PAS 8 – CHANGES IN ACCOUNTING POLICIES,
ESTIMATES AND ERROR
Change in Accounting Estimate
PAS 8 defines a change in accounting estimate
as “an adjustment of the carrying amount of an
asset or a liability, or the amount of periodic
consumption of an asset that results from the
assessment of the present status of and
expected future benefit and obligation
associated with the asset and liability.”
Note: When it is difficult to determine whether
an adjustment is a change in accounting
estimate or a change in accounting policy, the
change shall be treated as a change in
accounting estimate, with appropriate
disclosure.
Accounting Treatment for 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 period if the
change affects both.
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.
Note: a change in accounting estimate shall not
result in restating the amounts presented in
financial statements of prior periods.
Accounting Policies
Accounting policies are the specific principles,
bases, conventions, rules and practices applied
by an entity in preparing and presenting
financial statements.
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 statements
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
b. The application of a new accounting policy
for events or transactions which did not occur
previously or that was immaterial
Accounting Treatment for a Change in
Accounting Policy
With transitional provision: A change in
accounting policy required by a standard or an
interpretation shall be applied in accordance
with transitional provisions therein.
Without transitional provision: 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.
PAS 8, paragraph 22, provides that “an entity
shall adjust the opening balance of each
affected component of equity for the earliest
period presented and the comparative amounts
disclosed for each prior period presented as if
the new policy had always been applied.”
Limitation of Retrospective Application
Retrospective application of a change in
accounting policy is not required if it is
impractical to determine the cumulative effect
of change.
For a particular prior period, it is impractical to
apply a change in accounting policy when:
a. The effects of the retrospective application
are not determinable.
b. The retrospective application requires
assumptions about what management’s
intentions would have been at that time.
c. The retrospective application requires
significant estimate, and it is impossible to
distinguish objectively information about the
estimate that:
1. Provides evidence of circumstances that
existed at that time, and
2. Would have been available at that time
Prospective Application
When it is impractical to apply a new accounting
policy retrospectively because it cannot
determine the cumulative effect of applying the
policy to all prior periods, 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.
A change in reporting entity is actually a change
in accounting policy and therefore shall be
treated retrospectively or retroactively to
disclose what the statements would have
looked like if the current entity had been
existing in the prior year. Thus, the financial
statements of all prior periods presented shall
be restated to show financial information for the
new reporting entity.
Absence of Accounting Standard
PAS 8, paragraph 10, provides that in the
absence of an accounting standard that
specifically applies to a transaction or event,
management shall use its 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 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 similar
Conceptual Framework, other accounting
literature and accepted industry practices.
Prior Period Errors
Prior period errors are omissions from and
misstatements 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 into account in the
preparation and presentation of those financial
statements.
Accounting Treatment for Prior Period Errors
Prior period errors shall be corrected
retrospectively by adjusting the opening
balances of retained earnings and affected
assets and liabilities.
For comparative statements, financial
statements of the prior period shall be restated
so as to reflect the retroactive application of the
prior period errors.
This is known as retrospective restatement
which is “correcting the recognition,
measurement and disclosure of amounts of
elements of financial statements as if the prior
period error had never occurred.
In other words, the net income, its components,
retained earnings and other affected balances
for the prior period presented shall be adjusted
accordingly.
If the error occurred before the earliest period
presented, the opening balances of assets,
liabilities and equity for the earliest period
presented shall be restated.
When it is impractical to determine the
cumulative effect at the beginning of the current
period of an error on all prior periods, the entity
shall restate the comparative information to
correct the error prospectively from the earliest
date practicable.
Disclosures of Prior Period Errors
An entity shall disclose the following:
1. The nature of prior period error
2. The amount of correction for each prior
period presented to the extent practicable:
a. For each financial statement line item
affected
b. For basic and diluted earnings per share
3. The amount of correction at the beginning of
the earliest prior period presented
4. 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.
Example of prior period error:
1. Mathematical mistakes
2. Oversights or misinterpretation of facts
3. Mistake in applying accounting policies
4. Fraud
Statement of financial statement errors
Accounts Affected: Real accounts only
Example: improper classification of an asset,
liability and capital account
Correction: Reclassify the account balances
Income statement errors
Accounts Affected: Nominal accounts only
Example: improper classification of revenues
and expenses
Correction: Reclassify the account if the error is
discovered in the same year it is committed but
if the discovery of error is in subsequent year,
no need to reclassify accounts because the
nominal accounts for the current year are
correctly stated
Combined statement errors
Accounts Affected: Both real and nominal
accounts
Result in a misstatement of net income
Example: If accrued salaries payable is over meaning, if comparative statements are
looked, the effects are; presented, the prior year statements are
restated to correct the error.
a) Salaries expense is understated
(income statement error) Note: The correction of a prior period error is
b) Liability is understated (statement of excluded from profit or loss for the period in
financial position error) which the error is discovered. Instead, it should
c) Net income is overstated (income be adjusted to the beginning balance of
statement error) retained earnings of the earliest period
d) Retained earnings account is overstated presented.
(statement of financial position error)
Correction: It depends whether the error is
counter balancing or non counter balancing Effects of Counterbalancing Error on year-end
Profit and Loss:
Counterbalancing Errors
Year 1 Year 2 Year 3
Effect of error: Overstatement Understatement None
1. The income statements for two
successive periods are incorrect. Financial Position:
2. The statement of financial position at the
end of the first period is incorrect. Year 1 Year 2 Year 3
3. The statement of financial position at the Erroneous None None
end of the second period is correct.
Effect in subsequent years: If not detected, they Effects of Non Counterbalancing Error on year-
are automatically counter balanced or end
corrected in the next accounting period.
Profit and Loss:
Example: Misstatement of the ff; Inventory,
Year 1 Year 2 Year 3
prepaid expense, accrued expense, deferred
Overstatement None None
income and accrued income

Financial Position:
Non Counterbalancing Errors
Year 1 Year 2 Year 3
Effect of error: Erroneous Erroneous Erroneous

1. The income statement of the period in

which the error is committed is incorrect
but the succeeding income statement is
not affected.
2. The statement of financial position of the
year of the error and succeeding
statements of financial position are
incorrect until the error is corrected.
Effect in subsequent years: They are not
automatically counterbalance or corrected.
Example: Misstatement of depreciation and
doubtful accounts
Relationship between Accounts
Under Periodic Inventory System
• Direct Relationship
Ending Inventory : Profit
Beginning Inventory & Purchases : COGS
• Inverse Relationship
Ending Inventory : COGS
Beginning Inventory & Purchases : Profit
Under Perpetual Inventory System

Treatment of prior period errors • Direct Relationship

PAS 8 provides that an entity shall correct Asset-related Account : Profit

material prior period errors retrospectively in
• Inverse Relationship
the first set of financial statements authorized
for issue after their discovery by: Liability-related Account : Profit
a. Restating the comparative amounts for the
prior period presented in which the error
occurred. Special Note by me: In case you are having
trouble analyzing every situation and their
b. Restating the opening balances of assets, impact on one another, always remember the
liabilities and equity for the earliest prior period nature of the accounts and think of it carefully.
presented if the error occurred before the Do not be pressured, you already knew it,
earliest period presented. you’re just being confused. Take a breath
In other words, a prior period error shall be
corrected by retrospective restatement,