EQUITY

Equity is defined
as the residual interest in the assets ofan
of the liabilities.
entity after deducting all
words,equity is the equivalent of
net assets,
In other meaning
total assets minus total liabilities.
Although equity is defined as a residual, it
may be
subclassified in the statement of financial position.

In a corporate entity,
be shown separately:
the following subclassifications may
Share capital - funds contributed by shareholders
a. equal
to the par or stated value
b. Share premium funds contributed by shareholders in
excess of par or stated value

C. Retained earnings which may be unappropriated and

appropriated

The holders of instruments classified as equity are simply

known as "owners.

Statement of changes in equity

The statement of changes in equity is a formal statement that
shows the movements in the elements or components of the
shareholders' equity.
An entity shall present a statement of changes in equity
showing:
1. Comprehensive income for the period.
2. For each component of equity, the effects of changes in
accounting policies and corrections of errors.
3. For
each component of equity, a reconciliation between
the
the carrying amount at the beginning and end of
period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
C Transactions with owners in their owners
capacity as
showing separately contributions by and distributions
to owners

144
 - all amounts are assumed

EXAMPLAR COMPANY
Statement of Changes in Equity
Year ended December 31, 2019

Share Retained
capital Reserves earnings

5,000,000 2,000,000 1,000,000

Balances
of error resulting from
Correction

prior year underdepreciation ( 100,000)

Change in
accounting policy from
to FIFO-credit 300,000
weighted average
Issuance of 10,000 ordinary shares
with P100 par at P150 per
share 1,000,000 500,000

Issuance of 5,000 preference shares

with P50 par at P100 per share 250,000 250,000

income:
Comprehensive
Net income 1,550,000

Other comprehensive income 50,000

Dividends declared during the year 400,000)

Current appropriation for

contingencies 200,000 200,000)

Balances - December 31 6,250,000 3,000,000 2,150,000

Statement of retained earnings

The statement of retained earnings shows the changes
affecting directly the retained earnings of an entity.
the
The statement of retained earnings is now a part of
statement of changes in equity.

The important data affecting the retained earnings that

statement of retained
should be clearly disclosed in the
earnings are:
a. Net income or loss for the period
b. Prior period errors

C. Dividends declared and paid to shareholders

d. Effect of change in accounting policy
e.
Appropriation of retained earnings
145
 Items directly affecting retained earnings
Net income or loss for the period - Net income is added because
it increases retained earnings
and net loss
retained earnings.
is
deducted
because it decreases

Prior period errors - The prior period errors are shown as

adjustment of the beginning balance of retained earnings to
balance.
arrive at the corrected beginning

If the net income of the prior period is understated, the

amount of error is added to retained earnings. If the net
income of the prior period is overstated, the amount of the
error is deducted from retained earnings.

Dividends to shareholders The dividends declared or paid

during the year shall be deducted from the retained earnings.

Effect of change in accounting policy -

This is shown as an
*adjustment of the beginning balance of retained earnings.

If the net income of prior period is understated because of

change in accounting policy, the effect is added to the
beginning retained earnings.
If the net income of prior period is overstated because of
change in accounting policy, the effect is deducted from the
beginning retained earnings.

Retained earnings appropriated

The amount of appropriation is deducted from the
unappropriated balance of retained earnings.

Conversely, if the
is reverted or added
appropriation is subsequently canceled, it
back to the
unappropriated balance.

letained earnings may be appropriated for the following

reasons:

a. Legal
requirement, as in the case of treasury shares
b.
Contractual requirement, as in the case of bond redemption
C.
Entity policy, as in the case of an
contingencies appropriation
for

146
 all amounts are assumed
Illustration

EXAMPLAR COMPANY
Statement of Retained Earnings
Year ended December 31, 2019

Retained earnings, January 1,000,000

Correction
of error - prior year underdepreciation
Change in accounting policy from weighted average
to FIFO inventory valuation resulting 300,000
in increase

Corrected beginning balance 1,200,000

Net income for the period 1,550,000
Dividends declared during the year 400,000)
Appropriated for contingencies 200,000)

Retained earnings, December 31 2,150,000

147
caAPTen 1o

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Chans in aceountins estmate

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8
 CATEGORIES OF ACCOUNTING CHANGE

a. Change in accounting estimate

b. Change in accounting policy

Accounting changes can have a great impact

on an entity's
reported earnings.

Thus, it is critically important that users of financial

statements understand the nature and
effect of accounting
changes and must not rely solely on the bottom line which is
the net income or loss.

Change in accounting estimate

PAS 8, paragraph 5, defines a. change in accounting estimate
as an adjustment of the carrying amount of an asset or (
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.

Simply stated, 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.

The use of reasonable estimate is an essential part of the

preparation of financial statements and does not undermine
their reliability.

An estimate may need revision if changes occur regarding the

circumstances on which the estimate was based or as a result of
new information. more experience or subsequent development.

By very nature, the revision of the estimate does not relate

to prior periods and is not a correction of an error.

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 q. change in accounting policy.

In such acase, the change is treated as a change in accounting

estimate, with appropriate disclosure.

194
tramples of accounting estimate

result of the uncertainties in business

As a
tems in financial statements cannot be activities, many
only be estimated. measured with precision
but can

Estimation involves judgment based on the latest available and

reliable information. Estimates may
be required for the
following:

Doubtful accounts
b. Inventory obsolescence
Useful life,
residual value, and expected pattern of
consumption of benefit of depreciable asset
d. Warranty cost
e. Fair value of financial assets and financial liabilities

How to report change in accounting estimate

The effect of change in accounting estimate shall be
a

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.

To the extent that change in accounting estimate gives rise

a

to changes in assets and liabilities, or relates to item of equity.

it shall be recognized by adjusting the carrying amount ol
the related asset, liability or equity in the period of change.
A change in an accounting estimate shall not be accounted
for by restating amounts reported in financial statements of
prior periods.
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.

195
CHAPTER 11

ACCOUNTING CHANGES
Change in accounting policy
Prior period errors

TECHNICAL KNOWLEDGE

To understand the concept of a change in accounting policy.

To know the recognition and reporting of a change in

accounting policy.

To know the guideline when selecting accounting policy in

the absence of an accounting standard.

To understand the concept of prior period errors.

To know the recognition and reporting of prior period

errors.

205
 POLICIES
ACCOUNTING P
the specific
principles, bases.
Accounting policies are
rules and practices applied by an entity in
conventions, statements.
preparing and presenting financial

Accounting policies are essential for a proper understanding

contained in the financial statements.
of the information

An entity isrequired to outline all significant accounting

financial statements.
policies applied in preparing

Under accounting standards, alternative treatments are

possible.

In this case, it becomes all the more important for an entity

to clearly state the accounting policies used in preparing
financial statements.

The entity shall select and apply the same accounting policies
each period in order to achieve comparability of financial
statements or to identify trends in the financial position,

performance and cash flows of the entity.

Change in accounting policy

Once selected, accounting policies must be applied
consistently for similar transactions and events.

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.

206
Examples
of
change in accounting policy
in accounting policy arises when.
A change an
entity adopts a
accepted accounting principle which is
generally 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.

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.

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 a standard or an
interpretation shall be applied in accordance with the
transition.l
provisions therein.

If the standard
or interpretation contains no transitional
provisions or if an accounting policy is changed voluntarily,
the
change shall be applied restropectively
or

retroactively.

207
Retrospective application

Retrospective application is applying new accounting

transactions, otherevents and conditions
a

if policy
as
to thatpolicy
had always been applied.
PAS 8, paragraph 22, provides that an entity shall adjust
opening balance of each affected component ofequity the
comparative amounts
for the
earliest prior period presented and the
disclosed for each prior period presented as if the
new policy
had always been applied.
Simply stated, 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.

If comparative information is presented, the financial

statements of the prior period presented shall be restated
to conform with the new accounting policy.
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.

Illustration

An entity has used the FIFO method of inventory valuation

since it began operations in 2018. The entity decided to change
to the weighted average method for determining inventory
cost at the beginning of 2019.

FIFO Weighted average

December 31, 2018 1,000,000 750,000
December 31, 2019
1,500,000 1,200,000
FIFO inventory - January 1, 2019 1,000,000
Weighted average inventory January 1, 2019 750,000
Decrease in beginning inventory 250,000

208
raiustment of the decrease in beginning inventory
n mined earnings
Retained
250,000

Inventory - January 250,000

The
computation of the cost of goods sold for 2019 would
then
show beginning inventory at P750,000 and ending
inventoryat P1,200,000 to conform with the weighted average
method.

The statement of changes in equity for the year ended

December 31, 2019 would show the effect of the change of
P250,000 net of tax as a deduction from the beginning balance
of retained earnings.

Limitation of retrospective application

Restropective application of a change in accounting policy is

not required if it is impracticable to determine the
cumulative effect of the change.

Applying a requirement of a standard is impracticable when

the entity cannot apply it after making every effort to do so.

For a particular prior period, it is impracticable to apply a

change in an accounting policy when:

1. The effects of the retrospective application are not

determinable.

2. The retrospective application requires assumptions about

what management's intentions would have been at that
time.

3. The retrospective application requires significant

estimate, and it is impossible to distinguish objectively
information about the estimate that:

Provides evidence of circumstances that existed

a.
at

that time, and

b. Would have been available at that time.

209
 Prospective application
Prospective application means that the new accounting Policy
isapplied to events and transactions occurring after the dot.
at which the policy is changed.

When it is impracticable for an entity to apply a new

because it
accounting policy retrospectively cannot
determine the cumulative effect of applying the policy to all
the new
prior periods, the entity shall apply policy
prospectively from
the earliest period practicable.

In other words, if the amount of the adjustment on the

cannot be reasonably
opening balance of retained earnings
determined, the change in accounting policy shall be applied
prospectively.

No adjustments relating to prior periods are made either to

the opening balance of retained earnings or other component
of equity because existing balances are not recalculated.

Change in reporting entity

entities
A change in reporting entity is a change whereby
in such a way
change their nature and report their operations
that the financial statements are in effect those of a different
reporting entity.
result from
For example, this accounting change may
the group of
changing the specific subsidiaries comprising
entities for which consolidated financial statements are
presented.

A change in reporting entity is actually a change in

treated
accounting policy and therefore shall be
retrospectively or retroactively to disclose what the
statements would have looked like if the current entity had
been existence in the prior year.

periods
In other words, the financial statements of all prior
information
presented shall be restated to show financial

for the new reporting entity.

210
 accounting standard

paragraph 10, provides that in the absence of an

PAS 8,
standard that specifically applies to a transaction
counting
accounti's
or
event, management shall use judgment in selecting and
applying an accounting policy that results in information that
is
relevantto the economic decision making needs of users

and faithfully represented.

Paragraphs 11 and 12 specify the following 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 or misuse of reliable information that:

Was available when financial statements for those periods

were authorized for issue.

b.
Could reasonably be expected to have been obtained and
taken into account in the preparation and presentation
of those financial statements.

Errors
may occur as a result of mathematical mistakes,
mistakes in misinterpretation
applying accounting policies,
•of
facts, fraud or oversight.

211
 of prior period errors

shall disclose the following:

entity
An

nature of the prior period error.

The

b.
The
amount of correction for each prior period presented,
extent practicable:
to the

For each financial statement line item affected.

a.

b. For basic and diluted earnings per share.

The amount of correction at the beginning of the earliest

prior period presented.

d. If retrospective restatement is impracticable for a

particular prior period, the circumstances that led to the
existence of that condition and a description of how and

from when the error has been corrected.

Illustration

During 2020, an entity discovered that certain goods that

had been sold during 2019 were incorrectly included in

December 31, 2019 inventory in the amount of P300,000.

The accounting records for 2020 before adjustment revealed

sales of P5,000,000 and cost of goods sold of P3,000,000.

correct the prior

The adjustment on December 31, 2020 to
period error is:

Retained earnings 300,000

300,000
Inventory, January 1 (or cost of goods sold)

Accordingly, the partial income statement for 2020 would

appear as:

Sales 5.000,000
Cost of 2,700,000
goods sold (3,000,000 - 300,000)
Gross income 2,300,000

213
CHAPTER 12

STATEMENT OF CHANGES INEQUITY

Financial copital and physical capital

QUESTION 12-1
What is a statement of changes in equity?

ANSWER 12-1

The statement of changes in equity is a basic statement that shows

the movements in the elements or components of the shareholders'
equity.

The holderg of instruments classified as

equity are simply
known as "owners".

QUESTION 12-2
What are the components of the statement of changes in equity?

ANSWER 12-2

a. Comprehensive income for the period.

b. For each component of equity, the effects of changes in
accounting policies and corrections of errors.
C. For each component of equity, a reconciliation between the
carrying amount at the beginning and end of the period,
separately disclosing changes from:
1. Profit or loss

2. Each item of other comprehensive income

3. Transactions with owners in their capacity as
owners
showing separately contributions by and distributions
to owners

196
QUESTION 12-3
What is a statement of retained earnings?
12-3
ANSWER

The statement of retained earnings shows

directly the retained earnings and relates
the changes affecting
the income statemen?
to the statement of financial position.

The important data affecting the retained earnings that

should
be clearly disclosed in the statement of retained earnings are:

a. Profit or loss for the period

b. Frior period errors
C. Dividends declared and paid to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings

The statement of retained earnings is no longer a required basic

statement but it is a part of the statement of
changes in equity.

QUESTION 12-4

What do you understand by the capital maintenance.

approach?

ANSWER 12-4

The transaction approach is the traditional approach of

determining net income.
The capital maintenance approach 18 another approach
of
determining net income.
Thecapital maintenance approach or net assets approach
meana that net income occurs only after the capital used
from the
beginning of the period is maintained.
Net the
income is the amount an entity can distribute to
Owners and be as "well-off" at the end of the year as at the
beginning.

This capital
and
approach has two variations, namely financial
Physical capital.

197
 12-5
QUESTION

Explain financial capital.

ANSWER 12-5

of the net assets

Tinancial capital is the monetarythe
amount
increase in net assets
contributed by
shareholders and
by the entity.
resulting from earnings retained

invested money orinvested purchasing

Financial capital is
or equity of the entity.
power and synonymous with net assets
the traditional concept based
Actually, financial capital is
on historical cost.

The financial capital concept is adopted by most entities.

QUESTION 12-6

Explain physical capital.

ANSWER 12-6

Physical capital is the quantitative measure of the physical

productive capacity to produce goods and services.

The physical productive capacity may be based on, for example,

units of output per day or physical capacity of productive assets

to produce goods and services.

Productive assets are valued at current cost, rather than
historical cost.

Productive assets include inventories and property, plant and

equipment.
be
The current costs for these productive assets must
maintained in order that physical capital is also maintained
of the
Accordingly, physical capital is equal to the net assets
entity expressed in terms of current cost.

198
 12-7 Multiple choice

1. In the statement of changes in equity, the effect of the

retrospective application of a change in accounting policy
is presented
Separately for each component of equity.
In aggregate for total equity.
C.
In aggregate for total equity and separately for the
total amount attributable to owners of the parent and
the noncontrolling interest.

d. Separately for the total amount attributable to owners

of the parent and the noncontrolling interest.

2. In the statement of changes in equity, the effect of the

correction of a prior period error is presented

Separately for each component of equity.

b. In aggregate for total equity.
C. Inaggregate for total equity and separately for the
total amount attributable to owners of the parent and
the noncontrolling interest.
d. Separately for the total amount attributable to owners
of the parent and the noncontrolling interest.

3. Which of the following should be presented in the

statement of changes in equity?

a.Investments by owners
b. Distributions to owners
c. Change in ownership interest in subsidiary that does
not result in a loss of control
All of these should be presented in the statement of
changes in equity

ANSWER 12-7

1.
2.
3, d

199
 choice (IAA)
QUESTION 12-8 Multiple
in a statement of
1. Which of the following does not appear
retained earnings?

a. Net loss
b. Prior period error
Preference share dividend
Other comprehensive income
would appear first in a statement
2. Which of the following
of retained earnings?

a. Net income

6 Prior period error

C. Cash dividend
d. Share dividend

3. Which of the following would not appear in the statement

of retained earnings?

Net loss
Priorperiod adjustment
Discontinued operation
d. Dividend declared

4. Corrections of errors in prior period are included in

Retained earnings
Other comprehensive income
C. Net income
d. Share premium

ANSWER 12-8

d
b
c

200
HESTION 12-9 Multiple choice
QUESTION
financial capital concept requires
1. The that
be measured at net assets shall
Current cost
Historical cost
Historical cost adjusted for
C.

power
changes in purchasing
d. Current cost adjusted for changes
power
in purchasing

The physical
2.
capital concept requires the adoption of
which measurement basis?

8. Historical cost
Current cost
c. Realizable value
d. Present value

3. Which capital maintenance concept

is applied
respectively to net income and comprehensive
income?

a Financial capital and Financial capital

Physical capital and Physical capital
C. Financial capital and Physical capital.
d.
Physical capital and Financial capital
4. Which
statement regarding the term "profit" is true?

a. Profit is
any amount over and above that required to
maintain the capital at the beginning of the period
b. Profit is the residual amount that remains after
expenses have been deducted from income
Profit.is the equivalent of net income under IFRS
All of these statements are true about the term profit
ANSWER
12-9

b
b
a
d

201
cliaeeR s

ACCOU PING ESTIMAT)

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gi
,
QUESTION 15-2
How should the effect of a change in accounting estimate be
accounted for?

ANSWER 15-2

that the effect of a change

PAS 8, paragraph 36, provides in
accounting estimate shall he recognized 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.

In other words, changes in accounting estimates are to be handled

currenlly and prospectively, if necessary.

To the extent that a change in accounting estimate gives rise to

changes in assets and liabilities, or relates to item of equity, it
shall be recognized by adjusting the carrying amount of the
related asset, liability or equity in the period of change.

A change in
accounting estimate shall not be accounted for
an

by restating amounts reported in financial statements of prior

periods.

QUESTION 15-3

What is the treatment of a change in

depreciation method?
ANSWER 15-3

A change in depreciation method is

accounted for as a change
in
accounting estimate.

PAS 16, paragraph 61, provides that the depreciation method

shall
be reviewed at least
at each financial year-end and if there
has been a significant change in the expected pattern of
consumption of the future
economic benefits embodied in An
asset, the
method shall
pattern, and such be changed to reflect the changed
change shall be accounted for a8 a change in
accounting estimate.

218
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ot
5. The effect of a change in accounting policy that is inseparable
from the effect of a change in accounting estimate should
be reported
the financial statements of all prior periods
a. By restating
presented.
As a correction of an
error.

As a component of income from continuing. operations,

future periods if the change
in the period of change and
affects bcth.
separate disclosure
d. As a
after income from continuing
operations.

6. When an entity changed from the straight line method of

depreciation to the double declining balance method, which
of the following should be reported?

a. Cumulative effect of change in accounting policy

b. Proforma effect of retroactive application
Prior period error
An accounting change that should be reported currently
and prospectively

7. Which of the following is not a justification for a change in

depreciation method?

a. A change in the estimated useful life

@o! A change in the pattern of the estimated future benefit

To conform with the depreciation method prevalent in
a particular industry
d. A change in the estimated future benefit
8. When an entity changed the expected service life of an asset,
which of the following should be reported?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
Prior period error
An accounting change that should be reported in the
period of change and future periods
ANSWER 15-4•

d
b

220
QUESTION 15-5 Multiple choice
(LAA)
1. Accounting changes are often made even
be a violation of the accounting thoughthis may
concept of
Materiality
D Prudence
Consistency
c.
d. Objectivity

2. Which is not classified as an accounting change?

estimate
financial statements Correction ot enors
these are classified as an accounting change
3. Which is the best explanation why accounting changes
classified into change in accounting policy and change
are

in accounting estimate?

The materiality of the change.

OF Each change involves different method of recognition
in the financial statements.
C. The fact that some treatments are considered GAAP
and some are not.
d. The need to provide a favorable profit picture.
4.
Why is retrospective treatment of a change in
accounting estimate prohibited?
Change in accounting estimate is a normal recurring
correction or adjustment which is the natural result
of
the accounting process.
b. The retrospective treatment for any
type of
presentation is not allowed.
Retrospective treatment of a change in accounting
estimate is prohibited under existing standard.
d.
The existing standard is silent on the issue.

ANSWER 15-5
b

221
CHAPTER 16

ACCOUNTING POLICY
Prior period error

QUESTION 16-1

Define an accounting policy.

ANSWER 16-1

An accounting policy is the specific principle, basis, convention,

rule and practice used by an entity in preparing and presenting
the financial statements.

QUESTION 16-2
What is a change in accounting policy?
ANSWER 16-2

A change in accounting policy arises when an entity adopts

different
which is
a generally accepted accounting principle
from the one previously used by the entity.

Examples of change in accounting policy are:

the FIFO
Change in the method of inventory pricing from
to weighted average method.
term
b. Change in the method of accounting for long
construction contract.

The assets at revalued

initial adoption of policy to carry
amount,

d. Change from cost model to fair value model in measuring

investment property.
e. Change to a new policy resulting from requirement of •
new PFRS.

222
 Not changes
in accounting policy

The application of an accounting policy for events or

that differ
transactions
in substance from previously
occurring events or transactions.

of
b. The application a
new accounting policy for events or
transactions which did not occur previously or that were
immaterial.

16-3
QUESTION
When is a change in accounting policy allowed?

ANSWER 16-3

PAS 8, paragraph 14, provides that a change in accounting policy

shall be made only when:

Required by an accounting standard or an interpretation of

the standard.

b. The change will result in more relevant or reliable

information about the financial position, financial
performance and cash flows of the entity.

QUESTION 16-4

What is the treatment of a change in accounting policy?

ANSWER 16-4

A change in accounting policy requiri d 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
the
an accounting policy is changed voluntarily,
or if
change shall be applied restropectively or
retroactively

223
 16-5
QUESTION
of a change in accounting
Explain retrospective application
policy.

ANSWER 16-5
accounting policy
Retrospective application is applying a new
to tronsactions, other events and conditions as if that
policy
had always been applied.
PAS 8, paragraph
22, provides that an entity shall adjust the
of equity for the
opening balance of each affected component
the other comparative
earliest prior period presented and
amounts disclosed for each prior period presented as if the

new policy had always been applied.

means that any resulting
Retrospective application
adjustment from the change in accounting policy shall
be

reported as an adjustment to the opening balance of

relained

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.

QUESTION 16-6

Explain prospective application of a change in accounting

policy.

ANSWER 16-6

Prospective application means that the new accounting policy

is applied to events, transactions and conditions occurring
after the date of change.
When it is impracticable for an entity to apply A new accounting
policy retrospectively because it cannot determine the
cumulative the
effect of applying the policy to all prior periods,
entity shall apply the new policy prospectively from the
earliest period practicable.

224
ESTION 16-7

What
is a change in reporting entity?

ANSWER 16-7
ANSWE

A change in reporting entity is a change whereby entities change

their
nature and report their operations in such a way that the
statements are in effect
financial those of a different reporting
entity.

For example, this accounting change may result from changing

the specific subsidiaries con-rising the group of entities for
which consolidated financial slatements are presented.

QUESTION 16-8

How is the change in reporting entity reported?

ANSWER 16-8

Achange in reporting entity is actually a change in accounting

policy and therefore shall be treated retroactively to disclose
what the statements
would have looked like if the current entity
had been existence in the prior year.
In other
words, the financial statements of all prior periods
presented shall be
restated to show financial information for
the new
reporting entity.

225
QUESTION 16-9
application of an
accounting policy
Explain the selection and
absence of an accounting standard.
where there iS an

ANSWER 16-9
provides that in the absence of an
PAS 8, paragraph 10,
standard that specifically applies to
a transaction
accounting use judgment in selecting and
event, management shall results in relevant and
applying an accounting policy that
reliable information.

12 specify the following hierarchy of

Paragraphs 11 and
guidance which management may use when selecting accounting
policies in such circumstances:
similar
a. Requirements of current standards dealing with
matters.

b. Definitions, 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
other
bodies that use a similar Conceptual Framework,
accounting literature and accepted industry practices.

QUESTION 16-10
What is the meaning of prior period errors?

ANSWER 16-10
misstatements
Prior period errors are omissions from and
in the financial statements for one or more periods arising from
a failure to use or misuse of reliable information that:

a. Was available when financial statements for those periods

were authorized for issue.

b. Could reasonably be expected to have been

obtained and taken
of those
into account in the preparation and presentation
financial statements.

Errors may occur as a result of mathematical mistakes, mistakes

fraud
of facts,
in applying accounting policies, misinterpretation
or oversight.

226
 16-12 Multiple choice (IFRS)
QUESTION

1. Which is
the first step within the hierarchy of guidance
when selecting accounting policies?
from IFRS if it specifically relates
Apply a standard
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
Framework.
Conceptual
a. Consider the most recent pronouncements of other
standard setting bodies.

2. In the absence of an accounting standard that applies

the most authoritative
specifically to a transaction, what is
source in developing and applying an accounting policy?

The requirement and guidance in the standard or

interpretation dealing with similar and related issue.
b. The definition, recognition criteria and measurement
of asset, liability, income and expense in the Conceptual
Framework.
C. Most recent pronouncement of other standard-setting
body.
d. Accounting literature and accepted industry practice.
made when
3. A change in accounting policy shall be

I. Required by law.

II. Required by an accounting standard or an interpretation

of the standard.
relevant or reliable
III. The change will result in more
financial
information about the financial position,
performance and cash flows of the entity.
I and III only

I and II only

228
 16-13 Multiple choice
QUESTION
An entity that changed an accounting policy
1. voluntarily
should
a.
Inform shareholders prior to taking the decision.
Account for the change retrospectively.
Treat the effect of the change as a component of other
comprehensive income.
d. Treat the change prospectively and adjust the effect
of
the change in the current period and
future periods

Which statement best describes

2.
prospective application?

a. current
Recognizing a change in accounting policy in the
and future periods affected by the change.
b. Correcting the financial statements as if a prior period
error had never occurred.
Applying a new accounting policy to transactions
occurring after the date at which the policy is
changed.
d. Applying a new accounting policy to transactions as
if that policy had always been applied.
3. Which term best
describes applying a new accounting
policy to transactions as if that policy had always been
applied?

Retrospective application
Retrospective restatement
C. Prospective application
d. Prospective restatement
4. This means
and
correcting the recognition, measurement
disclosure of amounts of elements of financial
statements as if a prior period error had never occurred.

a.
Retrospective application
® Retrospective restatement
d. Prospective application
Prospective restatement

231
 treated change in
the following should be
as a
5. All of
accounting policy, except

A new accounting policy of capitalizing development cost

as a project has become eligible for capitalization for
the first time.
b. A new policy resulting from the requirement of a new
relevant information, items of property,
C. To provide more
plant and equipment are now being measured
at fair

value, whereas they had previously been measured at

cost.
d. All of these qualify as change in accounting policy.

ANSWER 16-18

a
b
6. a

232
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SVER 151
QUESTION 16-15 Multiple choice (AICPA Adapted)

1. When financial statements for a single year are

being.
should
presented, a prior period error

Be shown as an adjustment of the balance of retained

earnings at the start of the current year
b. Affect net income of the current year
C. Be shown in the
statement of changesin equity
d. Be included in other comprehensive income.

2. Prior period errors

a. Do not include the effect of a mistake in the application

of accounting policy.
b. Do not affect the presentation of prior period
comparative financial statements.
C. Do not require further disclosure in the body of the
financial statements.
Are reflectedas adjustment of the opening balance of
retained earnings of the earliest period presented.

3. An example of a correction of an error in previously issued

financial statements is a change

a.
From FIFO method of inventory valuation to the average
method.
b. In the service life of property, plant and
equipment.
© From cash basis to accrual basis of accounting.
d. In the tax
assessment related to a prior period.

4. An entity that changed from cash basis to accrual basis

of
accounting during the current year should report

Prior period adjustment resulting from the correction

of an error.
b.
Prior period adjustment resulting from the change in
accounting policy.
C.
Component of income from continuing operations.
d. Component of income from discontinued operations.

234
 An entity that changed from an
5.
accounting principle that
is not generally accepted to one that is
should report the effect of the change, generally accepted
income tax, in the current net of applicable

Income statement
a.
as component of
continuing operations income from
b. Income statement
as component of discontinued
operations
Statement of retained earnings aS
the
an
adjustment of
opening balance
d. Statement of retained
earnings after net income but
before dividends

ANSWER 16-15

1. a

2. d
3. c
4. a
5. c

235
 Multiple choice (IFRS)
QUESTION 16-16 an entity discovered that ending
year,
the current in the financial statements for the
1. During
inventory reported
should the
understated. How
was understatement?
entity
prior year
for this
account in prior year.
the
inventory
beginning statements with corrected
Adjust thethe financial
6Restate for all periodspresented.
balances balance in retained earnings at
ending
c. Adjust the
current year-end.
because the error
will self-correct
d. Make no entry
2018, the entity discovered that
2. On March 25, was overstated. The 2017
for 2017
depreciation expense were authorized for issue on April
financialstatements
1, 2018. What must the entity do?

Correct the
2017 financial statements before issuing
them.
b. Reduce depreciation for 2018. for 2017
Restate the depreciation expense reportedfinancial
in the comparative figures of the 2018
C.

statements.
d. Do nothing.
discovered that
3. On March 25, 2018, the entity
overstated. The 2011
depreciation expense for 2017 was
mnancial staterents were authorized for issue on March
1, 2018. What must the entity do?
with the
a. Reissue the 2017 financial statements
correct depreciation expense.
Reduce depreciation for 2018.
b. for 2017
Restate the depreciation expense reported
in the comparative figures of the 2018
financial
statements.
d. Do nothing.
ANSWER 16-16

1. b

8. c

236
QUESTION 16-17 Multiple choice
Adapted)
1. A change in reporting entity is actually a change in

IG Accounting
Accounting policy
estimate

c. Accounting method
d. Accounting concept

2. Which of the following does not represent a change in

reporting entity?

a. Changing the entities included in combined financial

statements
Disposition of a subsidiary or other business unit
Presenting consolidated statements in place of the
statements of individual entities
d. Changing specific subsidiaries that constitute the group
of entities for which
consolidated financial statements
are presented.

3.
Which statement is correct regarding accounting changes
that result in financial statements that are in effect the
statements of a
different reporting entity?

Cumulative-effect adjustments should be reported aS

separate line item in the financial statements.
b. No restatements or adjustments are required if the
changes involve consolidation method of accounting.
C. No restatements or
adjustments are required if the
changes involve the equity method of accounting.
The financial statements
of all prior periods presented
are
adjusted retrospectively.

237
 What is the proper accounting treatment for a change in
4.
reporting entity?
statements of all prior
Restatement of financial periods
presented financial
b. Restatement of current period statements
C.
Note disclosure and supplementary echedule
of retained earnings and
note
disclosure
d. Adjustment

5. An entity has included in the consolidated financial

statements this year a
subsidiary acquired several years
ago that was
appropriately excluded from consolidation last
should this change be reported?
year. How

a. An accounting change that should be reported

prospectively
An accounting change that should be reported
retrospectively
A correction of an error
C.
d. Neither an accounting change nor a correction of an
error

ANSWER 16-17

1. a

b
d

238