Topic 3: ACCOUNTING CHANGES
LEARNING OBJECTIVES:
At the end of this topic, the students are expected to:
1. Identify the categories of accounting change.
2. Understand the concept of a change in accounting estimate.
3. Know the recognition and reporting of change in accounting estimate.
4. To know the recognition and reporting of a change in accounting policy.
5. To know the guidelines when selecting accounting policy in the absence of an accounting standard.
6. To understand the concept of prior period errors.
7. To know the recognition and reporting of prior period errors.
NOTES:
1. Categories of accounting change
a. Change in accounting estimate
b. Change in accounting policy
2. Change in accounting estimate
PAS 8, paragraph 5, defines a change in accounting estimate as an adjustment of the carrying amount of an
asset or a liability, or the amount of the periodic consumption of an asset that results from the assessment of
the present status and expected future benefit and obligation associated with the asset and liability.
Simply stated, a change in accounting estimate is a normal recurring correction or adjustment of an asset or
liability which is the natural result of the use of an estimate.
3. Examples of accounting estimate
Estimation involves judgement based on the latest available and reliable information. Estimates may be
required for the following:
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value, and expected pattern of consumption of benefit of depreciable asset
a. Warranty cost
b. Fair value of financial assets and financial liabilities
4. How to report change in accounting estimate
The effect of a change in accounting estimate shall be recognized currently and prospectively by including it
in income or loss of:
a. The period of change if the change affects that period only.
b. The period of change and future periods if the change affects both.
Prospective recognition of the effect of a change in accounting estimate means that the change is applied to
transactions, other events and conditions from the date of change in estimate.
5. Accounting policies
Accounting policies are the specific principles, bases, conventions, rules and practices applies by an entity in
preparing and presenting financial statements.
6. Change in accounting policy
Once selected, accounting policies must be applies consistently for similar transactions and events.
A change in accounting policy shall be made only when:
a. Required by an accounting standard or an interpretation of the standard.
b. The change will result in more relevant and faithfully represented information about the financial position,
financial performance and cash flows of the entity.
7. Examples of change in accounting policy
A change in accounting policy shall be made arises when an entity adopts a generally accepted accounting
principle which is different from the one previously used by the entity.
Examples of change in accounting policy are:
a. Change in the method of inventory pricing from the FIFO to weighted average method.
b. Change in the method of accounting for long term construction contract from cost recovery method to
percentage of completion method.
c. The initial adoption of policy to carry assets at revalued amount
d. Change from cost model to fair value model in measuring investment property.
e. Change to a new policy resulting from the requirement of a new PFRS.
The following are not changes in accounting policy.
a. The application of an accounting policy for events or transactions that differ in substance from
previously occurring events or transactions.
b. The application of a new accounting policy for events or transactions which did not occur previously or
that were immaterial.
8. How to report a change in accounting policy
A change in accounting policy required by a standard or an interpretation shall be applied in accordance with
the transitional provision therein.
If the standard or interpretations contains no transitional provisions or if the accounting policy is changed
voluntarily, the change shall be applied retrospectively or retroactively.
9. Retrospective application
Retrospective application is applying a new accounting policy to transactions, other events and conditions as
if that policy had always been applied.
Simply stated, retrospective application means that any resulting adjustment from the change in accounting
policy shall be reported as an adjustment to the opening balance of retained earnings.
10. Limitations of retrospective application
Retrospective application of a change in accounting policy is not required if it is impracticable to determine
the cumulative effect of the change.
11. Prospective application
Prospective application means that the new accounting policy is applied to events and transactions occurring
after the date at which the policy is changed
12. Change in reporting entity
A change in reporting entity is a change whereby entities change their nature and report their
operations in such a way that the financial statements are in effect those of a different reporting
entity.
A change in reporting entity is actually a change in accounting policy and therefore shall be treated
retrospectively or retroactively to disclose what statements would have looked like if the current
entity had been existence in the prior year.
13. Prior period errors
Prior period errors are omissions and misstatements in the financial statements for one or more
periods arising from a failure to use or misuse of reliable information that:
a. Was available when financial statements for those periods were authorized for issue.
b. Could be reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
14. How to treat prior period errors
Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained
earnings and affected assets and liabilities.
