SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS
College of Business Administration and Hospitality Management
City of Tacurong, Sultan Kudarat
__________________________________________________________________________________________________
ACCOUNTING CHANGES
OBJECTIVE/S:
At the end of the lecture/discussion/week, the student should be able to:
Identify accounting changes
Understand accounting estimate
Understand change in accounting policy
Identify change in reporting entity
Know the accounting treatment for the absence of accounting standard
Discuss prior period errors
PART 1. LECTURE/DISCUSSION
PAS 8 has identified two main categories of accounting changes, namely:
a. Change in accounting estimates
b. Change in accounting policy
Accounting changes can have a great impact on an entity’s reported earnings.
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”.
EXAMPLES OF ESTIMATE:
a. Bad debts
b. Inventory obsolescence
c. Useful life, residual value, and expected pattern of consumption of benefit of
depreciable asset
d. Warranty cost
e. Fair value of financial assets and financial liabilities
HOW TO REPORT CHANGE IN ACCOUNTING ESTIMATE -
The effect of 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.
A change in account estimate shall not be accounted for by restating amounts reported in
financial statements of prior periods. Prospective recognition of the effect of change in
accounting estimate means that the change is applied to transactions, other events and
conditions from the date of change in estimate.
ACCOUNTING POLICIES -are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements. Accounting policies are
essential for a proper understanding of the information contained in the financial statements.
Under accounting standards, alternative treatments are possible. In this case, it becomes all
the more important for an entity to clearly state the accounting policies used in preparing
financial statements.
CHANGE IN ACCOUNTING POLICY -arises when an entity adopts a generally accepted
accounting principle which is different from the one previously used by the entity.
Once selected, accounting policies must be applied 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.
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SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS
College of Business Administration and Hospitality Management
City of Tacurong, Sultan Kudarat
__________________________________________________________________________________________________
EXAMPLES OF CHANGE IN ACCOUNTING POLICY:
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.
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 and
property, plant and equipment.
e. Change to a new policy resulting from the requirement of a new PFRS.
HOW TO REPORT A CHANGE IN ACCOUNTING POLICY
A change in accounting policy required by standard or an interpretation shall be applied
in accordance with the transitional provisions therein. If the standard or interpretation
contains no transitional provisions or if an accounting policy is changed voluntarily, the
change shall be applied retrospectively or retroactively.
RETROACTIVE APPLICATION -is applying a new accounting policy had always been
applied. PAS 8, paragraph 22, provides that “an entity shall adjust the opening balance of each
affected component of equity for the earliest prior period presented and the comparative
amounts disclosed for each prior period presented as if the new 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. The amount of the adjustment is determined as of the beginning of the year
of change.
PROSPECTIVE APPLICATION -means that the new accounting policy is applied to events
and transactions occurring after the date at which the policy is changed. No adjustment
relating to prior periods are made either to the opening balance of retained earnings or other
component of equity because existing balances are not recalculated.
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 the statements
would have looked lie if the current entity had been existence in the prior year.
ABSENCE OF ACCOUNTING STANDARD -PAS 8, paragraph 10, provides that in the
absence of an accounting standard that specifically applies to a transaction or event,
management shall use judgement in selecting and applying an accounting policy that results in
information that is relevant to the economic decision making needs of users and faithfully
represented. Paragraph 11 and 12 specify the following hierarchy of guidance which
management may use when selecting accounting policies in such circumstances:
a. Requirements of current standards dealing with similar matters.
b. Definition, recognition criterial and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework for Financial Reporting.
c. Most recent pronouncements of other standard-setting bodies that use in similar
Conceptual Framework, other accounting literature and accepted industry practices.
PRIOR PERIOD ERRORS -are omission 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 reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
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. If comparative statements are
presented, the financial statements of the prior period shall be restated so as to reflect
the retroactive application of the prior period errors.
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SULTAN KUDARAT STATE UNIVERSITY-TACURONG CAMPUS
College of Business Administration and Hospitality Management
City of Tacurong, Sultan Kudarat
__________________________________________________________________________________________________
RETROSPECTIVE RESTATEMENT -correcting the recognition, measurement and disclosure
of amounts elements of financial statements as if a prior period error had never occurred.
DISCLOSURE OF PRIOR PERIOD ERRORS:
1. The nature of the prior period error.
2. The amount of correction for each prior period presented, to the extent practicable:
a. For each financial statement line item affected.
b. For basic and diluted earnings per share.
3. The amount of correction at the beginning of the earliest prior period presented.
4. If retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how
and from when the error has been corrected.
PART II. ASSESSMENT
QUESTIONS:
1. What are the two main categories of accounting changes?
2. Define a change in accounting estimate.
3. Give examples of items in the financial statements that may require estimate.
4. How is a change in accounting estimate reported?
5. Define accounting policies.
PART III. SOURCES/REFERENCES
Financial Accounting Volume 3 by: Conrado T. Valix, Jose F. Peralta and Christian Aris
M. Valix
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