Enquiry:

Para 3.4 of Revised AFRS for SSEs requires the Company to amortize the asset using straight line method, however our client, a Small Sized Company, was previously amortizing using written down value method of amortization.

a) Will it be mandatory for the Company to restate its opening balance sheet to account for the impact as required under para 22.2(d), or it may not be required?

Opinion:

Paragraph 3.4 of Section 3 ‘Intangible Assets’ and paragraph 22.2 of Section 22 ‘Transition to the Accounting Standards for SSEs’, referred in your enquiry, are reproduced below for reference:

3.4 “An entity shall allocate the amortizable amount of an intangible asset over its useful life using straight line method. The amortization charge for each period shall be recognized as an expense, unless another section of this standard requires the cost to be recognized as part of the cost of an asset such as inventories or property, plant and equipment.”

22.2 “An entity shall in its opening balance sheet as of its date of transition (beginning of the earliest period presented in financial statements) to this Standard:

a) Recognize all assets and liabilities whose recognition is required by to this Standard;
b) Not recognize items as assets or liabilities if to this Standard do not permit such recognition;
c) Reclassify items that it recognized under its previous financial reporting framework as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under to this Standard; and
d) Apply to this Standard in measuring all recognized assets and liabilities. (emphasis is ours)

The financial effect of above actions should be reflected in opening balance sheet by adjusting the amount of retained earnings as at the date of transition.”

Measurement is defined in the Framework of the Revised AFRS for SSEs as follows:

“Measurement is the process of determining the monetary amounts at which an entity measures liabilities, assets, income and expenses in its financial statement. Measurement involves the selection of a basis of measurement. Two common bases are: Historical cost and Fair value.

The measurement base most commonly adopted by entities in preparing their financial statements is historical cost.”

With regard to the enquiry, no change in the measurement basis of the intangible, i.e. historical cost shall be required on the adoption of AFRS for SSEs. Further, the change in the amortization method from the reducing balance method to straight line method, mandated on the adoption of AFRS for SSEs, is a change in the accounting estimate. The effect of change in accounting estimate shall be recognised prospectively in accordance with paragraph 19.6 of Section 19 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

In view of the above, the Committee is of the view that restatement on account of this point is not required under paragraph 22.2(d) of Revised AFRS for SSEs.

(March 20, 2017)