Accounting Changes and

Accounting Errors

Definitions
a. Accounting changes - A general term used to describe the use of different
estimates or accounting principles/policies or reporting entities from those used in a
prior year

b. Accounting errors - Incorrect accounting treatment resulting from mathematical

mistakes, improper application of accounting principles, or omissions of material
facts.

c. Change in accounting estimate - a specific type of accounting change that modifies

prediction of future events, for example, the useful life of a depreciable asset;
changes in estimates are to be reflected in current and future periods. 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. (e.g. bad debt estimates, useful life of PPE, or the expected
pattern of consumption of the future economic benefits embodied in a depreciable
asset. The gain or loss recognized on the outcome of a contingency is not the
correction of an error.)

d. Change in accounting principle/policy - a specific type of accounting change that

uses an accounting principle or method different from that used previously, for
example, shift to revaluation model from cost model in accounting PPE. Though this
is considered a change in accounting policy, it is treated currently and prospectively
in accordance with the IAS 16 and 38, rather than IAS 8)

e. Accounting policies - specific principles, bases, conventions, rules and practices

adopted by an enterprise in preparing and presenting the financial statements.
 f. Fundamental errors - errors discovered in the current period with such significance,
that the financial statements of one or more prior periods can no longer be
considered to have been reliable at the date of their issue.

Accounting Changes
1. Change in accounting estimate
a. Results when uncertainties are resolved as new events occur, more
experience is acquired, or as new information is obtained
b. Accounted for in the current and future periods to conform to the new
estimate
i. Adjusting the carrying amount of an asset, liability or item of equity in
the statement of financial position in the period of change;
ii. Recognizing the change by including it in the profit or loss in:
1. The period of change, if it affects that period only (for
example a change in bad debts)
2. The period of change and future periods, if it affects both
(for example, a change in estimated useful life of a PPE)
c. Prior period financial statements are not adjusted nor the opening balances
of the current period
d. If a change in accounting estimate cannot be distinguished from a change
in accounting policy, IAS 8 requires the change to be treated as a change in
accounting estimate and is accounted for prospectively.
e. Bad debts, inventory obsolescence, fv movement of financial assets or
financial liabilities, useful lives, depreciation method depreciable assets,
warranty obligations
2. Change in accounting principles/policies
a. Changing from one generally accepted accounting principle to another
generally accepted accounting principle.
b. Entities complying with IFRS do not have a free hand in selecting accounting
policies; indeed the very purpose of a body of accounting literature is to
confine such choices.
c. Policies may need not be applied when the effect of applying them is
immaterial. However, it is inappropriate to make, or leave uncorrected,
 immaterial departures from IFRS to achieve a particular presentation of an
entity’s financial position, financial performance or cash flows.
d. Changing from non-GAAP to GAAP method falls under correction of error
and not considered as change in accounting principle
e. Permitted changes in accounting policies:
i. Required by an IFRS
ii. Results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events or
conditions on the entity’s financial position, financial performance or
cash flows
f. Sources of changes in accounting policy:
i. Initial application (including early application) of an IFRS containing
specific transitional provisions
ii. Initial application of an IFRS which does not contain specific
transitional provisions
iii. Voluntary changes in accounting policy
g. The following are not changes in accounting policies:
i. the application of an accounting policy for transactions, other events
or conditions that differ in substance from those previously occurring;
and
ii. the application of a new accounting policy for transactions, other
events or conditions that did not occur previously or were immaterial.
h. Accounted for retroactively (retroactive application) unless the amount of
any resulting adjustment that relates to prior periods is not reasonably
determinable. Any resulting adjustment should be reported as an adjustment
to the opening balance of the retained earnings. Comparative information
should be restated unless it is impracticable to do so.
i. The cumulative effect of the change in accounting principle is shown
as an adjustment to the beginning balance of retained earnings of
the earliest period presented. The financial statements of prior
periods are restated as if the new accounting principle had been
applied in that period.
ii. If it is not practicable to retrospectively apply the new accounting
principle to a prior period, a company should apply the new
accounting principle as if the change was made prospectively as of
the earliest date practicable.
 i. A special type of change in accounting principle is the change in reporting
entity.
i. a company presents consolidated or combined financial statements in
place of financial statements for individual companies
ii. there is a change in the specific subsidiaries that make up the group
of companies
iii. the companies included in combined financial statements change
j. A company accounts for a change in reporting entity by retrospectively
adjusting the financial statements so that all financial statements are
presented for the same entity.

Correction of Errors
1. Errors include mathematical mistakes, mistakes in the application of accounting
principles, oversights, or intentional misstatements of accounting records (fraud)
arising from failure to use, or misuse of, reliable information that:
a. Was available when financial statements for those periods were authorized
for issue, and
b. Could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements
2. Errors can arise in respect of recognition, measurement, presentation or disclosure of
elements of financial statements. IAS 8 states that financial statements do not
comply with IFRS if they contain errors that are:
a. Material; or
b. Immaterial but are made intentionally to achieve a particular presentation of
an entity’s financial position, financial performance or cash flows
3. Correction of material error made in previous periods treated as a prior period
restatement (adjustment).
4. Impracticability of restatement – IAS 8 does not require the restatement of prior
periods following a change in accounting policy or the correction of material errors if
such restatement is impracticable. What is impracticable? That is when an entity
cannot apply it after making every reasonable effort to do so. For a particular period,
it is impracticable to apply a change in accounting policy retrospectively, or to make a
retrospective restatement to correct an error if:
 a. The effects of the retrospective application or retrospective restatement are
not determinable;
b. The retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in that
period; or
c. The retrospective application or retrospective restatement requires significant
estimate of amounts and it is impossible to distinguish objectively information
about estimates that:
i. Provides evidence of circumstances that existed on the dates as at
which those amounts are to be recognized, measured or disclosed;
and
ii. Would have been available when the financial statements for that prior
period were authorized for issue, from other information.
5. Types of error
a. Balance Sheet Errors: This type of error refers to improper classification of
real accounts such as assets, liabilities or stockholders' equity accounts.
They have no effect on net income
b. Income Statement Errors: This type of error affects only the presentation of
nominal accounts in the Income Statement. A reclassifying entry is necessary
only if the error is discovered in the same year it is committed. It has no
effect on the Balance Sheet and in the Income Statement. If the error is
discovered in a subsequent year, no reclassification entry is necessary.
c. Combined Balance Sheet and Income Statement Errors: This affects both
the balance Sheet and the Income Statement because they result in the
misstatement of net income.
i. Noncounterbalancing error: Noncounterbalancing errors are those
that will not be automatically offset in the next accounting period.
These errors take longer than two periods to correct themselves. They
are carried over to the subsequent accounting period until corrected or
until the balance sheet item involved is removed from the accounts by
sale, retirement or other means of disposal.
ii. Counterbalancing error: Counterbalancing errors are automatically
corrected in the next accounting period as a natural part of the
accounting process.
1. Net Income of two successive periods are misstated. The
amount of misstatement in one period is equal to but opposite
in effect in the income of the next period.
d. A correcting journal entry is necessary for any counterbalancing error that is
detected before it has counterbalanced. If the error is discovered after it has
counterbalanced, no correcting journal entry is necessary, but the financial
statements should be restated so that they are not misleading.
e. A correcting journal entry is necessary for a noncounterbalancing error and
any applicable financial statements must be restated.
f. Refer to summary below of counterbalancing errors (ending inventory,
purchases, sales, accrued expense, prepaid expense, accrued income and
deferred income) (accruals, deferrals, inventories/sales)
Cash Basis of Accounting to
Accrual Basis of Accounting
1. Cash basis of accounting does not conform to GAAP. Hence, shift from cash
basis to accrual basis of accounting is considered as a correction of an error.
a. Revenue – based on cash received from customers
b. Expense – recognized when cash is paid
2. Accrual basis of accounting conforms with GAAP
a. Revenue - recognized when earned
b. Expense - recognized when incurred
3. Depreciation is provided normally in both (modified and accrual)
4. Bad debt is only for accrual basis. None is recognized under modified cash basis of
accounting since no trade receivable is recognized.
a. CAVEAT: There are no really exact specifications for what is allowed under
the modified cash basis, since it has developed through common usage. It
could vary from user to user depending on internal purposes since there is no
accounting standard that has imposed any rules on its usage. If the modified
cash basis is used, transactions should be handled in the same manner on a
consistent basis, so the resulting financial statements are comparable over
time.
Single Entry of Accounting