Training workshop on

preparation of financial
statements using IPSAS Accrual

IPSAS 3
Accounting policies, change in accounting
estimates and errors
Objectives of IPSAS 3
It prescribes the followings:
• Selection of accounting policies
• Accounting Treatment and disclosures for changes in
accounting policies,
• Accounting Treatment and disclosures for changes in
accounting estimates.
• Accounting treatment and disclosures for correction of errors
Accounting policies: In the Financial Statements
Components of Financial Statements
.
A Statement of Financial Position
A Statement of Financial Performance
A Statement of Changes in Net Assets/Equity
Comparison of budget versus actual

A Cash Flow Statement

Note: Comprising significant accounting
policies and other explanatory notes
Comparative Information
Accounting policies: Understanding the Meaning
• Accounting Policies
• Are the specific principles, bases, conventions, rules and
practices adopted by an entity in preparing and presenting
financial statements.
Accounting Policies: Development of Accounting Policies
i. The requirements and guidance in IPSASs dealing with similar and
related issues
❖Assets
❖Liability
❖Revenue
❖Expenses
ii. The definitions, recognition and measurement criteria for assets,
liabilities, revenue and expenses described in the conceptual
framework
iii. Pronouncements of other standard setting bodies but only to the
extent, that these are consistent with the framework of IPSAS
iv. Management judgement (When no specific standard)-Departure
 Accounting policies: Application and changes
❑Accounting Policies must ❑ A change in accounting policy may be
necessary if:
be applied consistently to
promote comparability. It is required by an IPSAS

Results in the financial statements

providing:
1. Relevant information for economic
decision of users
2. Reliable information: (Faithful
representation, substance over
form, Neutral, Prudent, Complete)
6
 Accounting policies: Application and changes
Change in accounting policy: Not changes in accounting policies:
❑ A change from one basis of ❑The application of an accounting
accounting to another basis of policy for transactions, other
accounting. events or conditions that differ in
substance from those previously
❑ A change in the:- occurring; and
❑accounting treatment,
❑recognition,
❑presentation or ❑The application of a new
❑measurement accounting policy for transactions,
of a transaction, event, or condition other events or conditions that did
within a basis of accounting. not occur previously or that were
immaterial.
7
 Accounting policies: Application and changes
Example 1 Example 2:
Depreciation methods Borrowing costs
The entity has previously depreciated An entity has previously written all
vehicles using the reducing balance finance costs off to surplus or deficit as
method at 40% per year. It now incurred. The entity now wishes to
proposes to depreciate vehicles using capitalise interest on borrowing
the straight-line method over five incurred to finance the construction of
years. non current assets.

Does this decision involve a change in Does this decision involve a change in
accounting policy? accounting policy?

8
 Accounting policies: Treatment and disclosures
Change in accounting policy:
❑ Required by an IPSAS:-
Use transitional Provision, if any,
❑Changed for providing relevant and
reliable information or no transitional
provisions available:-
Use retrospective application
to the extent it is impracticable
“Adjust the opening balance of each
affected component for the earliest prior
period presented as if the accounting
policy had always been applied”
Key Disclosures
❑The nature of the change in
accounting policy.
❑The reasons for the change.
❑The amount of the adjustment for
the current and each prior period
presented for each line item
affected.
❑The amount of the adjustment to
periods before those presented.
9
Retrospective application
• Retrospective application is applying a new
accounting policy to transactions, other events
and conditions as if that policy had always been
applied.
 Accounting policies: Treatment and disclosures
Implementation Guidance on accounting policies
Case Study – Retrospective application for more than one
prior period year
During 2018, the entity changed its accounting policy for the treatment of
borrowing costs that are directly attributable to the acquisition of a
hydroelectric power station which is under construction. In previous
periods, the entity had capitalized such costs. The entity has now decided
to expense, rather than capitalize them. Management judges that the new
policy is preferable because it results in a more transparent treatment of
finance costs and is consistent with local industry practice, making the
entity’s financial statements more comparable.

The entity capitalized borrowing costs incurred of TZS.2,600 during 2017

and TZS.5,200 in periods prior to 2017. All borrowing costs incurred in
previous years with respect to the acquisition of the power station were
capitalized.
Case Study – Retrospective application for more than one
prior period year
The accounting records for 2018 show surplus before interest of TZS.30,000;
and interest expense of TZS.3,000 (which relates only to 2018). The entity
has not recognized any depreciation on the power station because it is not
yet in use. In 2017, the entity reported:
TZS.
Surplus before interest 18,000
Interest expense –
Surplus 18,000

2017 opening accumulated surpluses was TZS.20,000 and closing

accumulated surpluses was TZS.38,000.

The entity had TZS.10,000 of taxpayers’ fund throughout, and no other

components of net assets/equity except for accumulated surplus.
Case Study – Retrospective application for more than one
prior period year
Public Sector Entity – Statement of Financial Performance
(restated)
2018 2017
TZS. TZS.
Surplus before interest 30,000 18,000
Interest expense (3,000) (2,600)
Surplus 27,000 15,400
Case Study – Retrospective application for more than one prior period year
(restated)

Contributed Accumulated Total

capital Surplus
Balance at 30th June 2016 as previously reported 10,000 20,000 30,000

Change in accounting policy with respect to capitalization of 0 (5,200) (5,200)

interest (Note 1)

Balance at 30th June 2016 as restated 10,000 14,800 24,800

Surplus for the year ended 30th June 2017 (restated) 0 15,400 15,400

Balance at 30th June 2017 as restated 10,000 30,200 40,200

Surplus for the year ended 30th June 2018 0 27,000 27,000

Closing at 30th June 2018 10,000 57,200 67,200

Case Study – Retrospective application for more than one prior period year
Key Disclosures Note 1:
During 2018, the entity changed its accounting policy for the
❑The nature of the change in treatment of borrowing costs related to a hydro-electric power
accounting policy. station. Previously, the entity capitalized such costs. They are
now written off as expenses as incurred. Management judges
that this policy provides reliable and more relevant
information because it results in a more transparent treatment
❑The reasons for the change. of finance costs and is consistent with local industry practice,
making the entity’s financial statements more comparable.
This change in accounting policy has been accounted for
retrospectively and the comparative statements for 2017 have
❑The amount of the been restated. The effect of the change on 2017 is tabulated
adjustment for the current below.
and each prior period
presented for each line item Effect on 2017 TZS.
affected. (Increase) in interest expense (2,600)
(Decrease) in surplus (2,600)
Effect on periods prior to 2017
❑The amount of the (Decrease) in surplus (5,200)
adjustment to periods
before those presented. (Decrease) in assets in the course of
construction and in accumulated surplus (7,800)
Accounting Estimates
 Accounting Estimates: Meaning and treatment
❑Preparation of financial statements may involve the use of
accounting estimates in determining the carrying amounts of
assets & liabilities and the associated expense or revenue for the
period where such amounts cannot be measured precisely.

❑Changes in accounting estimates result from new information or

new developments and accordingly, are not correction of errors.

18
WHAT IS A CHANGE IN ACCOUNTING ESTIMATE?
• An adjustment of carrying amount of an asset or
liability;
• An adjustment of the amount of periodic
consumption of an asset; that results from:
➢The assessment of present status of assets and
liabilities
➢Expected future benefits of assets
Treatment of change in accounting estimates

Shall be recognized prospectively by including it in

surplus or deficit in:

The period of the change, if the change affects the period

only; or

The period of the change and future

periods, if the change affects both
Entity X under public sector has made the following assessment
for useful lives of its motor vehicle for the year ended 30th June,
2021.
Items Date of Cost Original Acc, CA as at 30th New
purchase Useful Deprec June, 2020 estimated
Life iatio (Remaining remaining
undepreciate useful life
d Amount) (Inclusive)
TZ.001 July 2017 200M 5 120M 80M 4

TZ.002 July 2017 200M 5 120M 80M 1

TZ.002 July. 2018 250M 5 100M 150M 2

TZ.003 July 2019 150M 5 30M 120M 5

 Illustration 1
❑ An entity has depreciated a machine over its
expected useful life of 5 years. The cost of
machine was TZS. 100,000,000 and annual
depreciation charge was therefore TZS.
20,000,000 . No residual value is expected at
the end of the machine's useful life.
❑ At the end of year three, the remaining
useful life of the machine was estimated to be
only 1 year.

Journal entries:
Year 1: DR: Depr, expense 20m, CR: Acc. Depr. 20m
Year 2: DR: Depr, expense 20m, CR: Acc. Depr. 20m
Year 3: DR: Depr, expense 30m, CR: Acc. Depr. 30m
Year 4: DR: Depr, expense 30m, CR: Acc. Depr. 30m

22
 Accounting Estimates: Disclosures
Key disclosures of changes in accounting Estimates

1. The nature and amount of a
change in an accounting
estimate that has an effect in the
current period or is expected to
have an effect on future periods.
2. If the amount of the effect in
future periods is not disclosed
because estimating it is
impracticable, the entity shall
disclose that fact
Note 5:
The entity has reassessed the useful lives and
residual values of the machine which
resulted in its remaining useful lives to
change from 2 to 1 year on average. The
effect of the change in accounting estimate
has resulted in an increase in depreciation
amounting to TZS.30,000,000 for the current
period. The effect on future periods could not
reasonably be determined (only if the effect
on future periods cannot reasonably be
determined should this be disclosed).
Accounting for Errors
 Accounting for Errors: Understanding the meaning
Prior period errors Examples:
Are omissions from, and ❑Misapplication of accounting policies:
misstatements in, the entity's
financial statements for one or more ❑Fraud: e.g. overstating revenue by issuing fake
prior periods arising from a failure to invoices before the reporting date.
use, or misuse of, reliable
information that:
❑Misunderstanding of, or failure to notice,
❑was available when the financial information at the time of preparation of
statements for those periods were financial statements:
authorized for issue; and e.g. not writing off a receivable who had been
announced as insolvent before the
authorization of financial statements
❑could reasonably be expected to
have been obtained and taken into
account in the preparation and ❑Arithmetical Errors
presentation of those financial
statements.
❑Omission of transactions and events from the
financial statements
25
 Accounting for Errors: Treatments
An entity shall correct material prior period errors
retrospectively in the first set of financial statements
authorized for issue after their discovery by:

Restating the comparative amounts for prior

period(s) presented in which the error occurred; or

If the error occurred before the earliest prior

period presented, restating the opening balances
of assets, liabilities and net assets/equity for the
earliest prior period presented.
26
 Case Study – Retrospective application
During 2019 the entity discovered that In 2018, The entity reported:
revenue from rent was incorrect. Rent TZS
revenue of TZS.6,500 that should have been Revenue from exchange transactions-Rent 34,000
recognized in 2018 were incorrectly omitted
from 2018 and recognized as revenue in Users charges 3,000
2019, furthermore rent revenue of Exchequer Revenue 30,000
TZS.7,000 was understated in 2017. Total revenue 67,000
Expenses (60,000)
Surplus 7,000
The entity accounting records for 2019
show revenue from rent of TZS.60,000
(including the TZS.6,500 rent revenue which 2018 opening accumulated surplus was TZS.20,000
and closing accumulated surplus was TZS.27,000. The
should have been recognized in opening entity had no other revenue or expenses.
balances), revenue from users charges
TZS.4,000, Exchequer revenue TZS.40,000 The entity had TZS.5,000 of Taxpayers’ Fund
and expenses of TZS.86,500. throughout, and no other components of net
assets/equity except for accumulated surplus.
Case Study – Retrospective application
Journal entries:
For 2018:
DR: Rent Receivable TZS.6,500
CR: Rent Revenue TZS.6,500

For 2017:
DR: Rent Receivable TZS.7,000
CR: Acc. Surplus TZS.7,000
Case Study – Retrospective application
Statement of Financial Performance
(restated)
2019 2018
TZS. TZS.
Revenue from exchange transaction – Rent Revenue 53,500 40,500
Users charges 4,000 3,000
Exchequer Revenue 40,000 30,000
Total Revenue 97,500 73,500
Expenses (86,500) (60,000)
Surplus 11,000 13,500
Case Study – Retrospective application
(restated)

Taxpayers' Accumulated Total

Fund Surplus
Balance at 30th June 2017 as previously reported 5,000 20,000 25,000

Rent revenue understated by error 0 7,000 7,000

Balance at 30th June 2017 as restated 5,000 27,000 32,000

Surplus for the year ended 30th June 2018 (restated) 0 13,500 13,500

Balance at 30th June 2018 5,000 40,500 45,500

Surplus for the year ended 30th June 2019 0 11,000 11,000

Closing at 30th June 2019 5,000 51,500 56,500

 Case Study – Retrospective application
Key Disclosures
❑The nature of the prior period error;
❑The amount of the correction for
each prior period presented for each
line item affected;
❑The amount of the correction at the
beginning of the earliest prior period
presented.
❑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.
Extracts from Notes to the Financial Statements
Revenue from rent of TZS.6,500 was incorrectly
omitted from the financial statements of 2018
and TZS.7,000 understated in 2017. To correct
this error opening balances have been corrected
and the financial statements of 2018 have been
restated. The effects are summarized below.
There is no effect in 2019.
Effect on 2018 TZS.
Increase revenue 6,500
Increase in surplus 6,500
Effect on periods prior to 2018
Increase in Surplus 7,000
Increase in rent receivable and in
accumulated surplus 13,500