ACCOUNTING CHANGES EXAMPLE

Categories of Accounting Change JIPIYA Inc. purchased equipment for P510,000 which
was estimated to have a useful life of 10 years with a
1. Change in Accounting Estimate
salvage value of P10,000 at the end of 2015.
2. Change in Accounting Policy
Depreciation has been recorded for 7 years on a
NOTE: Errors are not considered an accounting change. straight-line basis. In 2022 (year 8), it is determined that
the total estimated life should be 15 years with a
salvage value of P5,000 at the end of that time.
CHANGE IN ACCOUNTING ESTIMATE Required:
- A change in accounting estimate is an 1. Journal entry to correct the prior years’
adjustment of the carrying amount of an asset or depreciation. (NO ENTRY)
a liability, or the amount of the periodic 2. Calculate the depreciation expense for 2005.
consumption of an asset that results from the
assessment of the present status and expected Equipment cost P510,000
future benefit and obligation associated with the Salvage value (10,000)
asset and liability Depreciable base 500,000
Useful life (original) 10 years
“A normal recurring adjustment of an asset or liability
Annual depreciation P50,000 x 7 years = P350,000
which is the natural result of the use of an estimate
(evolution)” accumulated

REPORTING CHANGE IN ACCTG ESTIMATE

- currently and prospectively

- Prospective recognition is the application of
changes to transactions, other events and
conditions from the date of change in estimate.
- Shall NOT be accounted for by restating
amounts reported in financial statements of Net book value P160,000
prior period. Salvage value (new) 5,000
Depreciable base 155,000
Measurement basis is different from estimates, thus a
Useful life remaining 8 years
change in the former does not qualify as change in
Annual depreciation P19,375
accounting estimate, but that of an accounting policy
already.

Your conservatism principle will imply to your judgment

that:

If it is difficult to distinguish a change in accounting

estimate and a change in accounting policy, the change
is treated as that of accounting estimate with
appropriate disclosure.
CHANGE IN REPORTING ENTITY
- retrospective application
- change whereby entities change their nature
and report their operations in such a way that
the FS are in effect those of a different reporting
entity.
Examples of a change in reporting entity are:
 Presenting consolidated statements in place of
statements of individual companies.
 Changing specific subsidiaries that constitute
the group of companies for which the entity
presents consolidated financial statements.
 Changing the companies included in combined
financial statements.
 Changing the cost, equity, or consolidation
method of accounting for subsidiaries and
investments.
HIERARCHY OF GUIDANCE
- 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.
disclosed for each prior period presented as if
the new policy has always been applied.
- arises when an entity adopts a generally
accepted accounting principle which is
different from the one previously used by the
entity.
- any resulting adjustment from the change in
accounting policy shall be reported as an
adjustment to the opening balance of retained
earnings.
EXAMPLE: Income from Long-Term Contracts
Esbeem Construction Company used the completed
contract method to account for long-term construction
contracts for financial accounting and tax purposes in
2021, its first year of operations. In 2022, the company
decided to change to the percentage-of-completion
method for financial accounting purposes. Income
before long-term contracts and taxes in 2021 and 2022
was P80,000 and P100,000. The tax rate is 25% and the
company will continue to use the completed contract
method for tax purposes.

CHANGE IN ACCOUNTING POLICY

Comparative Income Statement
- Entities shall select and apply the same
accounting policies each period in order to
achieve comparability or to identify trends in
the FS.
- Accounting policies are the specific principles,
bases, conventions, rules and practices applied
by an entity in preparing and presenting the Retained Earnings Statement
financial statements.
-

REPORTING CHANGE IN ACCTG POLICY

- retrospective application
- adjust the opening balance of each affected
component of equity for the earliest prior
period presented and the comparative amounts
ERRORS EXAMPLE

- Financial statements do not comply with PFRSs

if they contain either material errors or
immaterial errors made intentionally to
achieve a particular presentation of an entity’s
financial position, financial performance, or
cash flows.

Prior period errors are omissions and misstatements in
the financial statements for one or more period arising
from a failure to use or misuse of reliable information
that:
 Was available when FS for those periods were
authorized for issue
 Could reasonably be expected to have been
obtained and taken into account in the
preparation and presentation of those FS.
Before issuing the report for the year ended December
31, 2022, you discover a P62,500 error that caused the
2021 inventory to be overstated (overstated inventory
caused COGS to be lower and thus net income to be
higher in 2021). Would this discovery have any impact
on the reporting of the Statement of Retained Earnings
for 2022? Assume a 20% tax rate.

TREATMENT OF PRIOR PERIOD ERRORS

- corrected retrospectively
- By adjusting the opening balances of retained
earnings and affected assets and liabilities
- If comparative statements are presented, the
FS of the prior period shall be restated so as to BALANCE SHEET ERRORS
reflect the retroactive application of the prior
period errors as a retrospective restatement. Balance sheet errors affect only the presentation of real
- If the error occurred before the earliest prior accounts (asset, liability, or stockholders’ equity
period presented, the opening balances of account).
assets, liabilities, and equity for the earliest
When the error is discovered in the error year, the
prior period presented shall be restated.
company reclassifies the item to its proper position.
Companies treat errors as prior-period adjustments
If the error is discovered in a prior year, the company
and report them in the current year as adjustments to
should restate the balance sheet of the prior year for
the beginning balance of RE. All material errors must be
comparative purposes.
corrected.
For example, if preference share capital is erroneously
credited instead of ordinary share capital, the
reclassifying entry is debit preference share capital and
credit ordinary share capital.
INCOME STATEMENT ERRORS

Improper classification of nominal accounts (revenues or expenses). They have no effect on the balance sheet and net
income.

Thus a reclassification entry must be made when it discovers the error in the error year.

If the error is discovered in a prior year, the company should restate the income statement of the prior year for
comparative purposes.

Type of error classified as:

Counterbalancing errors

- Will be offset or corrected over two periods.

Noncounterbalancing errors

- Not offset in the next accounting period.

Companies must make correcting entries, even if they have closed the books.

COUNTERBALANCING ERRORS
These are errors which, if not detected, are automatically counterbalanced or corrected in the next accounting period.
They will be offset or corrected over two periods.

If company has closed the books:

 If the error is already counterbalanced, no entry is necessary.

 If the error is not yet counterbalanced, make entry to adjust the present balance of retained earnings.

For comparative purposes, restatement is necessary even if a correcting journal entry is not required.

Will be offset or corrected over two periods.

If company has not closed the books:

 If error already counterbalanced, make entry to correct the error in the current period and to adjust the
beginning balance of Retained Earnings.
 If error not yet counterbalanced, make entry to adjust the beginning balance of Retained Earnings.
EXAMPLE Assuming that the books have been closed, what are
the adjusting entries necessary at December 31, 2022?
A partial trial balance of Sanghose Corporation is as
follows on December 31, 2022.

Instructions

 What are the adjusting entries necessary at

December 31, 2022?
 Assuming that the books have not been closed
or have been closed already.

Assuming that the books have not been closed, what

are the adjusting entries necessary at December 31,
2022?