IAS 8 Accounting Policies,

Changes in Accounting
Estimates and Errors
Changes in accounting estimates (par.5)

▪ A change in accounting estimate is 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 obligations associated with,
assets and liabilities. Changes in accounting estimates
result from new information or new developments and,
accordingly, are not corrections of errors.
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Changes in accounting estimates (par.5)

▪ Prospective Application

▫ recognising the effect of the change in accounting

estimate in the current and future periods affected
by the change

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Changes in accounting estimates (par.32)

▪ As a result of the uncertainties inherent in business

activities, many items in financial statements cannot be
measured with precision but can only be estimated.
Estimation involves judgements based on the latest
available, reliable information.

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Changes in accounting estimates (par.32)

▪ For example, estimates may be required of:

▪ (a) bad debts;
▪ (b) inventory obsolescence;
▪ (c) the fair value of financial assets or financial liabilities;
▪ (d) the useful lives of, or expected pattern of consumption of
the future economic benefits embodied in, depreciable
assets; and
▪ (e) warranty obligations.
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Changes in accounting estimates (par. 34)

▪ An estimate may need revision if changes occur in the

circumstances on which the estimate was based or as a
result of new information or more experience. By its
nature, the revision of an estimate does not relate to
prior periods and is not the correction of an error.

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Changes in accounting estimates (par.35)

▪ A change in the measurement basis applied is a change

in an accounting policy, and is not a change in an
accounting estimate. When it is difficult to distinguish a
change in an accounting policy from a change in an
accounting estimate, the change is treated as a change in
an accounting estimate.

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STRAIGHT LINE METHOD

Cost−Residual Value
▪ Annual depreciation=
Useful life in years

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STRAIGHT LINE METHOD

▪ An entity acquired a asset for P105,000 on January 1, 2019 and

appropriately assessed its useful life at 5 years from the date of
acquisition with a residual value of 5,000.
Initial Cost of asset 105,000
Residual Value 5,000
Depreciable amount 100,000
Divided by estimated useful life 5
Annual Depreciation 20000

Year Particulars Depreciation Accumulated Depreciation Carrying amount

Acquisition Cost 105,000
1 Depreciation for 1st year 20,000 20,000 85,000
2 Depreciation for 2nd year 20,000 40,000 65,000
3 Depreciation for 3rd year 20,000 60,000 45,000
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4 Depreciation for 4th year 20,000 80,000 25,000
5 Depreciation for 5th year 20,000 100,000 5,000
SUM-OF-YEARS’ DIGITS METHOD

LIFE+1
▪ SYD= [ 2
] x LIFE

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SUM-OF-YEARS’ DIGITS METHOD
▪ On January 1, 2018, Christmas Company acquired an equipment with
an estimated useful life of 4 years and a residual value of 20,000, for a
total purchase price of 100,000.
4+1
Initial Cost of asset 100,000 SYD= [ 2
]x 4
Residual Value 20,000 = 10
Depreciable amount 80,000
Depreciable Accumulated
Year Particulars SYD Rate amount Depreciation Depreciation Carrying Amount

Acquisition Cost 100,000

Depreciation for 1st
1 year 4/10 80,000 32,000 32,000 68,000
Depreciation for 2nd
2 year 3/10 80,000 24,000 56,000 44,000
Depreciation for 3rd
3 year 2/10 80,000 16,000 72,000 28,000 11
Depreciation for 4th
4 year 1/10 80,000 8,000 80,000 20,000
DOUBLE DECLINING BALANCE METHOD

▪ Double declining rate= (Straight line rate x 2)

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DOUBLE DECLINING BALANCE METHOD

▪ Hopeful Company purchased an asset for P500,000 on January 1,

2019 with residual value of 50,000. The estimated useful life is 5
years.
▪ Double declining rate= (100%/5 years) x 2= 40%

accumulated Carrying
Year Particulars Depreciation Depreciation Amount
Acquisition Cost 500,000
1 40% x 500,000 200,000 200,000 300,000
2 40% x 300,000 120,000 320,000 180,000
3 40% x 180,000 72,000 392,000 108,000
4 40% x 108,000 43,200 435,200 64,800 13
5 64,800-50,000 14,800 450,000 50,000
150% DECLINING BALANCE METHOD

▪ 150%declining rate= (Straight line rate x 1.50)

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150% DECLINING BALANCE METHOD

▪ Faithful Company purchased an asset for P500,000 on January

1, 2019 with residual value of 50,000. The estimated useful life
is 5 years.
▪ 150% declining rate= (100%/5 years) x 1.5= 30%
Accumulated
Year Particulars Depreciation Depreciation Carrying Amount
Acquisition Cost 500,000
1 30% x 500,000 150,000 150,000 350,000
2 30% x 350,000 105,000 255,000 245,000
3 30% x 245,000 73,500 328,500 171,500
4 30% x 171,500 51,450 379,950 120,050 15

5 120,050-50,000 70,050 450,000 50,000

UNITS OF PRODUCTION METHOD

▪ Depreciation rate= Cost-residual value/ total units or

total hours

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UNITS OF PRODUCTION METHOD
(output method- based on units)
▪ The company purchased a machinery for 650,000 with 50,00 residual
value. It has an estimated useful life of 5 years and total expected
output of 150,000 units. Outputs for 1st, 2nd, 3rd, 4th, and 5th year
amounted to 34,000 , 32,000 , 25,000, 29,000, and 30,000 units,
respectively.
Rate per unit/depreciation rate= 600,000/150,000 = 4 per unit of output

Accumulated Carrying
Year Particular Depreciation Depreciation amount
Acquisition Cost 600,000
1 34,000 x 4 136,000 136,000 464,000
2 32,000 x 4 128,000 264,000 336,000
3 25,000 x 4 100,000 364,000 236,000
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4 29,000 x 4 116,000 480,000 120,000
5 30,000 x 4 120,000 600,000 -
UNITS OF PRODUCTION METHOD
(input method- based on hours)
The company purchased a machinery for 100,000 with 20,00 residual value. It
has an estimated useful life of 4 years and total expected input of 40,000
hours. Manufacturing hours for 1st, 2nd, 3rd, and 4th year amounted to 16,000 ,
8,000 , 12,000, and 4,000 hours, respectively.
Rate per unit/depreciation rate= 80,000/40,000 = 2 per hour of input

Accumulated Carrying
Year Particular Depreciation Depreciation amount
Acquisition Cost 100,000
1 16,000 x 2 32,000 32,000 68,000
2 8,000 x 2 16,000 48,000 52,000
3 12,000 x 2 24,000 72,000 28,000 18
4 4,000 x 2 8,000 80,000 20,000
An entity acquired a asset for P1,000,000 on 1 January 20X1 and appropriately assessed
its useful life at 30 years from the date of acquisition with a residual value of P100,000.
The entity decided that the straight-line method is the most appropriate method on
which to depreciate the asset.
In 20X9 the entity undertook substantial research. As a result, as at 31 December 20X9
the entity assessed the useful life of the asset at 20 years from the date of acquisition
with a residual value of P500,000. It continued to believe that the straight-line method
the most appropriate method of depreciation for the asset.

Change in Accounting Estimate

Initial Cost of asset 1,000,000
Carrying Value (20x8) 760000
Residual Value 100,000
Depreciable amount 900,000 Residual Value 500000
Divided by estimated useful life 30 Depreciable amount 260000
Annual Depreciation 30000
Divided by estimated useful life 12
Annual Depreciation 21666.67
Initial Cost of Asset 1000000
Less: Accumulated Depreciation (30,000x8) 240000
Carrying Value (20x8) 760000
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At December 31 20X1 an entity measured one of its trade debtors at
P200,000 (P600,000 gross amount less P400,000 provision for doubtful
debts). The estimate of the extent of the doubtful debt was appropriately
made on the basis of all of the available information.

On December 31 20X2 the entity received notification from the liquidator of

the debtor that it would shortly receive P250,000 in full and final settlement
of the debt.

The entity must include P50,000 (P250,000 at December 31 20X2 less

P200,000 at 31 December 31 20X1) as change in accounting estimate.

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An entity provides warranties at the time of sale to purchasers of its
products. On 31 December 20X5 an entity assessed its warranty obligation
for products sold before 31 December 20X5 at P100,000. Annual financial
statements were approved for issue on 31 January 20X6.
Immediately before annual financial statements were approved for issue
the entity discovered a latent defect in one of its products ( a defect that
was not discoverable by reasonable or customary inspection). As a result
of the discovery the entity revised its estimate of its warranty obligation at
31 December 20X5 to P150,000.

This is the determination of an (initial) accounting estimate, not a change in accounting estimate. At 31
December 20X5 the obligation for the warranty provision must be measured at P150,000. The latent defect is a
condition that existed at the end of the reporting period and is therefore taken into account in determining the
amount of the obligation at the end of the reporting period.

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An entity provides warranties at the time of sale to purchasers of its
products. On December 31 20X5 an entity assessed its warranty obligation
for products sold before December 31 20X5 at P100,000. Annual financial
statements were approved for issue on January 5, 20x5.
The latent defect was discovered when preparing the interim financial
report for the six-month period ended June 30 20X6, after the December
31 20X5 annual financial statements were approved for issue. In July 20X6
the entity paid P150,000 to transfer the obligation to an independent third
party.

The additional P50,000 obligation (not provided for at 31 December 20X5) is a change in accounting estimate for
the year ended 31 December 20X6. The warranty obligation (provision) was appropriately measured and
reported at P100,000 in the entity’s 31 December 20X5 annual financial statements. This estimate was found to
be incorrect in 20X6, after the 20X5 financial statements were approved for issue. The P50,000 is recognised as
an expense in determining the profit or loss for the six-month period ended 30 June 20X6.

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Changes in accounting estimates (par.36)

▪ The effect of a change in an accounting estimate, other

than a change to which paragraph 37 applies, shall be
recognised prospectively by including it in profit or loss
in:
▪ (a) the period of the change, if the change affects that
period only; or
▪ (b) the period of the change and future periods, if the
change affects both.
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Changes in accounting estimates (par.37)

▪ To the extent that a change in an accounting estimate

gives rise to changes in assets and liabilities, or relates to
an item of equity, it shall be recognised by adjusting the
carrying amount of the related asset, liability or equity
item in the period of the change.

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Changes in accounting estimates (par.38)

▪ Prospective recognition of the effect of a change in an

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

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Changes in accounting estimates (par.38)

▪ A change in an accounting estimate may affect only the

current period’s profit or loss, or the profit or loss of
both the current period and future periods.
▪ For example, a change in the estimate of the amount of
bad debts affects only the current period’s profit or loss
and therefore is recognised in the current period.

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Changes in accounting estimates (par.38)

▪ However, a change in the estimated useful life of, or the

expected pattern of consumption of the future economic
benefits embodied in, a depreciable asset affects
depreciation expense for the current period and for
each future period during the asset’s remaining useful
life.

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Changes in accounting estimates (par.39)

▪ In both cases, the effect of the change relating to the

current period is recognised as income or expense in the
current period.

▪ The effect, if any, on future periods is recognised as

income or expense in those future periods.

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“ Disclosures
❖ An entity shall 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, except for the
disclosure of the effect on future periods when
it is impracticable to estimate that effect.

❖ If the amount of the effect in future periods is

not disclosed because estimating it is
impracticable, an entity shall disclose that fact.

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An entity acquired a asset for P1,000,000 on 1 January 20X1 and appropriately assessed
its useful life at 30 years from the date of acquisition with a residual value of P100,000.
The entity decided that the straight-line method is the most appropriate method on
which to depreciate the asset.
In 20X9 the entity undertook substantial research. As a result, as at 31 December 20X9
the entity assessed the useful life of the asset at 20 years from the date of acquisition
with a residual value of P500,000. It continued to believe that the straight-line method
the most appropriate method of depreciation for the asset.

Change in Accounting Estimate

Initial Cost of asset 1,000,000
Carrying Value (20x8) 760000
Residual Value 100,000
Depreciable amount 900,000 Residual Value 500000
Divided by estimated useful life 30 Depreciable amount 260000
Annual Depreciation 30000
Divided by estimated useful life 12
Annual Depreciation 21666.67
Initial Cost of Asset 1000000
Less: Accumulated Depreciation (30,000x8) 240000
Carrying Value (20x8) 760000
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Disclosures

Note 3
Operating profit
Change in accounting estimate
At 31 December 20X9, as a result of research undertaken, the entity reassessed the
useful life of its (respective asset) at 20 years (previously 30 years) from the date of
acquisition; and the residual value of its asset at P500,000 (previously P100,000). This
had the effect of decreasing the depreciation expense for the year ended 31
December 20X9 by P8,333 (previously P30,000 per year, now P21,667 per year).
Depreciation for each of the next 11 years is expected to be similarly affected by these
changes in accounting estimates.
Note: In this example, tax effects have been ignored.
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Changes in accounting estimates (par.50)

▪ In some circumstances, it is impracticable to adjust comparative

information for one or more prior periods to achieve comparability
with the current period.

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Impracticability in respect of retrospective application and
retrospective restatement (par.51)

It is frequently necessary to make estimates in applying an

accounting policy to elements of financial statements recognised or
disclosed in respect of transactions, other events or conditions.
Estimation is inherently subjective, and estimates may be
developed after the reporting period.

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Impracticability in respect of retrospective application and
retrospective restatement (par.51)

Developing estimates is potentially more difficult when

retrospectively applying an accounting policy or making a
retrospective restatement to correct a prior period error, because
of the longer period of time that might have passed since the
affected transaction, other event or condition occurred.

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Impracticability in respect of retrospective application and
retrospective restatement(par.51)

However, the objective of estimates related to prior periods

remains the same as for estimates made in the current period,
namely, for the estimate to reflect the circumstances that existed
when the transaction, other event or condition occurred.

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▪ END

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