CHAPTER 12 – PAS 8

Accounting policies, estimate, and error

ACCOUNTING POLICIES are the specific principles, bases, conventions, rules and practices applied by
entity in preparing and presenting financial statements.

Accounting policies are essential for a proper understanding of the information contained in the financial
statements.

An entity is required to outline all significant accounting policies applied in preparing financial
statements.

Under accounting standards, alternative treatments are possible.

In this case, it becomes all the more important for an entity to clearly state the accounting policies used
in preparing financial statements.

The entity shall select and apply the same accounting policies each period in order to achieve
comparability of financial statements or to identify trends in the financial position performance and
cash flows of the entity

Change in accounting policy

Once selected, accounting policies must be applied consistently for similar transactions and events.
A change in accounting policy shall be made only when:
a. Required by an accounting standard.
b. The change will result in more relevant and faithfully represented information about the
financial position, financial performance and cash flows of the entity.

A change in accounting policy arises when an entity adopts a generally accepted accounting principle
which is different from the one previously used by the entity.

Examples of change in accounting policy are

a. Change in the method of inventory pricing from the FIFO to weighted average method.
b. Change in the method of accounting for long term construction contract from cost recovery
method to percentage of completion method.
c. The initial adoption of policy to carry assets at revalued amount is a change in accounting policy
to be dealt with revaluation.
d. Change from cost model to fair value model in measuring investment property.
e. Change to a new policy resulting from the requirement of a new PFRS.

How to report a change in accounting policy

A change in accounting policy required by a standard or an Interpretation shall be applied in accordance

with the transitional provisions therein.
If the standard or interpretation contains no transitional provisions or if an accounting policy is changed
voluntarily, the change shall be applied retrospectively or retroactively.

Retrospective application means that any resulting adjustment from the change in accounting policy
shall be reported as an adjustment to the opening balance of retained earnings.

Absence of accounting standard

PAS 8, paragraph 10, provides that in the absence of an accounting standard that specifically applies to a
transaction or event, management shall use judgment in selecting and applying an accounting policy
that results in information that is relevant to the economic decision making needs of users and faithfully
represented.

ACCOUNTING ESTIMATE
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

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.

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.

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 asset and liability

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.

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.

Prior period errors are omissions and misstatements in the financial statements for one or more periods
arising from a failure to use or misuse of reliable information.
Errors may occur as a result of mathematical mistakes, mistakes in applyi ng accounting policies,
misinterpretation of facts, fraud or oversight.

How to treat prior period errors

Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained
earnings and affected assets and liabilities.

If comparative statements are presented, the financial statements of the prior period shall be restated
so as to reflect the retroactive application of the prior period errors as a retrospective restatement.

SOURCE/S:

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS 2019 EDITION (VALIX)

-Vince Pereda