IAS 8

Change in accounting estimates (32-41)

General
* 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. (5)
* Important element is that the change arises because of new information
* Prospective application of a change in accounting estimate affects only the current and future periods.
* Needs to be recognised in the period in which the change took place- thus from beginning of the year
* **From beginning of the year in most cases, as it might be uncertain about when the event took place.
However, if there is a certain specific date when an even takes place (e.g. an intangible asset that changes
from an indefinite useful life to a finite useful life on a specific date), then will only start depreciating (and
thus applying prospectively) from that date that the intention changed
*****Impairment indicators
• If the change in estimate indicates that the expected performance of the asset will be better than expected
(e.g. increased useful life) – change in estimate does not relate to impairment loss, thus apply the change
in estimate first and only thereafter test for/recognise the impairment loss.
• If the change in estimate indicates that the expected performance of the asset will be worse than expected
(decrease in useful life)- not clear if change in estimate caused impairment loss- recognise the impairment
loss first and only apply the change in estimate in the next reporting period.
Income tax consequences
• Changes affect the starting point of the current and deferred tax calculations
• Thus, profit before tax and carrying amounts are changed, before the tax calculations are done
Disclosure (39-40)
Must be disclosed
a) Nature of the change
b) Amount of the change in current period
c) Effect on future periods or statement that it is impracticable to estimate
E.g. change in useful life of PPE
* Thus if change in estimate- start with latest carrying amount as cost price, even if using straight line, and
use remaining useful life (read carefully between remaining/total useful life)
* Change in estimate disclosed in profit before tax/PPE/ change is estimate note (depends on what is
required in the question)
Note- three disclosures
1. State type of asset that the estimate is being changed for (background story)- nature of the change
2. Disclose effect of change in current financial year- how much did current year’s depreciation change (only
the change)
- Write: Decrease/Increase in depreciation
3. Disclose financial effect in all future years (prospectively, not retrospectively)
- Future depreciation (Depreciable amount) = Carrying amount- Residual amount
- ****Thus, take difference in depreciable amount between old and new estimates to determine
prospective effect
- Write: Increase/decrease in cumulative future depreciation
 - If the depreciable amount does not change (thus a change in useful life), the effect on the future
periods will be the same amount as the current year, but the opposite sign
Exceptions
• IAS 36- if a change in estimate during a year (e.g. change in useful life), only change the method (the actual
depreciation) in the following year- if change in estimate is because of impairment

Change in accounting policy (7-14)

General
• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting financial statements (5)
• May only be changed if required by IFRS, or if they result in reliable and more relevant information (thus
not necessarily more reliable) in the financial statements (voluntary changes)
• If required by an IFRS- dealt with using transitional provisions in that standard (even if starting to apply
earlier that required)
• If voluntary, applied retrospectively (as if it had always been applied)
Examples of changes
• Change in measurement basis of inventory (FIFO, weighted average)
• Cost to fair value model for investment property (vice versa not allowed, obviously!
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• Cost model to revaluation model for owner occupied land- not retrospective adjustment***
Presentation
• In terms of IAS 1 p 40A- 44: Need to present 3 SFPs: the end of the current period; the end of the preceding
period; and the beginning of the preceding period
• Disclosure is not required for the beginning of the preceding period
• SCE must also have a restated balance which shows the effect of the restatement (par 106 b)

* **Wording “as previously presented”, “recompiled” and “restated” is important

Income tax implications
Income tax returns reopened
• SARS will recalculate the entity’s current tax obligations for prior years’ assessments
• Deferred tax for the prior periods must recalculated if temporary differences change.
 • When SARS reopens tax returns of prior years, temporary differences could change because:
1. The carrying amounts of assets and / or liabilities change
2. The tax bases of assets and / or liabilities change

Practical- Without temporary differences

• E.g. for change in inventory valuation- no
temporary differences in the tax treatment, as
the returns were reopened for all previous
years
• In the change in policy note, also show the tax
effect the same as the effect that the normal
changes had, by multiplying the amounts with
28%
• The current tax payable balance will change at the
beginning of the comparative period
• There are no temporary differences arising because of the change in policy solely, because as the
accounting carrying amount changes, the Tax base is also changed by SARS
Tax returns not reopened
• SARS only accepts the new accounting policy when the current year’s current tax obligation is calculated.
• The current tax calculation for the current year includes an adjustment for the change in accounting policy
if the retrospective application of the accounting policy changed opening balances, for example, the
opening balance of inventories
• Deferred tax for the prior periods must be recalculated if temporary differences change.
• When SARS does not reopen tax returns of prior years, temporary differences could change because:
1. The carrying amounts of assets and / or liabilities change
• The tax bases cannot change if returns had not been reopened
Practical
• A temporary difference will arise, and thus a change in current tax, because there will be a difference in
the opening balance for tax and for accounting (thus, cancel accounting, put in tax; opening inventory will
be an expense, thus add that back and deduct the tax amount)
• Thus e.g. inventory, there will be a temporary difference between the previous opening balance, and the
new opening balance after the changes
• Thus, for the previous years, a deferred tax asset/liability will arise, because of the differences in the
carrying amounts and tax bases
• In the current year, the change will be
represented as a change in current tax
payable, and the contra entry for this
increase will be the elimination of the
deferred tax
• The amounts (in inventory example) will be
the same as if it had been reopened, the
allocation (between deferred tax and current
tax payable) just differs

* Question will usually indicate whether SARS has decided to reopen the returns-however, if no statement,
assume that it has not been reopened
Retrospective application impracticable
Can be impracticable because:
1. The impact of retrospective application cannot be determined; (impact on opening and closing balance
must be determinable)
2. Assumptions about management’s intentions would be required (e.g. intent to sell or use); or
3. Estimations are necessary for the application of the accounting policy and there is no objective way to
distinguish between information that was available when the policy should have been applied in previous
years and other information. (cannot use eventual outcomes that was not known at that date)
Effect
• Effect is that the cumulative or period-specific impact, or both cannot be determined- ****can only apply
and disclose retrospectively if both can be determined in a period
• Period specific cannot be determined- only apply to the cumulative impact, thus apply retrospectively
from the beginning of the earliest period possible (will still need to do the calculations as per normal to
get the current year’s effect on e.g. cost of sales)- class example 4- *** thus, even if you have the new
closing balance of the previous year available, but cannot apply the effect on the opening balance, the old
closing balance will be used (in the SFP), as the previous year is not accounted for retrospectively- in note
will also have only the current year column, but will have to show the effect on retained earnings at the
beginning of the year
• Cumulative effect at beginning of the year not determinable- prospectively applied from the earliest date
possible (beginning of the current year), and balances before that date remain unchanged (thus only
change the balances and period-specific effects for the current year- thus amounts will not be the same as
when the closing balance of the previous period was also available)- class example 5- thus, will have only
the current year column in the change in policy note

Disclosure
• Normally, if there is more than one change in accounting policy in the same period, each change in
accounting policy is disclosed in a separate note.
1. State the line items, and not the individual changes i.e. other expenses instead of depreciation
2. Income tax effect under OCI presented separately
3. Line items, such as PPE must be shown
4. Disclose each class of equity separately (thus, if it only affects retained earnings, only have to write once,
but write; “Increase in equity- retained earnings”
5. No subtotals are required, such as non- current assets (however, remember still to split long- and short-
term portions of debt, if applicable)

* Disclose the change (increase/decrease) for each financial statement line item affected)
* Note must be shown from the opening balance of the earliest period presented
* Opening balance of earliest period presented, only show the changes in the accounts with balances, thus
not profit for the year and the specific expense/ income
* Comparative period- disclose all expenses and balances, as these can be seen in the statements- thus do
the same as for the current year
* The change in the balances (Second part)
- Specific asset/liability
- Current/ non-current and total assets/liabilities
- Retained earnings
- Equity
* The change in accounting policy has no effect on the ordinary disclosure as per the standards. Thus e.g. if
Investment property is changed to fair value model, disclose as per normal as if it has always been on the
fair value model
* Change in earnings per share would be the same as the change in the profit for the year, divided by the
number of shares
* If retrospective application had been impracticable, state this fact, why it was impracticable, and from
which date the policy had been retrospectively applied
Prior period error (41-49)
General
• Prior period errors arise from existing information that was already available when the financial
statements were authorised for issue.
• Regardless of whether management had the information, if the information could have been reasonably
obtained, it can lead to a prior period error.
• Important to remember: If the tax returns are reopened, there will be adjustments to current tax liability
as well as deferred tax. If they are not reopened, only adjust the deferred tax balances
Practical
Class example 6
• More likely for an error that the tax returns of previous years would be reopened by SARS
• If there already had been temporary differences, such as with a depreciable asset, would need to change
the deferred tax as well as the current tax balances
• For deferred tax, get the temporary differences and deferred tax of what was done, and what should have
been done, and the difference is then shown in the note (but remember in the second year that deferred
tax is a cumulative calculation, and thus the difference in the 2 years increase will be the increase/decrease
in the deferred tax part of the current tax expense)
• For the current tax payable balance: Remember to take into account all the tax differences of all the
previous years in the opening balance of the prior year, and not only the period specific effect (thus
basically the cumulative effect of all the differences in the current tax calculations)- for the current year,
add the differences of the cumulative years, with the difference in the current year
• For the change in current tax calculation: Only take into account the difference in the tax allowances, and
not the differences in accounting allowances (depreciation)- thus, the change in tax payable balance is just
the differences of the tax allowances. Remember that in the second
year, the calculation gives the amount of the movement, and it is thus
not cumulative.
• **If every aspect of the error is taxable: The change in the accounting
expense, will be exactly the same as the tax implication, thus multiplied
by 28%
• For the balances, the change in the PPE will also be exactly the same as
the tax consequences, but you have to split between current and
deferred tax. Thus, one would be able to just work out the total change,
and then current or deferred tax, and then get the other one as a
balancing figure- deferred tax usually easier to calculate)
If asked for journals
• If there was a prior period error, and the journals for the current year is asked: Remember that you then
do not have to go and correct the prior period specific effect, and the opening balance of the prior period
• Will only write journal entries to correct the opening balance of the current year, and then just the journals
(or adjusting journals if already recorded and asked)

Leases general
• For finance leases, present the difference in the note as “Decrease in long-term net investment in lease
/ finance lease debtor” and “Decrease in short-term net investment in lease / finance lease debtor”
 • Thus, do not have to separately show gross investment in the lease and unearned finance income, as this
is one item when presenting, but it has to be split between the current and non-current portion.
• For the tax consequences: As the only deferred tax consequences for a finance lease are for the net
investment in the lease and for the asset that is being leased out (if not a manufacturing lessor), the
change in the balances will also represent the change in the deferred tax
Changes in estimates
• For changes in estimates where the URV decreased for a finance lease: The debit journal entry to the
finance income account (see leases notes), will be the amount with which finance income will differ for
the year.(thus do not have to subtract that amount with interest that would have been earned, as that is
already an adjusting journal). This is the same amount as the change in the balance (at the date of the
change in estimate) of the finance lease because of the new URV
• The cumulative change for the future periods will then be calculated as follows: The decrease in the URV
represents the total decrease in the finance cost over the entire period. Thus, to get the change in future
periods, take the change in the URV less the change in finance cost, as calculated above (Or, you can
work out the cumulative change first, as this will be the entire change in unearned finance income for the
future periods)

Tax rate changes

• Tax must be measured at the rate that was in use in the previous periods, regardless of the fact that there
was an error- thus, cannot use new tax rate for old periods
Class example 7
• The difference in the income tax expense will be exactly the same as the change in the deferred tax liability
balance from the previous year to the next. (thus, remember that in the note, the differences in the two
balances is the amount that is shown in the top half)- and this will also be the same as the change in the
PPE balance multiplied with the new tax rate
• ***Thus, if the tax rate changes, the change in the tax will not simply be the change in depreciation
multiplied by the tax rate
• Alternatively, calculate the income tax change by getting the change in the opening balance of the
deferred tax due to the tax rate change (thus change in opening balance (as per the note) * 5/30), plus
the tax effect of the change in depreciation
• For change in error journals- will only do the journals that affect the balances of the accounts, and thus no
period-specific journals
Retrospective adjustment not practicable
• If previous year’s period-specific effect cannot be determined, note becomes only a narrative stating
nature, why it was not possible to adjust retrospectively, and how it has been adjusted
 Example

Disclosure

General
* Columns: only prior periods- comparative year and opening balance of comparative year (no current year
column!)
* The changes in the balances will take into account the alteration of the opening balance, and thus the period
specific effect in the expenses and incomes (top part of note), might differ from the changes in the balances
(bottom part of note)- look at the change in the balance, as if only one entry would have had to be made
Restatement in SCE
Prior period error before comparative period
• Will have to correct the error before the comparative period is shown, thus:

Opening balance on 1 July 20X as previously presented

Retrospective correction of prior period error
Restated opening balance on 1 July 20X
Thereafter, in the comparative period:
 "Restated profit for the year" and the "Restated other comprehensive income"

• Thus, will have to be no restatement in the current year, as IAS 1 par 110 states that the effect must be
shown on the opening balances
Prior period error in comparative year
• Only impact is that you would have the "Restated profit for the year" and the "Restated other
comprehensive income" to correct the impact of the prior period error in the comparative period
• These corrections will automatically correct the closing balance for the comparative year. This means that
you would not have a separate line item at the start of the current year to show the impact of the prior
period error