CHAPTER 11 Accounting Policies, Estimate and
Change in the method of inventory pricing from
Errors | PAS 8 pp. 204-209
ACCOUNTING POLICIES
Accounting policies are the specific principles, bases,
convention, rules, and practices applied by an entity in
preparing and presenting the financial statements.
An entity is required to outline all significant accounting
policies applied in preparing financial statements.
The entity shall select and apply the same accounting
policies each period to achieve comparability of
financial statements or to identify trends in the financial
position, performance, and cash flows of the entity.
Change in accounting policy
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.
b. The change will result in more relevant and
faithfully represented information about the
financial position, financial performance, and
cash flows of the entity.
Examples of change in accounting policy
A change in accounting policy arises when an entity
adopts a generally accepted accounting principles which
is different from the one previously used by the entity.
Examples are:
a.
FIFO to weighted average method
b. Change from cost model to revaluation model in
measuring PPE.
c. Change from cost model to fair value model in
measuring investment property.
d. 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 a standard or
an interpretation shall be applied in accordance with the
transitional provisions therein.
If the standard or interpretation contains no transitional
provision or if an accounting policy is changed
voluntarily, the change shall be applied retrospectively or
retroactively.
Retrospective application
Retrospective application means that any resulting
adjustment from the change in accounting policy shall
reported as an adjustment to the opening balances of
retained earnings.
The amount of the adjustment is determined as of the
beginning of the year change.
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 inventory By very nature, the revision of the estimate does not
valuation since it began operations in 2021. relate to prior periods and is not a correction of an error.
The entity has decided to change to the weighted Sometimes it is difficult to distinguish a change in
average method for determining inventory cost at the accounting estimate and a change in accounting policy.
beginning of 2022.
In such case, the change is treated as a change in
FIFO Weighted ave. accounting estimate with appropriate disclosure.
Dec. 31, 2021 1,000,000 750,000
Dec. 31, 2022 1,500,000 1,200,000
As a result of the uncertainties in business activities,
many financial statements cannot be measured with
FIFO inventory - Jan. 1, 2022 1,000,000 precision but can only be estimated.
Weighted ave. inventory - Jan 1, 2022 750,000 Estimates may be required for doubtful accounts,
Decrease in beginning inventory 250,000 inventory obsolescence, useful life and residual value of
asset and warranty cost.
Adjustment of the decrease in beginning inventory
How to report change in accounting estimate
Retained earnings 250,000
The effect of a change in accounting estimate shall be
Inventory - Jan. 1 250,000
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
ACCOUNTING ESTIMATE
change affects both.
A change in accounting estimate is a normal recurring
A change in accounting estimate shall not be accounted
correction or adjustment of an asset or liability which is
for restating amounts reported in financial statements of
the natural result of the use of an estimate.
the prior periods.
An estimate may need revision if changes occur
Changes in accounting estimates are to be handled
regarding the circumstances on which the estimate was
currently and prospectively, if necessary.
based or because of new information, more experience
or subsequent development.
Prospective recognition of the effect of a change in How to treat prior period errors
accounting estimate means that the change is applied to
Prior period errors shall be corrected retrospectively by
transactions and other events from the date of change in
adjusting the opening balances of retained earnings and
estimate.
affected assets and liabilities.
Illustration
If comparative statements are presented, the financial
For example, a depreciable asset costing P500,000 is statements of the prior period shall be restated so as to
estimated to have a useful life of 5 years. reflect the retroactive application of the prior period
errors as a retrospective restatement.
At the beginning of the third year, the original life is
changed to 8 years. Thus, the asset has a remaining life
of 6 years.
The procedure is not to correct past depreciation.
Instead, the remaining carrying amount of P300,00
(P500,000 minus P200,000 accumulated depreciation
for 2 years) is now allocated over 6 years or a
subsequent annual depreciation of P50,000.
Thus, the entry to record the annual depreciation,
starting the third year is:
Depreciation 50,000
Accumulated depreciation 50,000
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.
Errors may occur because of mathematical mistakes,
mistakes in applying accounting policies,
misinterpretation of facts, fraud or oversight.