CHAPTER 12

ACCOUNTING POLICIES

- Are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.
- The entity shall select and apply the same accounting policies each period in order to achieve
comparability

CHANGE IN ACCOUNTING POLICY

- A change in accounting policy shall be made only when:

a. Required by an accounting 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:

a. Change in 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
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

How to report a change in accounting policy

- A change in accounting policy required by a standard 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
- Any resulting adjustment from the change in accounting policy shall be reported as an
adjustment to the opening balance of retained earnings
- Amount is determined as of the beginning of the year of change

Absence of accounting standard

- PAS 8, paragraph 10, 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
 Paragraphs 11 and 12 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 A, L, I, and E in Conceptual
Framework
c. Most recent pronouncements of other standard-setting bodies that use a similar Conceptual
Framework

Accounting Estimate

- A change in accounting estimate is a normal recurring correction or adjustment of an asset or

liability which is the natural result of the use of an estimate
- By very nature, the revision of the estimate does not relate to prior periods and is not a
correction of an error
- Sometimes it is difficult to distinguish a change in accounting estimate and a change in
accounting policy
May be required for the following:
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value and expected pattern of consumption of benefit of depreciable
asset
d. Warranty cost
e. Fair Value of asset and liability

How to report change in accounting estimate

- The effect of a change in accounting estimate shall be recognized currently and prospectively by
including it in income 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

Changes in accounting estimates are to be handled currently and prospectively, if necessary

Prospective recognition of the effect of a change in accounting estimate means that the change is
applied to transactions, other events and conditions from the date of change in estimate

Prior period errors

- Are omissions and misstatements in the financial statement for one or more periods arising
from a failure to use or misuse of reliable information

How to treat prior period errors

- Shall be corrected retrospectively by adjusting the opening balances of retained earnings and
affected assets and liabilities.
 CHAPTER 13

EVENTS AFTER THE REPORTING PERIOD

PAS 10, paragraph 3, defines events after the reporting period as 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

- Such events may require either adjustment or disclosure

Types of events after the reporting period:

a. Adjusting events (Adjustment) – those that provide evidence of conditions that exist at the end
of reporting period
b. Nonadjusting events (Disclosure) – indicative of conditions that arise after the end of reporting
period

Examples of adjusting events:

1. Settlement after reporting period of a court case

2. Bankruptcy of a customer which occurs after the reporting period
3. Sale of inventories after reporting period
4. Determination after reporting period of the cost of asset purchased or the proceeds from asset
sold before the end of reporting period
5. 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. Discovery of fraud 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
4. Destruction of a major production plant by a fire after the reporting period
5. Major ordinary share transaction 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 in current and deferred tax asset and liability

Financial statements authorized for issue

- When the board of directors reviews the financial statements and authorizes them issue