Reference no: EM132584046

The directors of Tunshill are disappointed by the draft profit for the year ended 30 September 20X3. The company's assistant accountant has suggested two areas where she believes the reported profit may be improved:

i) A major item of plant that cost RM20 million to purchase and install on 1 October 20X0 is being depreciated on a straight-line basis over a five-year period (assuming no residual value). The plant is wearing well and at the beginning of the current year (1 October 20X2) the production manager believed that the plant was likely to last eight years in total (i.e from the date of its purchase). The assistant accountant has calculated that, based on an eight-year life (and no residual value) the accumulated depreciation of the plant at 30 September 20X3 would be RM7.5 million (RM20 million / 8 years × 3). In the financial statements for the year ended 30 September 20X2, the accumulated depreciation was RM8 million (RM20 million / 5 years × 2). Therefore, by adopting an eight-year life, Tunshill can avoid a depreciation charge in the current year and instead credit RM0.5 million (RM8 million - RM7.5 million) to profit or loss in the current year to improve the reported profit.

ii) Most of Tunshill's competitors value their inventory using the average cost (AVCO) basis, whereas Tunshill uses the first in first out (FIFO) basis. The value of Tunshill's inventory at 30 September 20X3 (on the FIFO basis) is $20 million, however on the AVCO basis it would be valued at $18 million. By adopting the same method (AVCO) as its competitors, the assistant accountant says the company would improve its profit for the year ended 30 September 20X3 by $2 million. Tunshill's inventory at 30 September 20X2 was reported as $15 million, however on the AVCO basis it would have been reported as $13.4 million.

Required:

Question A. Comment on the acceptability of the assistant accountant's suggestions and quantify how they would affect the financial statements if they were implemented under MPERS 10. Ignore taxation.

Question B. MPERS 10 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates.

Explain the basis on which the management of an entity must select its accounting policies and distinguish, with an example, between changes in accounting policies and changes in accounting estimates.