ACCOUNTING CHANGES

Change in accounting estimate

Categories of Accounting Change

a. Change in accounting estimate
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 accounting estimate
a. Doubtful Accounts
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
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
Illustration:
Depreciable asset costing of 500,000 is estimated to have a life of 5 years. At the beginning of
the third year, the original life is changed to 8 years. Hence, the asset has a 6 years remaining
life.
(500,000-200,000 depreciation for 2 years)
The remaining carrying amount will be 300,000 is now allocated over 6 years or subsequent
annual depreciation of 50,000.
To record annual depreciation starting the third year is:

Depreciation 50,000
Accumulated Depreciation 50,000
Change in depreciation method
Illustration:
An entity decided to change from the sum of years’ digit method to the straight line method on
January 1, 2019.
The asset originally has a cost of 1,000,000 acquired on January 1, 2017 and is estimated to
have a four-year life.
Cost- January 1, 2017 1,000,000
Accumulated Depreciation:
2017 (4/10 x 1,000,000) 400,000
2018 (3/10 x 1,000,000) 300,000 700,000
Carrying amount- January 1, 2019 300,000
Procedure:
Allocate the carrying amount of 300,000 over the remaining life of 2 years.
2019 depreciation is recorded as follows:

Depreciation ( 300,000/2) 150,000

Accumulated Depreciation 150,000

ACCOUNTING CHANGES
Change in accounting policy
Prior period errors

Accounting policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by
an entity in preparing and presenting financial statements.
Change in accounting policy
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.
Example 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 from cost
recovery method to percentage of completion method.
c. The initial adoption of policy to carry assets at revalued amount is a change in
accounting policy to be dealt with as revaluation in accordance with PAS 16.
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.
How to report a change in accounting policy
1. A change in accounting policy required by a standard or an interpretation shall be applied in
accordance with the transitional provisions therein.
2. 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.
Retrospective application
• Applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied.
• Adjustment to the opening balance of retained earnings.
• If comparative information is presented, the financial statements of the prior period
presented shall be restated to conform with the new accounting policy.
Illustration:
An entity has used the FIFO method of the inventory valuation since it began operations in
2018. The entity decided to change to the weighted average method for determining inventory
cost at the beginning of 2019.
Limitation of retrospective application
For a particular prior period, it is impracticable to apply a change in an accounting policy when:
1. The effects of the retrospective application are not determinable.
2. The retrospective application requires assumptions about what management’s
intentions would have been at that time.
3. The retrospective application requires significant estimate, and it is impossible to
distinguish objectively information about the estimate that:
a. Provides evidence of circumstances that existed at that time, and
b. Would have been available at that time.

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.
• If the amount adjustment on the entity opening balance of retained earnings cannot be
reasonably determined, the change in accounting policy shall be applied prospectively.

• No adjustments 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

It 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.
• Change in reporting entity is a change in accounting policy, thus shall be treated
retrospectively or retroactively to disclose what the statements would have looked like
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 judgment 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 that management may use in
selecting accounting policies in such circumstances.
a. Requirements of current standards dealing with similar matters.
b. Definition, recognition criteria 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 similar
Conceptual Framework, other accounting literature and accepted industry practices.

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 reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

Errors as a result of mathematical mistakes, mistakes in applying accounting policies,

misinterpretation of facts, fraud or oversight.
How to treat prior period errors
Prior errors should be treated retrospectively by adjusting the opening balances of retained
earnings and affected assets 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 as a retrospective
restatement.
Retrospective restatement means correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if a prior period error had never occurred.
Disclosure of prior period errors
An entity shall disclose the following:
a. The nature of the prior period error.
b. 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
c. The amount of 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 a description of how and from when the error
has been corrected
Illustration:
During 2020, an entity discovered that certain goods that had been sold during 2019 were
incorrectly included in December 31, 2019 inventory in the amount of 300,000
The accounting records for 2020 before adjustment revealed sales of 5,000,000 and cost of
goods sold of 3,000,000.
The adjustment on December 31, 2020 to correct the prior period error is:

Retained earnings 300,000

Inventory, Jan 1 (or COGS) 300,000

Accordingly, the partial income statement for 2020 would appear as:

Sales 5,000,000
Cost of goods sold (3,000,000 – 300,00) 2,700,000
Gross income 2,300,000