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COURSE CODE: ACC108

COURSE DESCRIPTION: CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

COURSE INTENDED 1. Identify and obtain understanding of the scopes of the Conceptual Framework
LEARNING OUTCOMES: for Financial Reporting
2. Understand the means of processing the accountable events from one
accounting cycle to another.
3. Identify the components and understand the objective of the financial
statements
4. Demonstrate knowledge in identifying the appropriate financial reporting
standards to apply to specific business transactions and other events.

LEARNING MATERIAL 4
FOR WEEK NUMBER:

I. TITLE: PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

II. OBJECTIVES: After this lesson, you are expected to:

1. Define the following and give examples: (1) Change in accounting policy, (2)
Change in accounting estimates, and (3) Error
2. Differentiate between the accounting treatments of the following: change in
accounting policy, change in accounting estimate, and correction of prior period
errors.

III. INTRODUCTION: The objective of this Standard is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment and disclosure of changes
in accounting policies, changes in accounting estimates and corrections of errors. The
Standard is intended to enhance the relevance and reliability of an entity’s financial
statements, and the comparability of those financial statements over time and with
the financial statements of other entities.

IV. CONTENT

This Standard shall be applied in selecting and applying accounting policies, and accounting for changes in
accounting policies, changes in accounting estimates and corrections of prior period errors.

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.

Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.

Prior period errors 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:

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.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.

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Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied.

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of
financial statements as if a prior period error had never occurred.

Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable
effort to do so. For a particular prior period, it is impracticable to apply a change in an 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 estimates of amounts and it
is impossible to distinguish objectively information about those estimates that:
• provides evidence of circumstances that existed on the date(s) as at which those amounts are to be
recognized, measured or disclosed; and
• would have been available when the financial statements for that prior period were authorized for
issue from other information.

Prospective application of a change in accounting policy and of recognizing the effect of a change in an accounting
estimate, respectively, are:

a) applying the new accounting policy to transactions, other events and conditions occurring after the date as
at which the policy is changed; and
b) recognizing the effect of the change in the accounting estimate in the current and future periods affected by
the change.

Accounting policies

Selection and application of accounting policies

When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied
to that item shall be determined by applying the IFRS.

IFRSs set out accounting policies that the IASB has concluded result in financial statements containing relevant and
reliable information about the transactions, other events and conditions to which they apply. Those policies need
not be applied when the effect of applying them is immaterial. However, it is inappropriate to make, or leave
uncorrected, immaterial departures from IFRSs to achieve a particular presentation of an entity’s financial position,
financial performance or cash flows.

In the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use
its judgement in developing and applying an accounting policy that results in information that is:

a) relevant to the economic decision-making needs of users; and

b) reliable, in that the financial statements:
i. represent faithfully the financial position, financial performance and cash flows of the entity;
ii. reflect the economic substance of transactions, other events and conditions, and not merely the legal
form;
iii. are neutral, ie free from bias;

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COLLEGE OF BUSINESS, ACCOUNTANCY & ADMINISTRATION

iv. are prudent; and

v. are complete in all material respects.

Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and
conditions, unless an IFRS specifically requires or permits categorization of items for which different policies may
be appropriate. If an IFRS requires or permits such categorization, an appropriate accounting policy shall be selected
and applied consistently to each category.

Changes in accounting policies

An entity shall change an accounting policy only if the change:

(a) is required by an PFRS; or

(b) 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.

The following are not changes in accounting policies:

(a) the application of an accounting policy for transactions, other events or conditions that differ in substance from
those previously occurring; and

(b) the application of a new accounting policy for transactions, other events or conditions that did not occur
previously or were immaterial.

Applying changes in accounting policies

• an entity shall account for a change in accounting policy resulting from the initial application of an IFRS in
accordance with the specific transitional provisions, if any, in that IFRS; and
• when an entity changes an accounting policy upon initial application of an IFRS that does not include specific
transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the
change retrospectively.

For the purpose of this Standard, early application of an IFRS is not a voluntary change in accounting policy.

In the absence of an IFRS that specifically applies to a transaction, other event or condition, management
may, apply an accounting policy from the most recent pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards. If, following an amendment of such a
pronouncement, the entity chooses to change an accounting policy, that change is accounted for and
disclosed as a voluntary change in accounting policy.

Retrospective application
When a change in accounting policy is applied, the entity shall adjust the opening balance of each affected
component of equity for the earliest prior period presented and the other comparative amounts disclosed
for each prior period presented as if the new accounting policy had always been applied.

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Limitations on retrospective application

When retrospective application is required, a change in accounting policy shall be applied retrospectively
except to the extent that it is impracticable to determine either the period-specific effects or the cumulative
effect of the change.

When it is impracticable to determine the period-specific effects of changing an accounting policy on

comparative information for one or more prior periods presented, the entity shall apply the new accounting
policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period, and shall make a corresponding
adjustment to the opening balance of each affected component of equity for that period.

When it is impracticable to determine the cumulative effect, at the beginning of the current period, of
applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to
apply the new accounting policy prospectively from the earliest date practicable.

Disclosure

When initial application of an IFRS has an effect on the current period or any prior period, would have such
an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect
on future periods, an entity shall disclose:

a) the title of the IFRS;

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:
i. for each financial statement line item affected; and
ii. IAS 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 extent practicable;
h) if retrospective application required and it 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.

When a voluntary change in accounting policy has an effect on the current period or any prior period, would have
an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an
effect on future periods, an entity shall disclose:

a) the nature of the change in accounting policy;

b) the reasons why applying the new accounting policy provides reliable and more relevant information;
c) for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment:
i. for each financial statement line item affected; and
ii. if IAS 33 applies to the entity, for basic and diluted earnings per share;
d) the amount of the adjustment relating to periods before those presented, to the extent practicable; and
e) if retrospective application 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.

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Accounting estimates

An accounting policy may require items in financial statements to be measured in a way that involves measurement
uncertainty—that is, the accounting policy may require such items to be measured at monetary amounts that cannot
be observed directly and must instead be estimated. In such a case, an entity develops an accounting estimate to
achieve the objective set out by the accounting policy. Developing accounting estimates involves the use of
judgements or assumptions based on the latest available, reliable information. Examples of accounting estimates
include:

• a loss allowance for expected credit losses, applying IFRS 9 Financial Instruments;
• the net realizable value of an item of inventory, applying IAS 2 Inventories;
• the fair value of an asset or liability, applying IFRS 13 Fair Value Measurement;
• the depreciation expense for an item of property, plant and equipment, applying IAS 16; and
• a provision for warranty obligations, applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Changes in accounting estimates

An entity may need to change an accounting estimate if changes occur in the circumstances on which the accounting
estimate was based or as a result of new information, new developments or more experience. By its nature, a change
in an accounting estimate does not relate to prior periods and is not the correction of an error.

The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes
in accounting estimates unless they result from the correction of prior period errors.

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.

Applying changes in accounting estimates

The effect of a change in an accounting estimate, shall be recognized 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.

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 recognized by adjusting the carrying amount of the related asset, liability or equity item in
the period of the change.

Disclosure

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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Errors

Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial
statements. Financial statements do not comply with IFRSs if they contain either material errors or immaterial errors
made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or
cash flows. Potential current period errors discovered in that period are corrected before the financial statements
are authorized for issue. However, material errors are sometimes not discovered until a subsequent period, and
these prior period errors are corrected in the comparative information presented in the financial statements for that
subsequent period.

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized
for issue after their discovery by:

a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
b) if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.

Limitations on retrospective restatement

A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to
determine either the period-specific effects or the cumulative effect of the error.

When it is impracticable to determine the period-specific effects of an error on comparative information for one or
more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the
earliest period for which retrospective restatement is practicable (which may be the current period).

When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all
prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest
date practicable.

Disclosure of prior period errors

An entity shall disclose the following:

a) the nature of the prior period error;

b) for each prior period presented, to the extent practicable, the amount of the correction:
i.for each financial statement line item affected; and
ii.if IAS 33 applies to the entity, for basic and diluted earnings per share;
c) the amount of the correction at the beginning of the earliest prior period presented; and
d) if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the
existence of that condition and a description of how and from when the error has been corrected.

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