CHAPTER 11: ACCOUNTING POLICIES, ESTIMATE AND ERRORS The computation of the cost of goods sold for 2021

st of goods sold for 2021 would then show

PAS 8 beginning inventory at P750,000 and ending inventory at P1,200,000
to conform with the weighted average method.
ACCOUNTING POLICIES
 specific principles, bases, conventions, rules and practices The statement of changes in equity for the year ended December 31,
applied by an entity in preparing and presenting financial 2021 would show the effect of the change of P250,000 net of tax as a
statements deduction from the beginning balance of retained earnings.
 essential for a proper understanding of the information
contained in the financial statements ABSENCE OF ACCOUNTING STANDARD
PAS 8, paragraph 10
 An entity is required to outline all significant accounting policies In the absence of an accounting standard that specifically applies to a
applied in preparing financial statements. transaction or event, management shall use judgment in selecting and
 The entity shall select and apply the same accounting policies applying an accounting policy that results in information that is relevant
each period in order to achieve comparability of financial to the economic decision making needs of users and faithfully
statements or to identify trends in the financial position, represented.
performance and cash flows of the entity.
Paragraphs 11 and 12
CHANGE IN ACCOUNTING POLICY Hierarchy of guidance which management may use when selecting
A change in accounting policy shall be made only when: accounting policies in such circumstances:
a. Required by an accounting standard. a. Requirements of current standards dealing with similar matters
b. The change will result in more relevant and faithfully represented b. Definition, recognition criteria and measurement concepts for
information about the financial position, financial performance and assets, liabilities, income and expenses in the Conceptual
cash flows of the entity. Framework for Financial Reporting
c. Most recent pronouncements of other standard-setting bodies that
EXAMPLES OF CHANGE IN ACCOUNTING POLICY use a similar Conceptual Framework, other accounting literature
A change in accounting policy arises when an entity adopts generally and accepted industry practices.
accepted accounting principle which is different from the one
previously used by the entity. ACCOUNTING ESTIMATE
a. Change in the method of inventory pricing from the FIFO to A change in accounting estimate is a normal recurring correction or
weighted average method. adjustment of an asset or liability which is the natural result of the use
b. Change in the method of accounting for long term construction of an estimate.
contract from cost recovery method to percentage of completion
method.  By very nature, the revision of the estimate does not relate to prior
c. The initial adoption of policy to carry assets at revalued amount is periods and is not a correction of an error.
a change in accounting policy to be dealt with as revaluation.  Sometimes it is difficult to distinguish a change in accounting
d. Change from cost model to fair value model in measuring estimate and a change in accounting policy.
investment property.  Change is treated as a change in accounting estimate, with
e. Change to a new policy resulting from the requirement of a new appropriate disclosure.
PFRS.
EXAMPLES OF ACCOUNTING ESTIMATE
HOW TO REPORT A CHANGE IN ACCOUNTING POLICY Estimation involves judgment based on the latest available and reliable
If the standard or interpretation contains no transitional provisions or if information.
an accounting policy is changed voluntarily, the change shall be
applied restropectively or retroactively. Estimates may be required for the following:
a. Doubtful accounts
Retrospective application b. Inventory obsolescence
 any resulting adjustment from the change in accounting c. Useful life, residual value and expected pattern of consumption of
policy shall be reported as an adjustment to the opening benefit of depreciable asset
balance of retained earnings d. Warranty cost
e. Fair value of asset and liability
Beginning of the year of change
 amount of the adjustment HOW TO REPORT CHANGE IN ACCOUNTING ESTIMATE
The effect of a change in accounting estimate shall be recognized
If comparative information is presented, the financial statements of the currently and prospectively by including it in income or loss of:
prior period presented shall be restated to conform with the new a. The period of change if the change affects that period only.
accounting policy. b. The period of change and future periods if the change affects
both.
ILLUSTRATION
An entity has used the FIFO method of inventory valuation since it  A change in an accounting estimate shall not be accounted for by
began operations in 2020. The entity decided to change to the restating amounts reported in financial statements of prior
weighted average method for determining inventory cost at the periods.
beginning of 2021.  Changes in accounting estimates are to be handled currently and
prospectively, if necessary.
FIFO Weighted
average Prospective recognition
December 31, 2020 1,000,000 750,000  change is applied to transactions, other events and
December 31, 2021 1,500,000 1,200,000 conditions from the date of change in estimate
FIFO inventory - January 1, 2021 1,000,000
Weighted average inventory - 750,000 ILLUSTRATION
January 1, 2021 For example, a depreciable asset costing P500,000 is estimated to
Decrease in beginning inventory 250,000 have a life of 5 years. At the beginning of the third year, the original life
is changed to 8 years. Thus, the asset has a remaining life of 6 years.
Adjustment of the decrease in beginning inventory The procedure is not to correct past depreciation.
Retained earnings 250,000
Inventory - January 1 250,000 Instead, the remaining carrying amount of P300,000 (P500,000 minus
P200,000 depreciation for 2 years) is now allocated over 6 years or a
subsequent annual depreciation of P50,000.
Thus, the entry to record the annual depreciation, starting the third
year is:
Depreciation 50,000
Accumulated depreciation 50,000
PRICE PERIOD ERRORS
 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.
CHAPTER 12: EVENTS AFTER THE REPORTING PERIOD
EVENTS AFTER THE REPORTING PERIOD
 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 (PAS 10,
paragraph 3)
 also known as subsequent events
4. Destruction of a major production plant by a fire after the reporting
period
5. Major ordinary share transactions and potential ordinary share
transactions after the reporting period
6. Announcing or commencing the implementation of a major
restructuring
7. Abnormally large changes after the reporting period in asset
prices or foreign exchange rates
8. Entering into significant commitments or contingent liabilities, for
example, by issuing guarantees
9. Commencing major litigation arising solely from events that
occurred after the reporting period
10. Change in tax rate enacted or announced after the end of
reporting period that has a significant effect on current and
deferred tax asset and liability
FINANCIAL STATEMENTS AUTHORIZED FOR ISSUE
Financial statements are authorized for issue when the board of
directors reviews the financial statements and authorizes them issue.
In some cases, an entity is required to submit the financial statements
to the shareholders for approval after the financial statements have
been issued.
In such cases, the financial statements are authorized for issue on the
date of issue by the board of directors and not on the date, when
shareholders approve the financial statements.

Such events may require either adjustment or disclosure.

TYPES OF EVENTS AFTER THE REPORTING PERIOD

1. Adjusting events after the reporting period
 those that provide evidence of conditions that exist at the
end of reporting period
2. Nonadjusting events after reporting period
 those that are indicative of conditions that arise after the end
of reporting period

 It is appropriate to adjust the financial statements for all events

that offer clarity concerning the conditions that existed at the end
of reporting period and that occur prior to the date the financial
statements are authorized for issue.
 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.
 However, an entity does not recognize events after the reporting
period that relate to conditions that only arose after the reporting
period.
 The entity is required only to disclose significant nonadjusting
events.

Examples of adjusting events

1. Settlement after the reporting period of a court case because it
confirms that the entity already had a present obligation at the
end of reporting period.
2. Bankruptcy of a customer which occurs after the reporting period.
3. Sale of inventories after the reporting period may give evidence
about the net realizable value at reporting date.
4. The determination after the reporting period of the cost of asset
purchased or the proceeds from asset sold before the end of
reporting period.
5. The determination after the reporting period of the profit sharing
or bonus payment if the entity has the present obligation at the
end of reporting period to make such payment.
6. The discovery of fraud or errors that show the financial
statements were incorrect.

Examples of nonadjusting events

1. Business combination after the reporting period
2. Plan to discontinue an operation
3. Major purchase and disposal of asset or expropriation of major
asset by government