ACCOUNTING FOR:

CHANGES IN ACCOUNTING
POLICIES & ESTIMATES; &
SUBSEQUENT EVENTS
CHANGES IN
ACCOUNTING
POLICIES
Changes in accounting policies are accounted for
using the following order of priority:
1. Transitional provision in a PFRS, if any.
2. Retrospective application, in the absence of No.1.
3. Prospective application if No. 2 is impracticable.
RETROSPECTIVE
APPLICATION
-means adjusting the opening balance of each
affected component of equity (e.g., retained
earnings) for the earliest period presented and the
other comparative amounts disclosed for each
period presented as if the new accounting policy
had always been applied. (PAS 8.22)
ILLUSTRATION:
CHANGE OF COST FORMULA
During 20x1, ABC Co. decided to change from the Average
Cost formula for inventory valuation to the FIFO cost
formula. Inventory balances under each method are as
follows:
Average FIFO
January 1 1,000,000 1,200,000
December 31 2,000,000 2,100,000

Income tax rate is 30%

Requirement: What is the net cumulative effect of the
accounting change in ABC’s opening retained earnings
balance?
SOLUTION

Average inventory – Jan 1 1,000,000

FIFO inventory – Jan 1 1,200,000
Cumulative effect – gross of tax (increase) 200,000
Multiply by: (100% - tax rate of 30%) 70%
Cumulative effect – net of tax (increase) 140,000

Jan 1, 20x1

Inventory (1.2M-1M) 200,000

Retained Earnings 140,000
Deferred tax liability 60,000
CHANGES IN
ACCOUNTING
ESTIMATES
ACCOUNTING
ESTIMATES
 Estimates are an essential part of financial reporting and
do not undermine the reliability of financial reports.
 Examples:
 NRV of inventories;
 Depreciation;
 Bad debts;
 FV of financial assets and liabilities; and
 Provisions.
ACCOUNTING
ESTIMATES
A change in 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 corrections of errors.” (PAS
8.5)
ACCOUNTING FOR CHANGES IN
ACCOUNTING ESTIMATES

Accounting: PROSPECTIVE APPLICATION

Prospective Application means recognizing the effects of the
change in P/L, either in:
a. the period of change; or
b. the period of change and future periods, if both are
affected.
ILLUSTRATION
CHANGE IN DEPRECIATION ESTIMATES

On Jan. 1, 20x1, ABC Co. acquired equipment for P1,000,000

The equipment will be depreciated using the straight-line
method over 20 years. The estimated residual value is
P100,000.
In 20x6, following a reassessment of the realization of the
expected economic benefits from the equipment, ABC Co.
changed its depreciation method to ‘SYD’. The remaining
useful life of the asset is estimated to be 4 years and the
residual value is changed to P50,000.

Requirement: Compute for the depreciation expense in 20x6.

SOLUTION
Step 1: Compute carrying amount of equipment as of date fo
change:

Historical cost 1,000,000

Residual value (100,000)
Depreciable amount 900,000
Divided by: 20
Annual depreciation 45,000

Historical cost 1,000,000

Acc. Dep. (45,000x5) (225,000)
Carrying Amount, Jan. 1, 20x6 775,000
SOLUTION
Step 2: Depreciate carrying amount over remaining useful life

Carrying amount, Jan. 1, 20x6 775,000

Residual value (50,000)
Revised depreciable amount 725,000
Multiply by SYD rate (4+3+2+1) 4/10
Depreciation expense for 20x6 290,000
EVENTS AFTER THE
REPORTING PERIOD
(SUBSEQUENT EVENTS)
DEFINITION
Events after the end of the reporting period are those events,
favorable and unfavorable, that occur between the end of the
reporting period and the date when the financial statements are
authorized for issue.
There are two types of events:
(a) those that provide evidence of conditions that existed at the
end of the reporting period (adjusting events after the end of the
reporting period), and
(b) those that are indicative of conditions that arose after the end
of the reporting period (non-adjusting events after the end of the
reporting period).
ADJUSTING EVENTS
An entity shall adjust the amounts recognized
in its financial statements, including related
disclosures, to reflect adjusting events after the
end of the reporting period.
EXAMPLES OF
ADJUSTING EVENTS
a. the settlement after the end of the reporting period of a court
case that confirms that the entity had a present obligation at
the end of the reporting period
b. the receipt of information after the end of the reporting period
indicating that an asset was impaired at the end of the
reporting period, or that the amount of a previously
recognized impairment loss for that asset needs to be
adjusted
c. the determination after the end of the reporting period of the
cost of assets purchased, or the proceeds from assets sold,
before the end of the reporting period
EXAMPLES OF
ADJUSTING EVENTS
d. the determination after the end of the reporting
period of the amount of profit-sharing or bonus
payments, if the entity had a legal or constructive
obligation at the end of the reporting period to
make such payments as a result of events before
that date
NON-ADJUSTING
EVENTS
An entity shall not adjust the amounts
recognized in its financial statements to reflect
non-adjusting events after the end of the
reporting period.
EXAMPLES OF NON-
ADJUSTING EVENTS
a. a decline in market value of investments between
the end of the reporting period and the date when
the financial statements are authorized for issue.
The decline in market value does not normally
relate to the condition of the investments at the end
of the reporting period, but reflects circumstances
that have arisen subsequently.
b. an amount that becomes receivable as a result of a
favorable judgment or settlement of a court case
after the reporting date but before the financial
statements are issued