FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING

HACC PDP: LEVEL 4.2

ACC406: IPSAS3 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING

ESTIMATES AND ERRORS

NAME SURNAME REG NUMBER

WENDY Z KAMUMVURA R166719V
KUMBIRAI MATINANGA R166071H
BLESSING TN MUCHEKENI R167261J
TAFADZWA MAVENGERE R163700Y
BELINDA MAFUKIDZE R168372J
TINASHE SIBANDA R167605P
PATRICIA MADE R169902T
LOICE C SANZIRA R169188X
PETRONELLA PAMHIRWA R166223A
SONENI MBANO R167800P
INTRODUCTION

IPSAS 3 “Accounting policies, changes in estimates and errors” was introduced to replace the
previous standard IPSAS 3 “Net surplus or deficit for the period, Fundamental Errors and
changes in accounting policies” which was issued in May 2000. This standard became effective
for annual periods beginning on or after January 2008. The revised IPSAS 3 was developed as a
response to the IASB’s project on improvement to international accounting standards and its own
policy to converge public sector accounting standards with private sector standards to the extent
appropriate. IPSAS 3 is primarily drawn from IAS 8 and extracts of IAS 8 have been reproduced
in this standard with permission of the International Accounting Standards Committee
Foundation (IASCF)

Objective

The objective of the standard is to prescribe the criteria for selecting and changing accounting
policies, also including the treatment and disclosure of such changes in order to enhance the
relevance, reliability and comparability of an entity’s financial statements over time.

Scope

The standard is applicable when selecting and applying accounting policies, changes in these
policies, estimates and corrections of prior period errors. Not relevant in this standard are the tax
effects of corrections of prior period errors and of retrospective adjustments made to apply
changes in accounting policies as they are not relevant for many public sector entities. It applies
to all public sector entities other than government business enterprises which are defined in
IPSAS 1 apply IFRSs which are issued by the IASB.

KEY TERMS

1. Retrospective application and restatement

Retrospective application: is applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied
Retrospective restatement: is correcting the recognition, measurement and disclosure of amounts
of elements of financial statements as if a prior period error had never occurred

2. Prospective application

Involves applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed and recognizing the effect of the
change in the accounting estimate in the current and future periods affected by the change.

3. Impracticability

If an entity cannot apply a requirement after making every reasonable effort to do so, the
requirement is said to be impracticable. For prior period it is impracticable to apply a change in
an accounting policy retrospectively or to make a retrospective restatement to correct an error if

 the effect is not determinable,

 The retrospective application or retrospective restatement requires assumptions about
what management’s intent would have been in that period or
 if it requires significant estimates of amounts and it is impossible to distinguish
objectively information about those estimates that; provides evidence of circumstances
that existed on the date(s) as at which those amounts are to be recognized, measured or
disclosed and would have been available when the financial statements for that prior
period were authorized for issue.

4. Materiality

Omissions or misstatements of items are material if they could, individually or collectively,

influence the decisions or assessments of users made on the basis of the financial statements and
depends on the nature and size of the omission as the determining factors.
ACCOUNTING POLICIES
Accounting policies are the specific principles, bases, conventions, rules and practices applied by
an entity in preparing and presenting financial statements.

Selection and Application of Accounting Policies

The Standard specifies the hierarchy of IPSASB’s pronouncements, and authoritative and non-
mandatory guidance, to be considered when selecting accounting policies to apply in the
preparation of financial statements. When an IPSAS specifically applies to a transaction, other
event or condition, the accounting policy or policies applied to that item shall be determined by
applying the Standard and considering any relevant Implementation Guidance issued by the
IPSASB for the Standard.

However, in the absence of an IPSAS that specifically applies to a transaction, other event or
condition, management shall use its judgment in developing and applying an accounting policy
that results in information that is:

- Relevant to the decision-making needs of users; and

- Reliable, in that the financial statements:
- Represent faithfully the financial position, financial performance and cash flows of the
entity;
- Reflect the economic substance of transactions, other events and conditions and not
merely the legal form;
- Are neutral i.e., free from bias;
- Are prudent; and
- Are complete in all material respects.

In selecting accounting policies, management shall refer to, and consider the applicability of, the
following sources in descending order:

(a) The requirements and guidance in IPSASs dealing with similar and related issues; and
(b) The definitions, recognition and measurement criteria for assets, liabilities, revenue and
expenses described in other IPSASs.
 (c) The most recent pronouncements of other standard-setting bodies and accepted public or
private sector practices to the extent.
An entity shall select and apply its accounting policies consistently for similar transactions, other
events and conditions, unless an IPSAS specifically requires or permits categorization of items
for which different policies may be appropriate.

Changes in Accounting Policies

Users of financial statements need to be able to compare the financial statements of an entity
over time to identify trends in its financial position, performance and cash flows, therefore an
entity shall change an accounting policy only if the change:

(a) Is required by an IPSAS; or

(b) Results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events and conditions on the entity’s financial position,
financial performance or cash flows.
Changes in accounting policy include;

- A change from one basis of accounting to another basis of accounting

- A change in the accounting treatment, recognition or measurement of a transaction, event
or condition.
The following are not changes in accounting policies:
(a) The application of an accounting policy for transactions, other events or conditions that
differ in substance from those previously occurring; and
(b) The application of a new accounting policy for transactions, other events or conditions
that did not occur previously or that were immaterial.
Retrospective Application
An entity is required (where practicable) to account for changes in accounting policies
retrospectively.

When a change in accounting policy is applied retrospectively, the entity shall adjust the opening
balance of each affected component of net assets/equity for the earliest period presented and the
other comparative amounts disclosed for each prior period presented as if the new accounting
policy had always been applied except to the extent that it is impracticable to determine either
the period specific effects or the cumulative effect of the change.

When it is impracticable to determine the period specific effects of changing an accounting

policy on comparative information for one or more prior periods presented, the entity shall apply
the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of
the earliest period for which retrospective application is practicable, which may be the current
period, and shall make a corresponding adjustment to the opening balance of each affected
component of net assets/equity for that period

Disclosure Requirements

(i) The nature of the change in accounting policy;

(ii) The reasons why applying the new accounting policy provides reliable and more relevant
information;
(iii) For the current period and each prior period presented, to the extent practicable,
the amount of the adjustment for each financial statement line item affected;
(iv)The amount of the adjustment relating to periods before those presented, to the extent
practicable; and
If retrospective application is impracticable for a particular prior period, or for periods before
those presented, the circumstances that led to the existence of that condition and a description of
how and from when the change in accounting policy has been applied

CHANGES IN ACCOUNTING ESTIMATES

A change in an accounting estimate is 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 of, and expected future benefits and obligations associated with, assets and
liabilities. Changes in accounting estimates result from new information or new developments
and, accordingly, are not correction of errors.
 As a result of the uncertainties inherent in delivering services, conducting trading or other
activities, many items in financial statements cannot be measured with precision but can only be
estimated. Estimation involves judgments based on the latest available, reliable information.
For example, estimates may be required, of:

- Tax revenue due to government;

- Bad debts arising from uncollected taxes;

- Inventory obsolescence;

- The fair value of financial assets or financial liabilities;

- The useful lives of, or expected pattern of consumption of future economic

benefits or service potential embodied in depreciable assets, or the percentage
completion of road construction;

- Warranty obligations.

An estimate may need revision if changes occur in the circumstances on which the estimate was
based or as a result of new information or more experience. When it is difficult to distinguish a
change in an accounting policy from a change in an accounting estimate, the change is treated as
a change in an accounting estimate.

Prospective adjustment

A change in an accounting estimate shall be recognized prospectively by including it in surplus

or deficit in:

(a) The period of the change, if the change affects the period only; or

(b) The period of the change and future periods, if the change affects both.

And to the extent that the change has an effect on assets, liabilities and equity.

Prospective recognition of the effect of a change in an accounting estimate means that the
change is applied to transactions, other events, and conditions from the date of the change in
estimate. A change in an accounting estimate may affect only the current period’s surplus or
deficit, or the surplus or deficit of both the current period and future periods. For example, a
change in the estimate of the amount of bad debts affects only the current period’s surplus or
deficit, and therefore is recognized in the current period

However, a change in the estimated useful life of, or the expected pattern of consumption of
economic benefits or service potential embodied in, a depreciable asset affects the depreciation
expense for the current period and for each future period during the asset’s remaining useful life.
In both cases, the effect of the change relating to the current period is recognized as revenue or
expense in the current period. The effect, if any, on future periods is recognized in future periods.

Disclosure Requirements

An entity shall disclose the nature and amount of a change in an accounting estimate that has an
effect in the current period or is expected to have an effect on future periods, except for the
disclosure of the effect on future periods when it is impracticable to estimate that effect.

If the amount of the effect in future periods is not disclosed because estimating it is
impracticable, the entity shall disclose that fact.

ERRORS

Prior period Errors

Omissions from and misstatements in, the entity’s financial statements one or more prior periods
arising from a failure to use, or misuse of faithfully representative 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.
Such errors include the effects of mathematical mistakes in applying accounting policies,
oversights or misinterpretation of facts and fraud.
Errors can rise in respect of the:
a) Recognition
b) Measurement
c) Presentation
d) Disclosure of elements of financial statements
Potential current period errors discovered in that period are corrected before the financial
statements are authorized for issue. However, material errors are sometimes not discovered until
a subsequent period, and these prior period errors are corrected in the comparative information
presented in the financial statements for that subsequent period.

Retrospective Adjustment
An entity shall correct material prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:
a) Restating the comparative amounts for prior periods presented in which the error
occurred, or
b) If the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.
Limitations of Retrospective Restatement

 A prior period error shall be corrected by retrospective restatement except to the extent
that it is impracticable to determine either the period specific effects or the cumulative
effect of the error.
 In this instance, the entity shall restate the opening balances of assets, liabilities and
equity for the earliest period for which retrospective restatement is practicable (which
may be the current period).

Disclosure Requirements
An entity shall disclose the following:
a) The nature of the prior period error;
b) For each prior period presented to the extent practicable, the amount of the correction
for each financial statement line item affected;
c) The amount of the correction at the beginning of the earliest prior period presented;
d) If retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and the description of how and
from when the error was corrected.
Financial statements of subsequent periods need not repeat those disclosures.

EXAMPLE

After the financial statements of Kwekwe City Council had been prepared, the management
decided to change its method of depreciating its property, plant and equipment. The previous
pattern of depreciation differed from the actual pattern of economic benefits derived from the
depreciable assets. As a result, the reducing balance method of 20% per annum will be applied in
the future, instead of the straight-line method over 5 years as in the past.

A summary of the property, plant and equipment account at 31 December 2015, the previous
financial year ended, is as follows:

US$

Cost 800,000

Accumulated depreciation (400,000)

Carrying amount 400,000

No machinery has been purchased or disposed of during the year ended 31 December 2016.

Required:

a. Calculate the following amounts resulting from the change in accounting

estimates for inclusion in the financial statements of Kwekwe City Council for the
year ended 31 December 2016:
• Depreciation for the current year
• Depreciation for 2017 and 2018 [5 marks]

b. Journalize all the necessary adjustments to account for the changes in accounting estimates in
2016

c. Assume the amounts involved in the change in accounting estimates are material and
disclosure them in terms of IPSAS 3: Accounting policies, changes in accounting estimates and
errors