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    Chapter 12 (Cfas) PDF

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    Vince Pereda
    This document summarizes accounting policies, estimates, and errors according to PAS 8. It defines accounting policies as the principles, bases, conventions, rules and practices applied in preparing financial statements. It also discusses how to account for changes in accounting policies, estimates, and prior period errors. For changes in accounting policies, it explains when retrospective or retroactive application is required. For accounting estimates, it provides examples and notes that changes are recognized prospectively. And for prior period errors, it states they are corrected retrospectively through an adjustment to opening retained earnings and affected assets/liabilities.

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    Chapter 12 (Cfas) PDF

    Uploaded by

    Vince Pereda
    1K views3 pages
    This document summarizes accounting policies, estimates, and errors according to PAS 8. It defines accounting policies as the principles, bases, conventions, rules and practices applied in preparing financial statements. It also discusses how to account for changes in accounting policies, estimates, and prior period errors. For changes in accounting policies, it explains when retrospective or retroactive application is required. For accounting estimates, it provides examples and notes that changes are recognized prospectively. And for prior period errors, it states they are corrected retrospectively through an adjustment to opening retained earnings and affected assets/liabilities.

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    This document summarizes accounting policies, estimates, and errors according to PAS 8. It defines accounting policies as the principles, bases, conventions, rules and practices applied in preparing financial statements. It also discusses how to account for changes in accounting policies, estimates, and prior period errors. For changes in accounting policies, it explains when retrospective or retroactive application is required. For accounting estimates, it provides examples and notes that changes are recognized prospectively. And for prior period errors, it states they are corrected retrospectively through an adjustment to opening retained earnings and affected assets/liabilities.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views3 pages

    Chapter 12 (Cfas) PDF

    Uploaded by

    Vince Pereda
    This document summarizes accounting policies, estimates, and errors according to PAS 8. It defines accounting policies as the principles, bases, conventions, rules and practices applied in preparing financial statements. It also discusses how to account for changes in accounting policies, estimates, and prior period errors. For changes in accounting policies, it explains when retrospective or retroactive application is required. For accounting estimates, it provides examples and notes that changes are recognized prospectively. And for prior period errors, it states they are corrected retrospectively through an adjustment to opening retained earnings and affected assets/liabilities.

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    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

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