UNIT I MODULE 3:

ACCOUNTING POLICIES
ESTIMATES AND ERRORS
Learning Objectives

■ a. Recognize and describe the effect of change in accounting policy and accounting
estimate
■ b. Apply the concept in change of accounting policy and accounting estimateTo
identify the items included in inventory cost.
■ c. Recognize and describe the effect of accounting errors
■ d. Apply the concept in prior period accounting errors
■ Accounting policies are essential for proper understanding of
the information contained in the financial statements.
Accounting estimates on the other hand are the circumstances
on which the estimate was based or as a result of new
information, more experience or subsequent or subsequent
development. Prior period errors are omissions and
misstatement in the financial statements for one or more period
arising from a failure to use or misuse of reliable information.
Topic 1: CHANGE IN ACCOUNTING POLICY,
ACCOUNTING ESTIMATE AND PRIOR
PERIOD ERRORS
CHANGE IN ACCOUNTING POLICIES
Accounting policies are the specific, principles, bases,
conventions, rules and practices. 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 statements.
It is very important to note that an accounting policy has been
selected; it must be applied consistently for similar
transactions and events. However a change in accounting
policy shall be allowed for change when the following
justifications arise:
a. Required by an accounting standard
b. The change will result in more relevant and faithfully
represented information about the financial statements
CHANGE IN ACCOUNTING POLICIES
Examples of changes in accounting policy are:
a. Change in the method of inventory pricing (e.g. FIFO to
Weighted average method)
b. Change in the accounting recognition for long term
construction contract (e.g. cost recovery method to percentage
of completion method)
c. Change from cost model to fair value model in measuring
investment property
d. The initial adoption of policy to carry over assets at revalued
amount is change in accounting policy to be dealt with as
revaluation
e. Change to new reporting 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 provision.
If the standard or interpretation contains no
transitional provisions or an accounting policy is
changed voluntarily, the change shall be applied
retrospectively or retroactively.
RETROSPECTIVE APPLICATION
The comparative financial statements of all prior years
presented shall be restated as if the new policy had
always been applied. The cumulative effect of change
in accounting policy, net of applicable income tax, shall
be treated as an adjustment.
Limitation of Retrospective Application
Retrospective application of the change in accounting policy
need not be made, if it is IMPRACTICABLE to do so. A
procedure is considered impracticable if:
1. The effects of the retrospective application are not
determinable;
2. The retrospective application requires assumptions about
what management’s intentions would have been at the time;
3. The retrospective application requires significant estimates
of amounts, and it is impossible to distinguish objectively,
from other information, information about those estimates that
provides evidence of circumstances that existed at that time
and would have been available at that time.
Limitation of Retrospective Application
When it is impracticable to make retrospective
application, the entity applies the change to the
earliest period to which it is possible to apply the
change, which normally is the beginning of the current
period.
If comparative information is presented, the financial
statements of the prior period presented shall be
restated to conform with the new accounting policy.
• The computation of the
cost of goods sold for 2020
would then show beginning
inventory at P750,000 and
ending inventory at
P1,200,000 to confirm with
the FIFO method.
• The statement of changes
in in equity for the year
ended December 31, 2020
would show the effect of the
change of P250,000 net of
tax as a deduction from
beginning 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 accounting policy that results
in information that is relevant to the economic decision
making needs of users and faithfully represented.
Absence of Accounting Standard
In the absence of accounting standards, the following
hierarchy of guidance may use by management when
selecting accounting policies.
1. Requirements of current standards dealing with
similar matters
2. Definition, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in
the conceptual framework for financial reporting
3. Most recent pronouncement of other standard-
setting bodies that use a similar Conceptual
Framework, other accounting literature and accepted
industry practices
CHANGE IN 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 or
subsequent development. The revision of the estimate does
not relate to prior period error and is not a correction of an
error.
If it is difficult to distinguish a change in accounting estimate
and accounting policy, the change is treated as a change in
accounting estimate and is supported by appropriate
disclosure.
CHANGE IN ACCOUNTING ESTIMATE
Examples of Accounting Estimates
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 also involved
judgment based on the latest available and reliable
information. Estimates may be required for the following:
1. Doubtful accounts
2. Inventory obsolescence
3. Useful life, residual value and expected pattern of
depreciation of depreciable asset
4. Provisions liability
5. Fair value of assets and liability
CHANGE IN ACCOUNTING ESTIMATE
HOW TO REPORT 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. Doubtful accounts
CHANGE IN ACCOUNTING ESTIMATE
A change in accounting estimate shall not be
accounted for restating amounts reported in financial
statements of prior period. Changes in accounting
estimates are treated currently and prospectively, if
necessary. Prospective recognition of the effect of
change in accounting estimates means that the change
is applies to transactions or other events and condition
from the date of change in estimate.
CORRECTING PRIOR ERRORS
Prior period errors are omissions and misstatement in
the financial statements for one or more period arising
from a failure to use or misuse of reliable information.
Errors make arise as a result of mathematical mistakes,
mistakes in applying accounting policies,
misinterpretation of facts, fraud or oversight.
CORRECTING PRIOR ERRORS
HOW TO TREAT PRIOR PERIOD ERROR?
An entity shall correct material prior period errors respectively
in the first set of financial statements authorised for issue after
their discovery by:
(a) Restating the comparative amounts for prior period(s) in
which error occurred, or
(b) If the error occurred before that date – restating the
opening balance of assets, liabilities and equity for earliest
prior period presented.
CORRECTING PRIOR ERRORS
HOW TO TREAT PRIOR PERIOD ERROR?
If comparative statements are presented, the financial
statements of the prior period error shall be restated,
so as to reflect the retroactive application of the prior
period error as a retroactive restatement
 THANKYOU
Lovely Alviar. Roger Pailano. Alexa Tajadao. Jemaimah Castro