PAS 8: Accounting for Changes in Accounting Estimate, Accounting Policies and Errors

Accounting for Changes in Accounting Estimate

An accounting estimate is an approximation of the amount to be debited or credited on items for which no precise
means of measurement are available.

Estimates may be required for the following:

1. Bad Debts (PFRS 9)
2. Inventory Obsolescence (PAS 2)
3. Fair Value of Financial Assets or Financial Liabilities (PFRS 13)
4. Depreciation (PAS 16)
5. Warranty Obligation (PAS 37)

An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result
of new information or more experience.

The effect of a change in an accounting estimate shall be recognized prospectively by including it in profit or loss in:
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

Disclosures:
1. Nature and amount of change in accounting estimate that has an effect on the current period and is expected
to have an effect on future periods
2. If the amount of the effect in future period is not disclosed because estimating it is impracticable, the company
shall disclose that fact

Accounting for Changes in Accounting Policies

Accounting Policies: specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements

Examples of Accounting Policies

1. FIFO and Average Method in determining cost of inventories
2. Cost Model and Revaluation Model in valuing PPE
3. Accounting for Long Term Construction Contracts
4. Recognition of expenses related to exploration of mineral resources

An entity shall change an accounting policy only if the change

1. Is required by the standard
2. Results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity’s financial position, financial performance or cash flows

Accounting for Change in Accounting Policy

1. Transitional provisions in that standard
➢ Specific guidelines stated in the standard
2. Retrospectively, in the absence of transitional provisions
➢ Adjusting the opening balance of each affected component of equity (Retained Earnings) for the earliest
period presented and other comparative amounts disclosed for each period presented as if the new
policy had always been applied
3. Prospectively, if retrospective application is impracticable
➢ adjust the comparative information to apply the new accounting policy prospectively from the earliest
date practicable
Error Correction

Errors: Includes misapplication of accounting policies, mathematical mistakes, oversights or misinterpretation of

facts and fraud.

Types of error according to period of occurrence

1. Current period error: Errors in the current period and are discovered in the current period or the period before
the FS are authorized for issue
2. Prior period error: Errors in the past that were only discovered in the current year

Types of errors according to financial statements affected

1. Balance Sheet Errors: Error which affects only the Balance Sheet Items (Assets, Liabilities and Capital)
2. Income Statement Errors: Error which affects only the nominal account
3. Combined Income Statement and Balance Sheet Error: Error which affects real and nominal accounts
(income statement and the statement of financial position)
a. Counterbalancing errors
Examples
1. Accruals (Accrued Income and Accrued Expense)
2. Deferrals (Deferred Income and Prepaid Expense)
3. Errors in inventory (beginning and ending inventory)

b. Non-counterbalancing errors
Examples:
a. Misstatement in depreciation
b. Capitalizing costs that should not be capitalized
c. Not capitalizing costs that should have been capitalized