ACCOUNTING CHANGES

Change in accounting
estimate
Chapter 10
CATEGORIES OF ACCOUNTING
CHANGE
a. Change in accounting estimate
b. Change in accounting policy
Accounting changes can have a great impact on an entity’s
reported earnings.
Thus, it is critically important that users of financial
statements understand the nature and effect of accounting
changes and must not rely solely on the bottom line which is
the net income or loss.
Change in accounting
estimate
PAS 8, paragraph 5, defines a change in accounting
estimate as 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 and expected future benefit and
obligation associated with the asset and liability.
Simply stated, a change in accounting estimate is a normal
recurring correction or adjustment of an asset or liability
which is the natural result of the use of an estimate.
The use of reasonable estimate is an essential part of the
preparation of financial statements and does not undermine
their reliability.
An estimate may need revision if changes occur regarding
the circumstances on which the estimate was based or as a
result of new information, more experience or subsequent
development.
By very nature, the revision of the estimate does not relate
to prior periods and is not a correction of an error.
A change in measurement basis is a change in accounting
policy and not a change in accounting estimate.
Sometimes it is difficult to distinguish a change in
accounting estimate and a change in accounting policy.
In such case, the change is treated as a change in
accounting estimate, with appropriate disclosure.
Examples of accounting
estimate
As a result of the uncertainties in business activities, many items in financial
statements cannot be measured with precision but can only be estimated.
Estimation involves judgment based on the latest available and reliable information.
Estimates may be required for the following:
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value, and expected pattern of consumption of benefit of
depreciable asset
d. Warranty cost
e. Fair value of financial assets and financial liabilities
How to report change in
accounting estimate
The effect of a change in accounting estimate shall be 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 change affects
both.
To the extent that a change in accounting estimate gives rise to
changes in assets and liabilities, or relates to item of equity it shall
be recognized by adjusting the carrying amount of the related asset,
liability or equity in the period of change.
A change in an accounting estimate shall not be accounted
for by restating amounts reported in financial statements of
prior periods.
Changes in accounting estimates are to be handled
currently and prospectively, if necessary.
Prospective recognition of the effect of a change in
accounting estimate means that the change is applied to
transactions, other events and conditions from the date of
change in estimate.