Category: General accounting rules

A retrospective correction of prior period errors is a correction of errors that occurred in a previous period, but were not discovered until a subsequent period. Retrospective correction of prior period errors is required by IAS 8 and also FRS 102 s10.21 which state that errors should be corrected retrospectively by adjusting the opening balance of retained earnings for the earliest period presented.

To correct a prior period error retrospectively, the entity should first determine the amount of the error and the period in which the error occurred. The entity should then adjust the opening balance of retained earnings for the earliest period presented in the financial statements, by the amount of the error and a corresponding adjustment to the appropriate item in the statement of financial position.

For example, if an entity discovers a material £50,000 error in the calculation of opening balances for prepayments carried forward from 2022 during the audit of 2023, the entity would need to correct the error retrospectively. The other side of the entry would be to adjust the opening balance of retained earnings carried forward from 2022.

The journal in 2023 would be:
Dr prepayments £50,000
Cr retained earnings b/fwd £50,000

The comparatives column in the 2023 accounts would also be restated and the error would need to be disclosed.

The fair value of unlisted shares is the price at which the shares would be bought or sold between knowledgeable, willing parties in an arm’s length transaction. Estimating the fair value of unlisted shares can be challenging, as there is no readily available market price for the shares and the fair value must be determined using other methods.

One method for estimating the fair value of unlisted shares is the income approach, which values the shares based on the present value of future cash flows. The income approach involves estimating the future cash flows that the shares are expected to generate, and then discounting those cash flows at a rate that reflects the risks associated with the cash flows.

Another method for estimating the fair value of unlisted shares is the market approach, which values the shares based on comparable listed shares. The market approach involves identifying similar listed shares and comparing their market prices to the unlisted shares. The market approach can be challenging if there are no comparable listed shares, or if the listed shares are not sufficiently similar to the unlisted shares.

A third method for estimating the fair value of unlisted shares is the cost approach, which values the shares based on the cost of reproducing or replacing the assets of the company. The cost approach involves estimating the cost of reproducing or replacing the assets of the company, and then adjusting the cost for any changes in the value of the assets since they were acquired.

Overall, estimating the fair value of unlisted shares is a complex and uncertain process that requires careful analysis and judgment. The fair value of unlisted shares can be sensitive to the assumptions and methodologies used, and can vary significantly depending on the approach and the specific circumstances of the company.

The accruals concept is a fundamental principle of accounting that states that income and expenses should be recognized in the period in which they are earned or incurred, rather than in the period in which they are paid or received. The accruals concept is based on the idea that the financial statements should reflect the economic substance of transactions, rather than their legal form.

The accruals concept is applied through the use of accrual-based accounting, in which income and expenses are recognized based on the underlying economic events that give rise to them. This means that income is recognized when it is earned, and expenses are recognized when they are incurred, regardless of whether the cash has been received or paid.

The accruals concept is applied in a number of ways in accounting, including the recognition of revenue, the recognition of expenses, and the matching of revenue and expenses.

One example of the application of the accruals concept is the recognition of revenue. According to the accruals concept, revenue should be recognized in the period in which it is earned, rather than in the period in which it is received. This means that if a company performs a service or sells a product in one period, but does not receive payment until the next period, the revenue should be recognized in the first period, rather than the second period.

For example, if a company provides consulting services to a client in December and issues an invoice for £10,000, but does not receive payment until January, the company would recognize the £10,000 of revenue in December, rather than in January. This is because the revenue was earned in December, when the consulting services were provided, rather than in January, when the cash was received.

Another example of the application of the accruals concept is the recognition of expenses. According to the accruals concept, expenses should be recognized in the period in which they are incurred, rather than in the period in which they are paid. This means that if a company incurs an expense in one period, but does not pay the cash until the next period, the expense should be recognized in the first period, rather than the second period.

For example, if a company purchases office supplies in December for £500 and receives an invoice, but does not pay the cash until January, the company would recognize the £500 of expense in December, rather than in January. This is because the expense was incurred in December, when the office supplies were purchased, rather than in January, when the cash was paid.

The useful economic life of an asset is the period over which the asset is expected to generate economic benefits for the entity. In other words, it is the period of time during which the asset is expected to be used by the entity to generate revenue or other economic benefits.

The useful economic life of an asset is an important concept in accounting, as it is used to determine the amount of depreciation or amortization that should be recognized for the asset. Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life, while amortization is the systematic allocation of the amortizable amount of an intangible asset over its useful life.

The useful economic life of an asset is determined by the entity based on its expected use of the asset. The useful economic life of an asset may be shorter than its physical life, if the entity expects to dispose of the asset before the end of its physical life. For example, a vehicle may have a physical life of 15 years, but the entity may expect to dispose of the vehicle after 5 years, in which case the useful economic life of the vehicle would be 5 years.

The useful economic life of an asset may also be affected by obsolescence or technological changes. If an asset becomes obsolete or is replaced by a newer technology, the useful economic life of the asset may be shorter than its physical life. For example, a computer may have a physical life of 5 years, but if it becomes obsolete after 3 years, the useful economic life of the computer would be 3 years.