for obsolete stock similar to provision for doubtful debts) from last few years. However, recently they became aware that there was an issue with the ERP - if the inventory was transferred from one branch to another, it will show as 0 days aging in the other branch (even if the stock was more than 2 years old in 1st branch) and thus the provision would reduce by the amount pertaining to that stock. The cumulative amount of this over several years has become material. Client wants to correct this now.

Would this correction require restating the previous periods' financials based on the impact on amounts for each year and thus the opening retained earnings will be corrected OR this correction can be posted in current year as an extraordinary item (below the current year profit) without restating previous financials?

P.S. it is neither a change in accounting policy, accounting estimate nor an human error (it happened due to ERP not configured correctly and not by any person posting a wrongly calculated amount - it is not error like for e.g. instead of providing 50% on 2+ years stock, someone calculated 50% on 1+ year stock).

Please advise the treatment.

Regards,
Pratik

 

[Fidget]

There's a few things here. Under IAS 8 errors are corrected in the current period if they are not material, and retrospectively if they are material.

To gauge whether material or not requires some judgement, but IAS 1 - Presentation of financial statements, gives a good base by saying that if something in the financial statements, whether by its nature or value, could influence decisions made by users of the accounts (investors etc), then it should be classed as material to the financial statements. So that's the judgement that needs to be made in order to decide how to treat the correction of the error.

If you decide it can be corrected in the current year, it is not an "Extraordinary" item - there's no such thing anymore under IFRS. It would just need shown separately in the P&L (other comprehensive income section), or in the notes to the accounts.

Asides from that, it sounds as if IAS 2 - Inventories, is not being applied correctly. Stocks should be carried at the lower of cost or net realisable value. Therefore, if net realisable value is below the original cost of the stock, then the difference should be completely written off in the period that it occurs rather than a provision created for it. If it turns out that in a future period, that the value of the written down stock has increased again for whatever reason, then the write off can be reversed (but not to an amount above the original cost).