CHANGES IN ACCOUNTING POLICY WHETHER IT BE
RETROSPECTIVE AND PROSPECTIVE
NOTES IN CFAS – MILLAN BSA1
Reporting changes in accounting policy
- A standard's or interpretation's transitional provisions must be followed
when implementing an accounting policy change.
- If an accounting policy is changed voluntarily or if the standard or
interpretation lacks transitional provisions, the change must be
adopted either retrospectively or retroactively.
Retrospective application
- Any resulting adjustments from the change in accounting policy shall
be reported as an adjustment to the opening balance of retained
earnings.
- The adjustment in amount is determined as of the beginning of the year
of change.
- If comparative information is presented, the FS of the prior period
presented shall be restated to conform with the new accounting policy.
In the absence of an accounting standard that specifically applies to the
transaction or event, management must exercise judgment when deciding
on and implementing an accounting policy that produces information that is
faithfully represented and pertinent to the users' needs for economic
decision-making.
Selecting accounting policies in such circumstances:
1. Requirement 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 pronouncements of other standard-setting bodies that use
a similar Conceptual Framework, other accounting Literature and
accepted industry practices
Change in Accounting Estimate
- This 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 a result of new
information, more experience or subsequent development.
- The revision of the estimate does not relate to prior periods and is not
a correction of an error.
REMEMBER:
- When it is difficult to distinguish a change in accounting estimate and
a change in accounting policy, the change is treated as a change in
accounting estimate with appropriate disclosure.
Examples of accounting estimates
 As a result of uncertainties in business activities, many items in
financial statements cannot be measured with precision but can only
be estimate.
 Estimation involves 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 consumption of
benefit of depreciable asset
4. Warranty cost
5. Fair value of asset and liability
How to report change in accounting estimate
- The effect of the change in accounting estimate shall be recognized
currently and prospectively by including it in income or loss:
o The period of change if the change affects that period only
o The period of change and future periods if the change affects
both
- A change in accounting estimate shall not be accounted for by
restating amounts reported in the financial statements of prior periods.
- Changes in accounting estimates are to be held currently and
prospectively, if necessary.
Prior period errors
- are omissions and misstatements in the financial statements for one or
more periods arising from a failure to use or misuse of reliable
information.
Errors
- may occur as a result of mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, fraud or oversight.
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.
- If comparative statements are presented, the financial statements of
the prior period shall be restated so as to reflect the retroactive
application of the prior period errors as a retrospective restatement,
PART II – Events after the Reporting Period
An entity must adjust the amounts recognized in the financial statements for
adjusting events that provide evidence of conditions that existed at the end
of reporting period.
An entity does not recognize events after the reporting period that relate to
conditions that only arise after the reporting period.
Events after the reporting period
- are those events, whether favorable or unfavorable, that occur
between the end of reporting period and the date on which the financial
statements are authorized for issue.
- also known as subsequent events. Such events may require either
adjustments or disclosure.
Types of events after the reporting period:
1. Adjusting events after the reporting period are those that provide
evidence of conditions that exist at the end of reporting period
2. Non-adjusting events after reporting period are those that are
indicative of conditions that arise after the end of reporting period.
a. The entity is required only to disclose significant non-adjusting
events.
Examples of adjusting events:
 Bankruptcy of a customer which occur after the reporting period.
 Sale of inventories after the reporting period may give evidence about
the net realizable value at reporting date.
 The determination after the reporting period of the cost of asset
purchased or proceeds from asset sold before at the end of reporting
period.
 The discovery of fraud or errors that show the financial statements
were wrong.
Examples of non-adjusting events
 Plan to discontinue the operation.
 Major purchase and disposal of asset or expropriation of major asset
by government.
 Announcing or commencing the implementation of a major
restructuring.
 Abnormally large changes after the reporting period in asset prices or
foreign exchange rates.
 Commencing major litigation arising solely from events that occurred
after the reporting period.
 Change in tax rate enacted or announced after the end of reporting
period that has a significant effect in current and deferred tax asset and
liabilities.
Financial statements authorized for issue
- are authorized for issue when the board of directors reviews the
financial statements and authorizes them issue.
- an entity is required to submit the financial statements to the
shareholders for approval after the financial statements have been
issued.