Question 1 (25 marks) You are the senior accountant at Smarty Ltd. (Smarty). While proof-reading the financial statements for the year ended 31 December 2019, Lucia, a trainee accountant, has identified certain changes / errors but he is uncertain whether they represent a change in accounting policy, a change in accounting estimate or a correction of prior-year error. Previously, Smarty accounted for its property, plant and equipment using the historical cost basis. In the financial year 2019, however, due to the rapid appreciation in property market value, Smarty has adopted the revaluation model of HKAS 16 to account for its non-current assets. The management believed such a change would provide more relevant information for the users of the financial statements in making investment decisions. 2. Some of the inventories sold in January 2020 were erroneously included in the cost of sales figures for the year 2019. As a result, the closing inventories in the financial statements for the year ended 31 December 2019 were understated by $150,000. The corporate tax rate is 16.5%. This amount is considered material as it represents more than 10% of the cost of sales figures for the year 2019. Required: (a) Briefly explain the differences between a change in accounting policy, a change in accounting estimate and a correction of prior-year error. (15 marks) (b) With reference to your answer in (a), briefly discuss how you would classify the captioned changes for the above events (1) & (2). (10 marks)