CHAPTER

BLUE NOTES
45 S
L
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 periodic consumption of an asset that results from the assessment of the present status of and
expected future benefit and obligation associated with the asset and liability.”
Note: When it is difficult to determine whether an adjustment is a change in accounting estimate or a change in accounting policy, the change
shall be treated as a change in accounting estimate, with appropriate disclosure.

Accounting Treatment for a Change in Accounting Estimate

The effect of a change in accounting estimate shall be recognized currently and prospectively by including it in profit or
loss of:
a. The period of change if the change affects that period only.
b. The period of change and future period 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.
Note: a change in accounting estimate shall not result in restating the amounts presented in financial statements of prior periods.

Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing
and presenting financial statements.
A change in accounting policy shall be made only when:
a. Required by an accounting standard or an interpretation of the standard.
b. The change will result in more relevant and faithfully represented information about the financial statements
The following are not changes in accounting policy:
a. The application of an accounting policy for events or transactions that differ in substance from previously
occurring events or transactions
b. The application of a new accounting policy for events or transactions which did not occur previously or
that was immaterial
Accounting Treatment for a Change in Accounting Policy
With transitional provision: A change in accounting policy required by a standard or an interpretation shall be applied
in accordance with transitional provisions therein.
Without transitional provision: 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.
PAS 8, paragraph 22, provides that “an entity shall adjust the opening balance of each affected component of equity
for the earliest period presented and the comparative amounts disclosed for each prior period presented as if the new
policy had always been applied.”

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172 USL Blue Notes Chapter 45 – Accounting Changes

Limitation of Retrospective Application

Retrospective application of a change in accounting policy is not required if it is impractical to determine the
cumulative effect of change.
For a particular prior period, it is impractical to apply a change in accounting policy when:
a. The effects of the retrospective application are not determinable.
b. The retrospective application requires assumptions about what management’s intentions would have been at
that time.
c. The retrospective application requires significant estimate, and it is impossible to distinguish objectively
information about the estimate that:
1. Provides evidence of circumstances that existed at that time, and
2. Would have been available at that time

Prospective Application
When it is impractical to apply a new accounting policy retrospectively because it cannot determine the cumulative
effect of applying the policy to all prior periods, the entity shall apply the new policy prospectively from the earliest
period practicable.
Change in Reporting Entity
A change in reporting entity is a change whereby entities change their nature and report their operations in such a way
that the financial statements are in effect those of a different reporting entity.

A change in reporting entity is actually a change in accounting policy and therefore shall be treated retrospectively or
retroactively to disclose what the statements would have looked like if the current entity had been existing in the prior
year. Thus, the financial statements of all prior periods presented shall be restated to show financial information for
the new reporting entity.
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 its 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.
Paragraphs 11 and 12 specify the following hierarchy of guidance which management may use when selecting
accounting policies in such circumstances:
a. Requirements of current standards dealing with similar matters.
b. Definition, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the
Conceptual Framework for Financial Reporting
c. Most recent pronouncements of other standard-setting bodies that use similar Conceptual Framework, other
accounting literature and accepted industry practices.

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:
a. Was available when financial statements for those periods were authorized for issue.
b. Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
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Accounting Treatment for Prior Period Errors

Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained earnings and
affected assets and liabilities.
For comparative statements, financial statements of the prior period shall be restated so as to reflect the retroactive
application of the prior period errors.
This is known as retrospective restatement which is “correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if the prior period error had never occurred.
In other words, the net income, its components, retained earnings and other affected balances for the prior period
presented shall be adjusted accordingly.
If the error occurred before the earliest period presented, the opening balances of assets, liabilities and equity for the
earliest period presented shall be restated.
When it is impractical to determine the cumulative effect at the beginning of the current period of an error on all prior
periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date
practicable.

Disclosures of Prior Period Errors

An entity shall disclose the following:
1. The nature of prior period error
2. The amount of correction for each prior period presented to the extent practicable:
a. For each financial statement line item affected
b. For basic and diluted earnings per share
3. The amount of correction at the beginning of the earliest prior period presented
4. If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the
existence of that condition and a description of how and from when the error has been corrected

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