Accounting Changes
(Change in Accounting Policy and Prior Period Errors)
Accounting Policies
Accounting policies a.re the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
Change in Accounting Policy
A change in accounting policy shall be made only when:
a.
Required by an accounting standard or an interpretation of the 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.
Examples of Change in Accounting Policy
A change in accounting policy arising 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 as revaluation in accordance with PAS 16.
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.
The following are not changes in accounting policy:
a.
The application of an accounting policy for events or transactions that differ in substance from
previously occurring events or transactions.
b.
The application of a new accounting policy for events or transactions which did not occur
previously or that were immaterial.
How to Report a Change in Accounting Policy
A change in accounting policy required by 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
Retrospective application is applying a new accounting policy to transactions, other events and
conditions ag if that policy had always been applied.
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.
The amount of the adjustment is determined as of the beginning of the year of change. However, the
adjustment may be made to another component of equity, not retained earnings, in order to comply
with another standard.
The impact of the new policy on the retained earnings prior to the earliest period presented shall be
adjusted against the opening balance of retained earnings.
Limitation of Retrospective Application
Retrospective application of a change in accounting policy is not required if it is impracticable to
determine the cumulative effect of the change.
Prospective Application
If the amount of the adjustment on the opening balance of retained earnings cannot be reasonably
determined, the change in accounting policy shall be applied prospectively.
Change in Reporting Entity
A change in reporting entity is a change whereby change their nature and report their operations in such
a way that the financial statements are in effect those of a different reporting entity.
A change in reporting entity is actually a change accounting policy and therefore shall be treated
retrospectively or retroactively to disclose what the statements would have looked like if the current
entity had been existence in the prior year.
Absence of Accounting Standard
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.
The following is the hierarchy of guidance which management may use when selecting accounting
policies in such circumstances:
a.
Requirements of current standards dealing with similar matters.
b.
Definition, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Conceptual Framework for Financial Reporting.
c.
Most recent pronouncements of other standard-setting bodies that use a similar Conceptual
Framework, other accounting literature and accepted industry practices.
Prior Period Errors
Prior period errors are omissions and misstatements in the financial statements for one or more periods
arising from a failure to use misuse of reliable information.
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.
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 comparati.ve information to correct the error
prospectively from the earliest date practicable.