Question

QUESTIONS 1. Flocrliners sells timber wood for floors from several outlets. In the previous vcars, it had undertaken the responsibility to install the timber flooring in the customers' premises. The customers paid the full cost on ordering, and it took two months for the flooring to be installed. Floorliners recognised The revenue only on the successful installation of the timber floor. From i January x8, Floorliners changed its method of trading and sub-contracted the installation jobs to approved contractors. Under this policy, the sub- contractors are paid by Floorliners and the sub-contractors are liable for any errors made in the fitting. Floorliners wants to recognise revenue when the customers pay for the goods, rather than when they have been fitted The details of the relevant sales figures are: RM'000 100,000 5,000 Sales made for the year to 31 December 8 Sales value of timber flooring fitted in the two months to 28 February x8 (not included in the RM100 million above) Sales value of timber flooring fitted in the two months to 28 February x9 6,000 Required: Discuss whether the above situation represents a change of accounting policy.

Answer 1

Change of accounting estimate.

Despite first impressions, it is not a change in accounting policy as it is a new situation. A change in accounting policy is when a new policy is used to report the same situation or where the same circumstances are treated differently. In this case Floorliners have changed its method of trading; it is no longer responsible for any errors that may occur during the fitting of the carpets. An accounting policy that is applied to circumstances that differ from previous circumstances is not a change of accounting policy. Thus the amount to be recognised in income for the year to 31 December x8 would be RM106 million (100 + 6 m). Whilst this appears to boost the current year’s income it would be mitigated by the payments to the sub-contractors for the carpet fitting.

            Revenue is recognised at an early stage

            Cost of goods sold will net off early revenue recognition