THEORY OF ACCOUNTS

HAND-OUT NO. 13: ACCOUNTING CHANGES

CATEGORIES OF ACCOUNTING CHANGE

1. Change in accounting estimate
2. Change in accounting policy

CHANGE IN ACCOUNTING ESTIMATE

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 and
expected future benefit and obligation associated with the asset and liability.

A change in accounting estimate is not a correction of an error. However, a change in measurement basis is a
change in accounting policy and not a change in accounting estimate.

Sometimes it is difficult to distinguish a change in accounting estimate and a change in accounting policy. In such
a case, the change is treated as a change in accounting estimate, with appropriate disclosure.

REPORTING 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. The period of change and future periods if the change affects both.

ACCOUNTING POLICIES
Accounting policies are 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.

A change in accounting policy arises 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 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. Change from cost model to fair value model in measuring investment property.
d. Change to a new policy resulting from the requirement of a new PFRS.

REPORTING 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 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 as if
that policy had always been applied. 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.

If comparative information is presented, the financial statements of the prior period presented shall be restated
to conform with the new accounting policy.

Limitation of retrospective application

When it is impracticable to apply a new accounting policy retrospectively, the entity shall apply the new policy
prospectively from the earliest period practicable.
CHANGE IN REPORTING ENTITY
A change in reporting entity is a change whereby entities change their nature and report their operations in
 such a way that the financial statements are in effect those of a different reporting entity.

Reporting the change in reporting entity

A change in reporting entity is a change in accounting policy and shall be treated retroactively.

ABSENCE OF AN 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 relevant and reliable information.

Hierarchy of guidance
1. Requirements of current standards dealing with similar matters.
2. Definitions, recognition criteria and measurement concepts for elements of financial statements laid out
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.

DISCUSSION QUESTIONS:
Categories of accounting change
1. Which are included in the categories of accounting change?
I. Change in accounting estimate
II. Change in accounting policy
III. Correction of prior period error

A. I only
B. I and II only
C. III only
D. I, II and III

ACCOUNTING ESTIMATE
2. How should the effect of a change in accounting estimate be accounted for?
A. By restating amounts reported in financial statements of prior periods.
B. By reporting pro-forma amounts for prior periods
C. As a prior period adjustment to beginning retained earnings.
D. In the period of change and future periods if the change affects both.

3. Which of the following is accounted for as a change in accounting estimate?

I. Change in depreciation method.
II. Change in the method of calculating bad debts expense.
III. Change from cash basis to accrual basis of accounting.
IV. Change in measurement basis

A. I and II
B. III only
C. III and IV
D. I, II and IV

ACCOUNTING POLICIES
4. These are the specific principles, bases, conventions, rules and practices applied by an entity in preparing
and presenting financial statements.
A. Accounting principles
B. Accounting policies
C. Accounting estimates
D. Accounting law

5. A change in accounting policy shall be made when

I. Required by law.
II. Required by an accounting standard or an interpretation of the standard.
III. The change will result in more relevant and faithfully represented information about the
financial position, financial performance and cash flows of the entity.

A. I and II
B. I and III
C. II and III
 D. I, II and III

4. Which of the following is accounted for as a change in accounting policy?

A. Change in inventory valuation from FIFO to average method.
B. Change in depreciation method.
C. Change in the estimated useful life of property, plant and equipment.
D. Change in the method of calculating bad debts expense.
E. A change from cash basis to accrual basis of accounting.

5. A change in accounting policy requires what kind of adjustment to the financial statements?
A. Current period adjustment
B. Prospective adjustment
C. Retrospective adjustment
D. Current and prospective adjustment

6. If it is impracticable to determine the cumulative effect of an accounting change to any of the prior periods,
the accounting change should be accounted for
A. As a prior period adjustment
B. On a prospective basis.
C. As a cumulative effect change on the income statement.
D. As an adjustment to retained earnings.

7. 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
B. Change in accounting policy
C. Correction of error
D. Any of the above

8. A change in reporting entity is actually a change in

A. Accounting policy
B. Accounting estimate
C. Accounting method
D. Accounting concept

9. What is the proper accounting treatment for a change in reporting entity?

A. Restatement of financial statements of all prior periods presented.
B. Restatement of current period financial statements.
C. Note disclosure and supplementary schedule.
D. Adjustment of retained earnings and note disclosure.

10. Which is the first step within the hierarchy of guidance when selecting accounting policies?
A. Apply a standard from IFRS if it specifically relates to the transaction.
B. Apply the requirements in IFRS dealing with similar and related issue.
C. Consider the applicability of the definitions, recognition criteria and measurement concepts in the
Conceptual Framework.
D. Consider the most recent pronouncements of other standard-setting bodies.

11. In the absence of an accounting standard that applies specifically to a transaction, what is the most
authoritative source in developing and applying an accounting policy?
A. The requirement and guidance in the standard or interpretation dealing with similar and related issue.
B. The definition, recognition criteria and measurement of the elements of financial statements in the
Conceptual Framework.
C. Most recent pronouncement of other standard-setting body.
D. Accounting literature and accepted industry practice.

END OF HANDOUT