Professional Documents
Culture Documents
Introduction
PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the accounting
and disclosures of changes in accounting policies, changes in accounting estimates and correction of
prior period errors. These are intended to enhance the relevance, reliability and comparability of the
entity’s financial statements.
Accounting Policies
Accounting policies are “the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements”. (PAS 8.5)
When selecting and applying accounting policies, and entity shall refer to the hierarchy guidance
summarized below.
a. Is required by a PFRS; or
A change in accounting policy usually results from a change in measurement basis. Examples of changes
in accounting policies:
a. Change from FIFO to the Weighted Average cost formula for inventories.
b. Change from the cost model to the fair value model of measuring investment property.
c. Change from the cost model to the revaluation model of measuring property, plant and
equipment and intangible assets.
g. Change in financial reporting framework, such as from PFRS for SMEs to full PFRS.
b. The application of a new accounting policy for transactions, other events or conditions that did
not occur previously or were immaterial (PAS 8.16)
Changes in accounting policies are accounted for using the following order of priority:
For example, if an entity changes an accounting policy, it shall refer first to any specific transitional
provision of the PFRS that specifically deals with that accounting policy. If there is no transitional
provision, the entity shall account for the change using retrospective application. If, however,
retrospective application is impracticable, the entity is allowed to account for the change using
prospective application.
Retrospective Application
Retrospective application means adjusting the opening balance “of each affected component of equity
(e.g., retained earnings) for the earliest prior period presented and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy had always been applied.” (PAS
8.22)
For example, if an entity changes its accounting policy from the Average to the FIFO cost formula, all
previous financial statements presented in comparative with the current-year financial statements are
restated to apply FIFO. It is as if FIFO had always been applied.
If retrospective application is impracticable for all periods presented, the entity shall apply the new
accounting policy as at the beginning of the earliest period for which retrospective application is
practicable, which may be the current period. If retrospective application is still impracticable as at the
beginning of the current period, the entity is allowed to apply the new accounting policy prospectively
from the earliest date practicable.
Impracticable means it cannot be done after making every reasonable effort to do so.
Many items in the financial statements cannot be measured with precision but only through estimation
because of uncertainties inherent in business activities. The use of reasonable estimates therefore is
necessary in order to provide relevant information. Estimates are an essential part of financial reporting
and do not undermine the reliability of financial reports. For example, the following necessarily requires
estimation:
b. Depreciation;
c. Bad debts;
e. Provisions.
Estimates involve judgments based on latest available information. Consequently, estimates need to be
revised when there is a change in circumstances such that new information or more experience is
obtained.
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)
If a change is difficult to distinguish between these two, the change is treated as a change in an
accounting estimate.
c. Change in the required balance of allowance for uncollectible accounts or impairment losses
Changes in accounting estimates are accounted for by prospective application. Prospective application
means recognizing the effects of the change in profit or loss, either an:
Under the prospective application, the beginning balance of retained earnings and the previous financial
statements are not restated.
Errors
“Financial statements do not comply with PFRSs if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.” (PAS 8.41)
Material errors are those that cause the financial statements to be misstated. Intentional errors are
fraud. In the case of fraud, it does not matter whether the error is material or immaterial. Fraudulent
financial reporting does not comply with PFRSs.
Errors can be errors of commission or errors of omission. An error of commission is doing something
wrong while an error of omission is not doing something that should have been done.
a. Current period errors – are errors in the current period that were discovered either during the
current period or after the current period but before the financial statements were authorized
for issue. These are corrected simply by correcting entries.
b. Prior period errors – are errors in one or more prior periods that were only discovered either
during the current period or after the current period but before the financial statements were
authorized for issue. These are corrected by retrospective restatement.
Retrospective Restatement
a. Restating the comparative amounts for the prior period(s) 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. (PAS 8.42)
Just like retrospective application, retrospective restatement shall be made as far back as practicable. If
it is impracticable to determine the cumulative effect of a prior period error at the beginning of the
current period, the entity is allowed to correct the error prospectively from the earliest date practicable.