CHAPTER 41

Accounting Policies, Changes in

Estimates and Errors
 Objective and Scope
PAS 8 prescribe the criteria for selecting, applying, and changing accounting
policies and the accounting and the disclosure of changes in accounting
policies, changing in accounting estimates and correction of prior period
errors. These are intended to enhance an entity’s financial statements,
relevance, reliability, and comparability.
Selecting and Applying Accounting Policies
When a PFRS specifically applies to transaction, other events or condition,
the accounting policy or policies applied to that item shall be determined by
applying the PFRS.
Philippine Financial Reporting Standards (PFRS)
- are standards and interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise the following:
a.) Philippine Financial Reporting Standards (PFRS)
b.) Philippine Accounting Standards (PAS)
c.) Interpretations
Application and Implementation Guidance
PFRS are accompanied by guidance to assist entities in applying their
requirements. Guidance that is an integral part of the PFRS is mandatory.
Guidance that is not integral part of the PFRS does not contain requirements
for financial statements.
Accounting policies – are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
financial statements.
Materiality
It is a matter of professional judgement. Omissions or misstatements
of items are material if they could, by their size or nature, individually
or collectively, influence the economic decisions of users taken on the
basis of the financial statements.
 Absence of a Standard or an
Interpretation

In the absence of a PFRS that specifically applies to a

transaction, other event or condition, management must use its judgment
in developing and applying an accounting policy that results in
information that is relevant and reliable.
In making that judgement, management shall refer to, and
consider the applicability of, the following sources in descending order.
1.) The requirements in PFRSs dealing with similar and related issues; and
2.) The definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Conceptual Framework.
In making the judgement, management may also consider
1.) The most recent pronouncement of other standard-setting bodies that use a
similar conceptual framework to develop accounting standards.
2.) Other accounting literature and accepted industry practices, to the extent
that these do not conflict with PFRSs dealing with similar and related issues and
the Framework.

Consistency of Accounting Policies

Accounting policies shall be selected and applied consistently for similar
transactions, unless a PFRs specifically requires or permits categorization of
items for which different policies may be appropriate. In such cases, an
appropriate accounting policy shall be selected and applied consistently to
each category.
 Accounting Changes
There are 2 types of accounting changes accounted for under PAS 8, namely
1.) Changes in Accounting Policy; and
2.) Changes in Accounting Estimate
Changes in Accounting Policies
An entity shall change an accounting policy only if the change:
a.) is required by PFRS; or
b.) results to a more relevant and reliable information about an entity’s financial position,
performance, and cash flows.
The ff. are not changes in accounting policies:
a.) the application of an accounting policy for transaction, other events
or conditions that differ in substance from those previously occurring
b.) the application of a new accounting policy for transactions, other
events or conditions that did not occur previously or were immaterial
 Accounting for changes in
accounting policies

Changes in accounting policies are accounted for

under specific transitional provisions, if any, in a PFRS.
In the absence of specific transitional provisions,
or in case of a voluntary change in accounting policy,
changes in accounting policies are accounted for by
retrospective application.
Retrospective Application – is applying a new accounting policy to
transitions, other events and conditions as if that policy had always
been applied.
It also means adjusting the beginning balance of each affected component
of equity for the earliest prior period presented and the other comparative
amount disclosed for each prior presented as if the new accounting policy
had always been applied.
Impracticable Application – results when the entity cannot apply a
requirement after making every reasonable effort to do so.

Voluntary Change in Accounting Policy

An entity may adopt a pronouncement of other standard-settling body in the
absence of a PFRS that specifically applies to a transaction. If the
pronouncement adopted is later on amended by the other standard-settling
body and the entity decides to adopt the amended version of the
pronouncement, the change is accounted for and disclosed as a voluntary
change in accounting policy.
 Future Changes in Accounting Policies
If an entity has not applied a new standard or interpretation that has been issued
but not yet effective, the entity must disclose that fact and any and known or
reasonably estimate information relevant to assessing the possible impact that
the new pronouncement will have in the year it is applied.
Changes in reporting entity
A change that result in financial statements that, in effect, are those of a different
reporting entity.
1.) presenting consolidated or combined financial statements in place of
financial statements of individual entities.
2.) changing specific subsidiaries that make up the group of entities for which
consolidated financial statements are presented
3.) changing the entities included in combined financial statements.
 Disclosures
a.) The title of the PFRS;
b.) When applicable, that the change in accounting policy is
made in accordance with its transitional provisions;
c.) The nature of the change in accounting policy;
d.) When applicable, a description of the transitional provisions;
e.) When applicable, the transitional provisions that might have
an effect on future periods;
f.) For the current period and each prior period presented, to
the extent practicable, the amount of the adjustment:
 For each financial statement line item affected; and
 If PAS 33 Earnings per Share applies to the entity for
basic and diluted earnings per share;
g.) The amount of the adjustment relating to periods
before those presented, to the extend practicable; and

h.) If the retrospective application required is

impracticable for a particular prior period, or for
periods before those presented, the circumstances
that led to the existence of that condition and a
description of how and from when the change in
accounting policy has been applied.
CHANGE IN ACCOUNTING
ESTIMATES
What is a Change in Accounting
Estimates?
a Change in Accounting Estimates is an
Adjustment in
• Carrying Value of an Asset;
• or a liability;
• Or the amount of Periodic consumption
of an Asset; As a result of Present
Condition
And Circumstances
What are the REASONS FOR
ESTIMATION?
When an item of financial statements
cannot be measured precisely ,it can
only be estimated because:
• Uncertainty inherent to the business
• Where judgments are involved
Where ESTIMATION ARE
REQUIRED?
• Bad debts
• Inventory Obsolescence
• Fair value of financial assets or
financial liability
• The useful lives of, or expected
pattern of consumption of the future
economic benefits embodied in,
depreciable assets
• Warranty Obligation
When Change in Accounting
Estimate is necessary?
● If changes occur in the
circumstances on which the estimate
was based
○ as a result of a new information
○ As a result of new development
○ More experience
RECOGNITION CRITERIA OF CHANGE IN
ACCOUNTING ESTIMATES
• Adjusting the carrying amounts of the
related asset, liability or equity item in
the period of change recognizes a
change in an accounting estimate
Disclosure Required for Change in
Accounting Estimate
Disclose:
the nature and amount of a change in an
accounting estimate that has an effect in the
current period or is expected to have an
effect in future periods
if the amount of the effect in future periods
is not disclosed because estimating it is
impracticable, an entity shall disclose that
fact.
 ERRORS
 Occur when transactions are recorded
incorrectly or when they are omitted.
 Errors include the effects of:
 Mathematical mistakes
 Mistakes in applying accounting policies
 Oversights or misinterpretation of facts
 Fraud
 Current Period Errors
 Errors committed during the current period
 Illustration:
On Jan. 10,20x2 prior to authorization of ABC Co.’s Dec. 31,
20x1 financial statements for issue, the accountant of ABC Co.
received a bill for an advertisement made in the month of
December 20x1 amounting to 400,000. This expense was not
accrued as of Dec. 31,20x1.
 If the books are still open:
Dec. 31, Advertising Expense 400,000
20x1 Advertising Payable 400,000
 If the books are already closed:
Jan. 10, Retained Earnings 400,000
20x2 Advertising Payable 400,000
***Books still open means that closing entries have not yet been made.
***Books closed means that closing entries have already been made.
Nominal accounts cannot be used anymore.
 Prior period errors
 These are omissions from, and misstatements in, the
entity’s financial statements for one or more prior periods
arising from a failure to use, or misuse of reliable
information that:
Was available when FS 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 those FS
Correction of prior period errors

An entity must correct all material prior period errors

retrospectively in the first set of FS authorized for issue after their
discovery by:
Restating the comparative amounts for the prior period(s)
presented in which the error occurred; or
Restating the opening balances of assets, liabilities and
equity for the earliest prior period presented, if the error
occurred before the earliest prior period presented.
 In other words, prior period errors are corrected by retrospective
restatement.

Retrospective statement is correcting the recognition,

measurement and disclosure of amounts of elements of financial
statements as if a prior period error had never occurred.
 Illustration:
On Jan. 15, 20x3 while finalizing its 20x2 financial
statements, ABC Co. discovered that depreciation expense
recognized in 20x1 is overstated by 400,000.

Jan. 15, Accumulated Depreciation 400,000

20x3 Retained Earnings 400,000
Types of errors in accounting

1. Errors in principle – these may arise from lack of knowledge of

accounting standards or procedures, misuse of available
information, or misinterpretation of accounting standards,
whether intentional or unintentional.
Intentional misstatement of FS is sometimes reffered to as
fraudulent financial reporting.
2. Clerical errors – arise from a variety of sources which may include
some of those enumerated under PAS 8.
a) Transposition error
b) Transplacement error
c) Errors of omission
d) Errors of commission
e) Compensating errors
f) Accounting system error
g) Counterbalancing and Non-counterbalancing errors
Counterbalancing errors
- errors which, if remained uncorrected, are automatically
corrected or offset in the next accounting period. Their effect on
the FS automatically reverses in the next accounting period.
Examples:
1. Inventory
2. Purchases
3. Sales
4. Prepayments and Unearned items
5. Accruals for income and expenses
 Non-counterbalancing errors
It affects the profit or loss only in the period the error was committed.
The profit and loss in subsequent periods where the error remains
uncorrected, are unaffected.
Examples:
1. Misstatement in depreciation
2. Erroneous capitalization of cost that should be expensed outright
3. Non-capitalization of capitalizable cost
 Relationships between accounts
In a periodic inventory system, the following relationships can provide
guidance in determining the effects of counterbalancing errors on profit or loss.
ENDING INVENTORY: PROFIT – DIRECT RELATIONSHIP
***Direct relationship means that if ending inventory is understated, profit is
also understated. Inverse relationship means that if an account is understated,
the related account is overstated.
Ending inventory: COGS – Inverse relationship
Beginning inventory & Purchases: COGS – Direct relationship
Beginning inventory & Purchases: Profit – Inverse relationship
 ASSET-RELATED ACCOUNT: PROFIT – DIRECT RELATIONSHIP
Asset-related account pertains to prepayments and accrual for income.
Example:
Error on prepaid asset – if prepaid insurance is understated, profit is
also understated.
Liability-related account: Profit – Inverse relationship
Liability-related account pertains to unearned items and accrual for
expenses.
Example:
Error on unearned income – If unearned rent is overstated, profit is
understated.