H Ltd began trading on 1 January 2014, preparing to 31 December each year. During 2017, the company decided to change its accounting policy with regard to one of its operating expenses. Total operating expenses calculated using the previous accounting policy and shown in the company’s for the first three years of trading were as follows:
| £000 | |
| year to 31 December 2014 | 240 |
| year to 31 December 2015 | 260 |
| year to 31 December 2016 | 290 |
| –––– 790 –––– |
If the new accounting policy had been applied in previous years, the total operating expenses would have been:
|
£000
|
|
| year to 31 December 2014 | 390 |
| year to 31 December 2015 | 310 |
| year to 31 December | 230 |
| –––– 930 –––– |
Furthermore, the company’s liabilities at 31 December 2016 would have been higher by £140,000 (£930,000 – £790,000).
A summary of the company’s statement of comprehensive income for the year to 31 December 2017 (before adjusting comparative figures to reflect the change in accounting policy) shows the following:
| 2017 | 2016 | |
| £000 | £000 | |
| Profit before operating expenses | 1,510 | 1,450 |
| Operating expenses | 190 | 290 |
| Profit before taxation | ––––– 1,320 |
––––– 1,160 |
| Taxation | 264 ––––– |
232 ––––– |
| Profit after taxation | 1,056 ––––– |
928 ––––– |
Retained earnings were originally reported to be £2,371,000 on 31 December 2016. No dividends have been paid in any year. It may be assumed that the company’s tax expense is always equal to 20% of the profit before taxation.
Required:
(a) Rewrite the extract from the statement of comprehensive income so as to reflect the change in accounting policy, in accordance with the requirements of IAS8.
(b) Prepare an extract from the company’s statement of changes in equity for the year to 31 December 2017, showing changes to retained earnings.
