MFRS108

ACCOUNTING POLICIES, CHANGE IN

ACCOUNTING ESTIMATES AND ERRORS
Chapter 5 page 115

1
 LEARNING OUTCOME

• At the end of this topic, you should be able:

1. Define ACCOUNTING POLICIES, ACCOUNTING
ESTIMATES AND ERRORS
2. Explain the ACCOUNTING TREATMENT for changes in
accounting policies and changes in accounting estimates
3. Explain the accounting treatment for PRIOR PERIOD ERROR
4. Explain why changes in accounting policies and errors affect
SOCIE (Retained Profits) but not changes in accounting
estimates.
5. Explain the disclosure requirements
 Introduction
• When preparing the financial statements, an entity
apply judgements in the selection of the accounting
policies and in estimating the amounts to be accorded
to the line items.
• The entity may need to change its accounting policies
if required by a new standard or when a policy in use
is no longer appropriate due to changing
circumstances.
• MFRS108 prescribes the criteria for selecting and
changing accounting policies, changes in accounting
3

estimates and correction of errors.

 Definition-Accounting Policies
pg 116
• The specific principles, bases, conventions, rules and
practices applied by an entity in preparing and
presenting financial statements.
• Relate to recognition principles and measurement
bases of line items in financial statements
• Example- initial measurement of investment property
is at cost.
• Example-subsequent measurement of PPE whether
measured using cost model or revaluation model. 4
 Selection and Application of
Accounting policies
• Specific treatment prescribed in the an MFRS that
treatment shall be adopted as an accounting policy.
• For example, measurement basis for investment
property is using fair value model.
• This measurement basis shall be applied by
reporting entity in their accounting policies.

5
 Consistency of Accounting
Policies
• MFRS108 requires that entity shall select and apply its
accounting policies consistently for similar transactions,
other events and conditions unless MFRS specifically
requires or permits categorisation of items for which
different accounting policies may be appropriate.
• Categorisation for which different accounting policies may
be appropriate: Measurement basis applied for property,
plant and equipment:
• Land and building use revaluation model.
• Plant and equipment use cost model.
6
CHANGES IN ACCOUNTING POLICIES

• Consistency in accounting policies is one of desirable

attributes in the Conceptual Framework if financial statements
are to meet the qualitative characteristic of comparability.
• The entity does not change their accounting policies from
period to period as otherwise the comparability objectives of
financial reporting may be impaired.
• MFRS108 identifies 2 circumstances which require or warrant
a change in accounting policy.

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CHANGES IN ACCOUNTING POLICIES

• The standard prescribes that an entity shall change an

accounting policy only if the change:
1. It is required by an MFRS,
2. Results in the financial statements providing RELIABLE and
more RELEVANT information about the effects of
transactions, other events or conditions on the entity’s
financial position, financial performance or cash flows.

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CHANGES IN ACCOUNTING POLICIES

1. It is required by an MFRS, or mandatory change because it is

caused by anew law or a new accounting standard which
mandates that the new policy be applied.
2. Discretionary change or voluntary change because it is
dependent on the judgement of management of the entity
whether a new policy is more appropriate than the policy
in use.
# Research finding shows that companies have used discretionary changes
to influence the reported results, smooth reported profits and even to
manipulate profits
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Changes in Accounting Policies

• To qualify as a change in accounting policy, it must

involve a change from generally accepted
accounting principle to another generally accepted
accounting principle.
• Principles relate to recognition and measurement
bases such as measurement basis of property plant
and equipment.

10
 Accounting Policies- Other
Examples pg 119
• A change in recognition basis of revenue on
construction contracts from completed basis to of % of
completion basis.
• A change in the measurement basis of investment
property from cost model to fair value model.
• Inventory valuation methods-FIFO or weighted
average
• Subsequent measurement of property, plant and
equipment -Choice of using cost model or revaluation
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model
 Changes in accounting policies

• The following are not changes in accounting policies:

1. straight-line method to declining balance method for
depreciation.
2. Absorption rate based on labour hour to machine hour in
absorption costing
3. Revision in amortisation rate for intangible assets
• Are NOT changes in accounting policies because the
measurement basis has not changed.

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Methods of Effecting a Change in Accounting
Policy

• The effects of a change in accounting policy can

be incorporated into the financial statement in one
of the 3 different ways:
1. Retrospective application
• By treating as if the new policy had always been in use( known
as prior year adjustment (PYA).

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Methods of Effecting a Change in Accounting
Policy

2. Current period application

• By presenting as a single item in the profit or
loss for the current period the amount of the
cumulative effect on the retained profits at the
beginning of the period in which the change is
made. (Current year adjustment or CYA)

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Methods of Effecting a Change in Accounting
Policy

3. Prospective application
• By applying the new policy to the financial
statements of the current and future periods.

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 Treatment under MFRS108 pg
122
1. An entity shall account for a change in accounting policy
resulting from the initial application of an MFRS in
accordance with the specific transitional provision if any
in that MFRS.
2. In the absence of any specific transitional provisions in a
MFRS and for all changes in accounting policies made
voluntarily, the entity shall apply the change
retrospectively (applying a new accounting policy to
transactions, other events and conditions as if that policy
had always been applied).
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 Treatment under MFRS108 pg
122
• When a change in policy applied retrospectively,
the entity shall adjust the opening balance of each
affected component of equity for the earliest prior
period presented and other comparative amounts
disclosed for each prior period presented as if new
policy had always been applied.

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 CHANGES IN ACCOUNTING POLICIES – AN EXAMPLE

Example 1 MFRS 140: Changes from cost model to fair value model.
( Without tax implication)
•Lazziz Bhd acquired an investment property on 1.1.2017 at RM100 million and
measured it using cost model. The estimated useful life is 50 years. On 1.1.2018,
it changed the accounting policy and used fair value model to measure
investment property.
•As at 1 January 2018, retained profits was RM15,000,000.
•Given below are the fair values of the investment property.
Date Fair Value (Million)
31.12.2017 105
31.12.2018 108
• Note: the current year is 2018.
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 ACCOUNTING TREATMENT
RETROSPECTIVE ADJUSTMENT
The change in the policy from cost model to
fair value model should be applied
RETROSPECTIVELY by restating the
opening balance of retained profits.

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 Calculation for the changes in accounting policy

Year Old policy New policy Difference

(cost model) (Fair value (FV-CA)
model)
2017 Depr exp FV=105m 105m-
=100/50=2m 98m=7m(to
CA=100m-2m RE)
=98m
2018(CY) FV=108m
Gain
=108-105
=3m(SOPL)
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 JOURNAL ENTRIES

Retrospective adjustment in 2018

Dr. Accumulated depreciation 2,000,000
Cr. Investment property 2,000,000
Dr. Investment property 7,000,000
Cr. Retained profits 7,000,000
To record the increase in fair value of IP in the
CURRENT year (2018)
Dr. IP 3,000,000
Cr. SOPL-gain 3,000,000

21
 STATEMENT OF RETAINED EARNINGS

An extract of the Statement of Changes in

Equity FYE 31 December 2018
As at 1 January 2018 RM 15,000,000
Prior year adjustment:
Change in accounting policy 7,000,000
Restated balance as at 1 January 2018 22,000,000

22
Limitations to Retrospective Application pg 126

• The Standard also provides for circumstances where it

may not be practicable to apply retrospectively the
effects of a change in accounting policy.
• The effects may be:
• The period specific effects or the cumulative effect
of the change.
• When it is impracticable to determine the effects,
MFRS 108 allows the entity to apply the new
accounting policy prospectively.
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Disclosure requirements of Changes
in Accounting Policies pg 128
1. The title of the Standard or Interpretation.
2. When applicable, the change in accounting policy is made
in accordance with its transitional provisions
3. The nature of the change in accounting policy
4. When applicable, a description of the transitional provisions
5. When applicable the transitional provisions that might have
an effect on future periods.
6. The amount of the adjustment.

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 ACCOUNTING ESTIMATES pg 133

• Accounting estimates are by their

nature subject to errors because
uncertainties in business operations.
• Estimates involve JUDGEMENT
applied in determining the
amount to be reported in the
financial statements 25
ACCOUNTING ESTIMATES - EXAMPLES

• Bad debt provisioning

• 2%??? 5%???
• Stock obsolescence
• Depreciation rate
• Useful Lives Of Depreciable Assets
• 10 years??? 20 years??? 50 years???
• Depreciation Method
• Straight-line?? Reducing balance??? 26
 Definition- Changes in
accounting estimates
• An adjustment of the carrying amount of an asset or
liability, or the amount of the periodic consumption
of an asset, that results from the assessment of the
present status of an expected future benefits and
obligations associated with assets and liabilities.
• Changes in accounting estimates result from new
information or new development and accordingly are
not correction of errors.

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 Prospective Application

The effect of changes in accounting

estimates must be applied
PROSPECTIVELY
• Adjusting the carrying amount of the related asset, liability
or equity item in the period of change.
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 Prospective Application

• EFFECT OF THE CHANGE IS

RECOGNISED IN profit or loss in:
• the period of the change, if the change
affects the current period only, or
• the period of the change and future
periods -if the change affects both current
and future periods
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 CHANGES IN ACCOUNTING ESTIMATES – AN
EXAMPLE 1
Change in useful life

• 1 January 2016 – an equipment costing

RM50,000 and residual value of RM2,000
was acquired and depreciated on a straight-
line basis over 10 years.
• 1 January 2018 – the remaining life of the
equipment was revised to 4 years with no
residual value. 30
 DEPRECIATION CHARGE

DEPRECIATION CHARGE FYE 31 DECEMBER 2016

(50,000 – 2,000) ÷ 10 years RM4,800
Initial cost as at 1 January 2016 RM 50,000
Accumulated depreciation as at
31 December 2017: RM4,800 x 2 years 9,600
Carrying amount as at 31 December 2017 40,400
farahmustafa

DEPRECIATION CHARGE FYE 31 DECEMBER 2018

RM40,400 ÷4 years RM10,100
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 JOURNAL ENTRIES and
EFFECT ON CARRYING AMOUNT
•  
To depreciate the equipment in the CURRENT year
(2018)
Dr. SOPL– depreciation expense RM 10,100
Cr. Accumulated depreciation RM 10,100

Carrying amount as at 1 January 2018 RM 40,400

Depreciation – FYE 31 December 2018 (10,100)
Carrying amount – 31 December 2018 30,300

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 ACCOUNTING TREATMENT
•PROSPECTIVE
  ADJUSTMENT
The change in the useful life from 10 years to 6 years
(which affects the depreciation charge) should be adjusted
PROSPECTIVELY.

The change will affect the period of change (current year

2018) and future periods (if the change affects future years).

The CURRENT year depreciation shall be RM10,100

recognized as expense in profit or loss.
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 CHANGES IN ACCOUNTING
ESTIMATES

• Where difficulty arises in differentiating

change in accounting policy and change in
estimate, the change is a change in estimate.

34
 CHANGES IN ACCOUNTING ESTIMATES – AN
EXAMPLE 2
Change in Depreciation method

•1 January 2015 – an equipment costing

RM5,000,000 with a residual value of RM500,000
was acquired and depreciated over 10 years on a
STRAIGHT-LINE basis.
• 1 January 2018 – equipment will be depreciated at
25% per year based on the REDUCING
BALANCE method 
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 DEPRECIATION CHARGE

DEPRECIATION CHARGE FYE 31 DECEMBER 2015

(5,000,000 – 500,000) ÷ 10 years RM450,000
Initial cost as at 1 January 2015 RM 5,000,000
Accumulated depreciation as at
31 December 2017: RM450,000 x 3 years 1,350,000
Carrying amount as at 31 December 2017 3,650,000

DEPRECIATION CHARGE FYE 31 DECEMBER 2018

RM3,650,000 X 25% RM912,500
farahmustafa 36
 JOURNAL ENTRIES and
EFFECT ON CARRYING AMOUNT
•  
To depreciate the equipment in the CURRENT year
(2018)
Dr. SOPL – depreciation expense RM 912,500
Cr. Accumulated depreciation RM 912,500

Carrying amount as at 1 January 2018 RM 3,650,000

Depreciation – FYE 31 December 2018 (912,500)
Carrying amount – 31 December 2018 2,737,500

farahmustafa 37
 ACCOUNTING TREATMENT

PROSPECTIVE ADJUSTMENT
The change in the depreciation policy from straight-
line to reducing balance (which affects depreciation
charge) is accounted as a change in estimate.
It should be adjusted PROSPECTIVELY, in the
period of change (current year 2018) and future
periods (if the change affects future years).
The CURRENT year depreciation shall be
RM912,500 recognized as expense in profit or loss.

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 Disclosure requirements of
Changes in Accounting Estimates
• An entity shall disclose the nature and amount of a
change in accounting estimate that has an effect in
the current year period or is expected to have an
effect in future periods.

farahmustafa 39
 Accounting Errors pg 135

• Errors are bound to arise whenever judgements

have to be exercised and these include errors in
making stock write-down and bad debt allowance,
applying wrong accounting principles or simply
careless mathematical mistakes.

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 ACCOUNTING ERRORS

• Current period errors

• Prior period errors

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 CURRENT PERIOD ERROR

An error that has been COMMITTED in

the current year and
DISCOVERED in the current year

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 PRIOR PERIOD ERRORS –
DEFINITION
• OMISSIONS from, and MISSTATEMENTS in, the
entity’s financial statements for one or more prior periods
arising from a failure to use(negligence), or misuse
of(fraud), reliable information that:
• was available when financial statements for those
periods were authorized for issue; and
• could reasonably be expected to have been obtained
and taken into account.

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ERRORS – EXAMPLES pg 136 para
6

• Mathematical mistakes.
• Mistakes in applying accounting
policies.
• Oversights or misinterpretation of facts.
• Fraudulent transactions.
44
 PRIOR PERIOD ERROR

Material errors that have been

committed in the PREVIOUS
year(s) financial statements and are
discovered during the CURRENT
period

farahmustafa 45
Correction of prior period errors

• Correction of prior period error must be made

RETROSPECTIVELY the first set of

in
financial statements authorized for issue after their
discovery by:
• Restating the comparative amounts for the period(s) presented
in which error occurred or
• If the error occurred before the earliest prior presented,
restating the opening balances of assets, liabilities and equity
for the earliest prior period presented. 46
 Accounting treatment

•RETROSPECTIVE???
?
• Error of the prior year is adjusted through
the opening balance of retained earnings

47
 PRIOR PERIOD ERROR – AN EXAMPLE
• Payment of RM100,000 was made to
trade suppliers in 2017.
• The payment was accounted as
employee salaries and included as
administrative expense.
• The error was discovered in 2018.
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 JOURNAL ENTRIES and
ACCOUNTING TREATMENT

TO CORRECT THE PRIOR PERIOD ERROR

Dr. Trade payables 100,000
Cr. Retained profits 100,000
YEAR END ADJUSTMENT
The prior period error should be accounted
RETROSPECTIVELY.
The error must be adjusted to the opening
balance of RETAINED PROFITS.
farahmustafa 49
CURRENT AND PRIOR PERIOD ERROR–
AN EXAMPLE
• 1 January 2018 – Fasha Bhd discovered fraudulent
transactions made by an ex-employee.
• Cash receipts from customers of RM1,000,000
divested by ex-employee since 2015
• ¼ = RM250,000 – stolen in 2018
• ¾ = RM750,000 – stolen during previous years
• Retained earnings as at 1 January 2018 –
RM20,000,000.

farahmustafa 50
 CURRENT AND PRIOR PERIOD ERROR–
AN EXAMPLE
• TYPE OF ERROR???
• FRAUD!!!
• Cash receipt from customers stolen by employee.
• WHEN was error COMMITTED????
• 2015 – 2017 (PRIOR YEARS)
• 2018 (CURRENT YEAR)
• WHEN was error DISCOVERED????
• 2018 (CURRENT YEAR)
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 ACCOUNTING TREATMENT

YEAR- END ADJUSTMENT

The current year loss (RM250,000) is
written off against the current year’s profits.
RETROSPECTIVE ADJUSTMENT
The prior period loss (RM750,000) should
be adjusted retrospectively and adjusted to
the opening balance of retained earnings.
farahmustafa 52
 Example: Error

Journal Entries on 2 January 2018

Dr. SOPL – operating 250,000
expenses
Cr. Trade receivables 250,000

Dr. Retained profits 750,000

Cr. Trade receivables 750,000
farahmustafa 53
 Example: Prior year error

Statement of retained earnings – extract from statement of

changes in equity FYE 31 December 2018
As at 1 January 2018 RM
20,000,000
Prior year adjustment:
Prior year error (750,000)
Restated balance as at 1 January 19,250,000
2018

farahmustafa 54
RETROSPECTIVE ADJUSTMENT and EFFECT
ON RETAINED EARNINGS

• INCREASE RETAINED EARNINGS???

• If the original policy (or error) has resulted in
decreased profits in the previous years

• DECREASE RETAINED EARNINGS???

• If the original policy (or error) has resulted in
increased profits in the previous years
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 Example 9 page 137

• During the year ended 31 Dec 20x8, Sansmile Bhd

discovered that in the year ended 31 Dec 20x5, fictitious
invoices were recognized as sales and receivables to the
tune of RM200m. The receivables were subsequently
reclassified to property, plant and equipment in the year
ended 31 Dec 20x6 and depreciated over an estimated
useful life of 10 years. Verification work done by the
company’s internal auditors indicated that there were no
such items of property, plant and equipment and
receivables.
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 Example 9 page 137
• The relevant information for the past four years
was as follows:
31 Dec 31 Dec 31 Dec 31 Dec
20x8 20x7 20x6 20x5
RM’m RM’m RM’m RM’m
Receivables 400 380 360 550
PPE at cost 800 760 740 500
Acc Depr (200) (140) (90) (80)
CA 600 620 650 420
Net profit for the year 40 60 50 180
Opening retained profits 310 250 200 20
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 Example 9 pg 137

• Required: Explain how the prior period error shall

be adjusted in the financial statements.

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 Solution to Example 9 pg 137

• The error occurred in the year 20x5.

• If the comparative financial statements are presented for the
prior 3 financial statements, the error shall be corrected in
the comparative financial statements of the year ended 31
Dec 20x5.
• The journal entry to correct the error in that year is as
follows:
• Dr sales RM200m
Cr Receivables RM200m
59
 Solution to Example 9 pg 137

• The consequential effects of the correction to the

subsequent years would be as follows:
31 Dec 31 Dec 31 Dec
20x8 20x7 20x6
RM’m RM’m RM’m
Decrease in PPE at cost 200 200 200
Acc Depr (60) (40) (20)
CA 140 160 180
Decrease in depreciation 20 20 20
exp
Decrease in Opening 160 180 200
retained profits 60
 Solution to Example 9 pg 137

• The corrected financial statements for the current

year and the restated comparative financial
statements for the prior three financial years would
be as follows:

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 Solution to Example 9 pg 137
31 Dec 31 Dec 31 Dec 31 Dec
20x8 20x7 20x6 20x5
RM’m RM’m RM’m RM’m
Receivables (400- (380-200) (360- (550-
200) 180 200) 200)
200 160 350
PPE at cost (800- (760- (740- 500
200) 200)560 200)540
600
Acc Depr (200-60) (140-40) (90-20) (80)
(140) (100) (70)
CA 560 560 470 420
Net profit for the year (40+20) (60+20)80 (50+20) (180-
62

60 70 200)
(20)
 Solution to Example 9 pg 137

• Continue statement...
31 Dec 31 Dec 31 Dec 31 Dec
20x8 20x7 20x6 20x5
RM’m RM’m RM’m RM’m
Opening retained profits 310 250 200 20
Prior year adjustment (160) (180) (200) -
Restated op. balance 150 70 0 20
Closing retained profit 210 150 70 0

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 Disclosure requirements of
corrections of errors
• The nature of the prior period error
• For each prior period presented, to the
extent practicable the amount of the
correction
• The amount of the correction at the
beginning of the earliest prior period
presented.
64
 Illustration
Cerah Bhd is involved in the manufacturing of rubber products. The products are marketed
through the company’s appointed agents throughout the country. Cerah Bhd’s reporting period
ends on 31 December.

a. State whether the following transactions is a change in accounting policy or a change in

accounting estimate for Cerah Bhd under MFRS108 Accounting Policies, Changes in
Accounting Estimates and Errors:

i. Cerah Bhd estimates that 5% of its account receivables are uncollectible.

ii. Cerah Bhd recognises income arising from service contracts on the basis of the
stage of completion.

iii. Cerah Bhd determines that it will adopt fair value model for the measurement of
its investment property.

iv. The current year’s warranty provision is calculated by providing for 1% of current
year sales, based on last year’s warranty claims amounting to 1% of sales.
(4 marks)
65
   
Illustration
a. Cerah Bhd has a building which it purchased on 1 January 2009. The building has been
depreciated on straight line basis over its useful life. On 1 January 2014, the remaining
life of the building is 10 years.

In 2014, the company’s directors determined, after a review of depreciation rates for
similar buildings used in its industry, that the buildings should be depreciated over a
longer period which is 20 years.
As at 31 December 2013, the building has been used for 5 years and the details of the
building are as follows:

RM
Cost 9,000,000
Accumulated depreciation (3,000,000)
Carrying amount 6,000,000
farahmustafa 66
 Illustration
Required:

i. Determine whether a change in useful life of the building is a change in

accounting policy or a change in accounting estimate for Cerah Bhd in accordance
to MFRS 108 Accounting Policies, Changes in accounting Estimates and Errors.
(3 marks)

ii. Compute the total amount of annual depreciation before the economic life
changes.
(3 marks)

iii. Calculate the revised annual depreciation based on the remaining life of the asset
for the year ended 31 December 2014.
(4 marks)

iv. With reference to MFRS 108 Accounting Policies, Changes in accounting

Estimates and Errors, discuss the appropriate accounting treatment of the above
situation.
(6 marks)
(Total: 20 marks)

67
 Solution
a.
i. accounting estimate√

ii. accounting policy√

iii. accounting policy√

iv. accounting estimate√ (i.e., an accounting estimate that is determined by

applying a policy of estimating warranty provisions as a % of sales based on
the prior period %)
(4 √ = 4 marks)
68
 Solution
b.
i. A change in useful life of the building is a change in accounting estimate√ since
it cannot be measured with accuracy√ and involves judgements based on the
latest reliable information√
(3 √ = 3 marks)

ii. The annual depreciation charge prior to the change in estimate was:
= RM9,000,000√
RM15 years√√
= RM600,000
(3 √ = 3 marks)

iii. Since the total useful life is re-assessed as being 20 years, and 5 years have
already elapsed, the remaining useful life is 15 years.

= 20 years-5years
= 15 years√
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 Solution
The revised annual depreciation for the year ended 31 December 2014 and
future years will be:

= RM9,000,000√ – RM3,000,000√
15 years√
= RM400,000

i.e., the carrying amount of the asset at the date of the change in estimate,
divided by the remaining useful life.
(4 √ = 4 marks)

iv. Accounting treatment:

Para 36 MFRS 108 stipulated that changes in accounting estimates√ are to

be adjusted prospectively√ in the period in which the estimate is amended
and to future periods. √

In future periods annual depreciation expense will be RM400,000√√ (2013:

RM600 000√). There is no change to the comparative figures because the
change in accounting estimate is applied prospectively.
(6 √ = 6 marks)
(Total: 20 marks)

70