Accounting Changes

2 Main Categories
Change in Accounting Estimate

Change in Accounting Policy

What is a change in accounting estimate?

PAS 8 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 of and expected future benefits and obligation associated with the asset and liability.

 Revision of an estimate does not relate to prior periods and is not a correction of error Sometimes it is difficult to distinguish a change in accounting estimate and a change in accounting policy.

Examples of Accounting Estimate

Bad Debts Inventory Obsolescence Service life, residual value and expected pattern of consumption of benefits of depreciable asset Warranty cost Fair value of financial assets and financial liabilities

Effect of change in accounting estimate

The effect of a change in accounting estimate shall be recognized prospectively by including it in income or loss of: The period of change if the change affects that period only The period of change and future periods if the change affects both

Prospective Recognition
The effect of a change in accounting estimate means that the change is applied to transactions, other events and conditions from the date of the change in estimate.

Change in Accounting Policy

 Accounting policy is the specific principle, basis, convention, rule and practice used by an entity in preparing and presenting the financial statements

So when does a change in accounting policy arises?

Examples of change in accounting policy

Change in the method of inventory pricing from the FIFO to weighted average method Change in the method of accounting for long term construction contract The initial adoption of policy to carry assets at revalued amount Change from cost model to fair value model in measuring investment property

The following are not changes in accounting policy

Application of an accounting policy for events or transactions that differ in substance from previously occuring events or transactions Application of a new accounting policy for events and transaction which did not occur previosly or that were immaterial

When is a change in accounting policy allowed?

 Required by an accounting standard or an interpretation of the standard The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity

What is the treatment of a change in accounting policy?

Retrospective Application
Applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied.

Limitations of retrospective application

It is impracticable to apply a change in accounting policy when:

The effects of a retrospective application are not determinable The retrospective application requires assumptions about what managements intentions would have been at that time When it requires significant estimate, and it is impossible to distinguish objectively information about estimate that:
Provides evidence of circumstances that existed at that time and Would have been available at that time

Explain prospective application of a change in accounting policy

Prior Period Errors

Prior period errors are omissions from and misstatements in the financial statements for one or more periods arising from a failure to use or misuse of reliable information that:

-Was available when financial statements for those

periods were authorized for issue -Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of FS

Treatment of priod period errors

Types of errors
Statement of financial position errors Income Statement errors Combined statement of financial position and income statement errors
Counterbalancing errors Noncounterbalancing errors

Necessary disclosures for prior period errors

Nature of prior period error The amount of correction for each prior period presented to the extent practicable
For each financial statement line item affected For basic and diluted earnings per share

The amount of correction at the beginning of the earliest prior period presented If retrospective application is impracticable, the circumstances that led to the existence of that condition and a description of how and from the error occured