Categories of Accounting Change

a. Change in Accounting estimate

b. Change in Accounting Policy

Change in Accounting Estimate

PAS 8, paragraph 5, defines a change in accounting estimate as an adjustment of the carrying

amount of an asse or a liability, or the amount of periodic consumption of an asset that results from
assessment of the present status and expected future benefit and obligation associated with the
asset and liability
Examples:
a. Doubtful accounts
b. Inventory obsolescence
c. Change in useful life, residual value, and expected pattern of consumption
d. Warranty cost
e. Fair value of financial assets and financial liabilities
Change in accounting estimate is recognized currently and prospectively

Illustration
An asset costing P5,000,000 is estimated to have a useful life of 10 years. At the beginning of the
third year, the original life is changed to 8 years. Compute the depreciation expense for the third
year.
• Assuming that the asset is expected to have remaining useful life at the beginning of the
third year, how much depreciation expense should be charged to year 3?
• Assume that the asset has a residual amount of 10% of cost, how much is the depreciation
expense to be charged for both situation?

Accounting Policies

These are specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements. These are essentials for a proper understanding of
the information contained in the financial statements.

Examples of change in accounting policy

Module on Accounting Changes 1

 a. Change in method of inventory pricing from FIFO to weighted average
b. Change in method of accounting for LTC from cost recovery to percentage of completion
method.
Etc.

Retrospective application is applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied. PAS 8, paragraph 22, provides that an
entity shall adjust the opening balance of each affected component of equity for the earliest
prior period presented and the comparative amounts disclosed for each prior period presented
as if the new policy had always been applied,

Illustration
An entity has used the FIFO method of inventory valuation since it began operations in 2019.
The entity decided to change to the weighted average method for determining inventory cost
at the beginning of 2020.
FIFO Weighted Average
December 31, 2019 1,000,000 750,000
December 31, 2020 1,500,000 1,200,00

Provide the adjusting entry

Prospective application means that the new accounting policy is applied to events and
transaction occurring after the date at which the policy is changed.

Prior Period error

Prior period errors are omissions and misstatement in the financial statements for one or more
period arising from a failure to use of misuse of reliable information that:
a. Was available when financial statement for those periods were authorized for issue
b. Could reasonably be expected to have ben obtained and taken into account in the
preparation of those financial statements.

Module on Accounting Changes 2

 How to treat prior period errors?

Prior period errors shall be corrected prospectively by adjusting the opening balance of retained
earnings and affected accounts (assets/liabilities).

Restatement of financial statement is also applicable.

Illustration
During 2021, an entity discovered that certain goods that had been sold during 2020 were
incorrectly included in December 31, 2020 inventory in the amount of P300,000.

The accounting records for 2021 before adjustment revealed sales of P5,000,000 and cost of
goods sold of P3,000,000.
Prepare adjusting entry

Module on Accounting Changes 3