Accounting Policies, Changes in

Accounting Estimates and Errors:

IAS 8
ACCOUNTING CHANGES
The accounting standard of consistency requires that
similar transactions should be reported similarly each year
 Occasionally an entity may find that reporting needs are better
served by changing a method of accounting
 If so, the comparability of financial statements is impaired
Basic question: Should previously issued financial
statements be amended?
ACCOUNTING CHANGES

four types of accounting changes:

1. Change in an accounting principle
Occurs when an entity adopts a GAAP that differs from one previously used
for reporting purposes.
2. Change in an accounting estimate
Result from the necessary consequences of periodic presentation.
3. Change in a reporting entity
Caused by changes in reporting units, which may be the result
a. Consolidations,
b. Changes in specific subsidiaries, or a
c. Change in the number of companies consolidated.
4. Errors
Not viewed as accounting changes.
Result of mistakes or oversights such as the use of incorrect accounting
methods or mathematical miscalculations.
TYPES OF ACCOUNTING CHANGES
Change in accounting principle
 How reported
 Retrospective application

 Change in accounting estimate

 How reported – Prospective application
 Change in accounting entity
 How reported- Retrospective application
 Errors
 How reported –Prior period adjustments
 Changes in Accounting Principle

Change in Accounting Principle: Gaubert Inc. decided in March

2019 to change from FIFO to weighted-average inventory pricing.
Gaubert’s income before taxes, using the new weighted-average
method in 2019, is $30,000.
ILLUSTRATION 4.17
Pretax Income Data Calculation of a Change in
Accounting Principle

ILLUSTRATION 4.18
Income Statement
Presentation of a Change
in Accounting Principle
(Based on 30% tax rate)

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 Change in Accounting Estimates

Change in Estimate: Arcadia HS, purchased equipment for

$510,000 which was estimated to have a useful life of 10 years
with a residual value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line
basis. In 2019 (year 8), it is determined that the total estimated
life should be 15 years with a residual value of $5,000 at the
end of that time.

Questions:
 Does prior years’ depreciation need to be restated?
 Calculate the depreciation expense for 2019.

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 After
Change in Accounting Estimates 7 years

Equipment cost $510,000 First, establish NBV

Residual value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2018)

Fixed Assets:
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

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 After
Change in Accounting Estimates 7 years

Net book value $160,000 Depreciation

Residual value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2019.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2019

Depreciation Expense 19,375

Accumulated Depreciation 19,375

4-8 LO 4
 Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019

Balance, January 1 ₩1,050,000

Net income 360,000
Dividends (300,000)
Balance, December 31 ₩1,110,000

Before issuing the report for the year ended December 31, 2019, you
discover a ₩50,000 error (net of tax) that caused 2018 inventory to
be overstated (overstated inventory caused COGS to be lower and
thus net income to be higher in 2018). Would this discovery have
any impact on the reporting of the Statement of Retained Earnings
for 2019?
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 Retained Earnings Statement
CHOI LTD.
Statement of Retained Earnings
For the Year Ended December 31, 2019

Balance, January 1 ₩1,050,000

Prior period adjustment - error correction (50,000)
Balance, January 1 (restated) 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 ₩1,060,000

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