Accounting Policies,

Changes in Accounting
Estimates and Errors
Lecture 4

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Agenda
Applicable Standard and Scope (IAS 8/ MFRS 108)
Accounting Policy and Accounting Estimate
Selection and Application of Accounting Policies
Changes in Accounting Policies
Changes in Accounting Estimates
Prior Period Errors

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 Applicable Standard and Scope
 IAS 8 / MFRS 108 Accounting Policies, Changes in Accounting
Estimates and Errors shall be applied in:
1. Selecting and applying accounting policies, and
2. Accounting for
a. Changes in accounting policies,
b. Changes in accounting estimates and
c. Corrections of prior period errors.

 Respective tax effect on these changes should be accounted for and

disclosed in accordance with IAS 12 Income Taxes.

 Disclosure requirements for accounting policies are set out in IAS 1

Presentation of Financial Statements.

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 Accounting Policy and Estimate
Accounting policies defined in IAS
8/ MFRS 108
are the specific principles, base,
conventions, rules and practise
applied by an entity in preparing
and presenting financial
statements.

Accounting policy selected by an

entity on a particular element
should determine the following:
 Recognition: When and whether
the element is recognised;
 Measurement: How much of the
element is recognised; and
 Presentation: How the element is
presented in financial statements.
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Accounting Policy and Estimate
 Accounting estimates are not defined in any accounting
standards and IAS 8 only defines changes in accounting
estimates instead.
 Accounting estimates represent an entity’s estimates
which may affect the elements in the financial statements.
Example?
 Estimation should involve entity’s judgements based on the
latest available, reliable information.
 Many items affecting the elements in the financial statements
cannot be measured with precision but can only be estimated
because of the uncertainties inherent in business activities.
 Use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine
their reliability.

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Select and Apply Accounting Policy
 In determining an accounting policy in preparing and
presenting the financial statements, an entity has no
choice but to comply with the following sources or
requirements in descending order:
1. An entity is required to apply the IFRS; and

2. In case of no such applicable IFRS, an entity is

required to develop and apply an accounting policy
that results in information that is relevant and
reliable.

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Example 1
Example & Workings

Required:
List the accounting policies and accounting estimates
that may be used in subsequently measuring:
Freehold land held for undetermined future use

Freehold land held for undetermined future use

 IFRS?
 Accounting policies?
 Accounting estimates?

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 Changes in Accounting Policies
Definition
A change of accounting policy occurs where there is any
change to any ONE of the components of:
1. Recognition criteria
2. Measurement basis
3. Method of presentation

Any change that does not affect any of these three

components is not a change in accounting policy and it
may only be a change in accounting estimates.

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 Changes in Accounting Policies
An entity should change an accounting policy only if:
i. Required by an IFRS.
 Where accounting policy is changed due to an amendment in
IFRS of the introduction of a new IFRS, the change must be
applied in accordance with the transitional provisions of the new or
amended IFRS.

ii. Applied voluntarily.

 The change results in the financial statements providing reliable
and more relevant information.
 Initiated by the entity itself voluntarily.

The following are not changes in accounting policies:

a) Differ in substance from those previously occurring; and
b) Did not occur previously or were immaterial.

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Changes in Accounting Policies
When an entity is required to apply the change in accounting policy
retrospectively, it is required to adjust:
Opening balance of each affected component of equity for the
earliest prior period presented.
Other comparative amounts disclosed for each prior period
presented as if the new accounting policy had always been applied.

Retrospective application is defined in IAS 8 as

Applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied.

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 Changes in Accounting Policies
When it is impracticable to apply the
retrospective application of a change
in accounting policy because of
difficulties to determine:
 Apply the new accounting policy to
the carrying amounts of assets and
liabilities as at the beginning of the
earliest period for which retrospective
application is practicable, (which may
be the current period)

 Make a corresponding adjustment to

the opening balance of each affected
component of equity for that period

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Changes in Accounting Policies
Disclosures
 An entity should disclose the following (unless it is impracticable to
determine the amount of adjustment) on a change of accounting policy:

i. Title of IFRS
ii. That the change in accounting policy is made in accordance with its
transitional provisions, if applicable
iii. Nature of the change in accounting policy
iv. A description of the transitional provisions, if applicable;
v. The transitional provisions if they have an effect on future periods, if
applicable
vi. Amount of the adjustments in current and prior period presented
vii. For current and prior periods, the amount of the adjustment for each
item effected as well as its impact on EPS;
viii. Where retrospective application is impracticable, the conditions that
caused that impracticability
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 Example 2
Example

 Excel Berhad acquired a piece of land for RM200 million on 1

January 2015. The land was classified as investment property
and measured using the cost model.
 On 1 January 2019, Excel changed its accounting policy to fair
value measurement for the land. It was able to derive the fair
values of the land only from 31 December 2018 which was
RM290 million.

 On 1 January 2019, the opening balance of the retained earnings

is RM500 million.
 The fair value of the land on 31 December 2019 was RM313
million. There was no tax suffered on fair value changes or on
sale of the land.

Required:
Discuss the effects of the change in accounting policy on the
financial statements on 31 December 2019.

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 Example 2
Workings

 Not possible to apply the new policy from 1 Jan 15

 Earliest date possible =

 FV Land @ 31 Dec 18 =

 CA Land @ 31 Dec 18 =

 Fair value gain =

 Balance restated for retained earnings on 1 Jan 19 =

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 Example 2
Workings

Example of Disclosures in Notes

 From the start of year 2019, Excel Berhad changed its accounting
policy for measuring investment property from cost model to fair
value model as the management takes the view that this policy
provides reliable and more relevant information based on up-to-date
date.
 The policy is applied prospectively from the start of 2019 as it was
not practicable to determine the fair values of the investment
property for periods prior to 2019.

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Changes in Accounting Estimates
Definition
i. Change in accounting estimate is an adjustment of the carrying
amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the
present status of, and expected future benefits and obligations
associated with, assets and liabilities.

ii. Results from new information or new developments and, accordingly,

are not corrections of errors.

iii. Examples of change in accounting estimate would be applied include:

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Changes in Accounting Estimates
 An estimate may need revision if changes occur in the
circumstances on which the estimate was based or as
result if new information or more experience.

 By its nature, does relate to prior periods and is not the

correction of an error.

 A change in the measurement basis applied is a change

in an accounting policy, and is not a change in an
accounting estimate.

 When it is difficult to distinguish a change in an

accounting policy from a change in an accounting
estimate, the change is treated as a change in an
accounting estimate.
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Changes in Accounting Estimates
 An entity is required to recognise such effect of a change
in an accounting estimate prospectively as follows:
1. To the extent that a change in an accounting
estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, an entity is
required to recognise the change by adjusting the
carrying amount of the related asset liability or
equity item in the period of the change.

2. Other than a change to which the above

requirement applies, the effect of a change in an
accounting estimate should be recognised
prospectively by including it in the P/L in:
• The period of the change, if the
change affects that period only; or

• The period of the change and future

periods, if the change affects both.
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Changes in Accounting Estimates
Disclosures
 An entity is required to disclose 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 in future periods, except for the
disclosure of the effect on future periods when it is
impracticable to estimate that effect.
 If the amount of the effect in future periods is not disclosed
because estimating it is impracticable, an entity is required to
disclose that fact.

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 Example 3
Example

 On 1 January 2015, Rise Berhad acquired a plant

costing RM4 million. The economic life was estimated to
be 8 years with no residual value at the end of its useful
life.

 On 1 January 2019, the remaining life was estimated to

be 2 years while the residual value estimated to be
RM400,000.

Required:
Discuss the accounting treatment in year 2019.

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Example 3
Workings

 Change in estimated life & residual value is:

 Adjustments:
Plant would be depreciated at for year 2015 – 2018

CA of plant at 2018

Depreciation for Year 2019

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 Prior Period Errors
 Prior Period Errors are omissions from, and misstatements
in, prior period financial statements resulting from failure to
use, or the misuse of, reliable information that was available
or could be reasonably expected to have been obtained, at
the time or preparation of those financial statements.
 Examples:

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 Prior Period Errors
 Errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements.

 Financial statements cannot be regarded as full compliance with

the accounting standards if they contain either one of the
followings:
 Material errors, or
 Immaterial errors made intentionally

 Current period errors discovered in a period should be corrected

before the financial statements are authorised for issue.

 Materials errors are sometimes discovered in subsequent period.

These prior period errors are corrected in the comparative
information presented in the financial statements for that
subsequent period.

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Prior Period Errors
Correction of material prior period errors
 An entity is required to correct material prior period errors retrospectively in
the first set of financial statements authorised for issue after their discovery
by:
a) Restating the comparative amounts for the prior period(s) presented in
which the error occurred; or
b) If the error occurred before the earliest prior period presented, restating
the opening balances of assets, liabilities and equity for the earliest prior
period presented.

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Prior Period Errors
Correction of material prior period errors
When it is impracticable to determine:
a) Period-specific effects (of an error on comparative
information for one or more prior periods presented)
 Required to restate the opening balances of assets,
liabilities and equity for the earliest period for which
retrospective restatement is practicable (which may
be the current period).

b) Cumulative effect (at the beginning of the current period,

of an error on all prior periods)
 Required to restate the comparative information to
correct the error prospectively from the earliest date
practicable.

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Disclosures
An entity is required to disclose the following:
i. Nature of the prior period error;

ii. For each prior period presented, to the

extent practicable, the amount of the
correction:
 For each financial statement line item

affected; and
 If IAS 33 applies to the entity, for basic and

diluted earnings per share;

iii. Amount of the correction at the beginning of

the earliest prior period presented; and

iv. 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.

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 Example 4
Example

 On 1 January 2018, YTK Berhad purchased a building costing

RM30 million. The economic life of the building is 20 years and
the scrap value is RM2 million.

 The company decided not to depreciate it in year 2018.

 This was discovered when the financial statements for year

2019 were being finalized.

 Retained profit brought forward as at 1 January 2019 was

RM45 million.

Required:
Discuss the accounting treatment.

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Example 4
Workings

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 Example 5
Example & Workings

 Identify whether the following constitute a change in accounting policy, a

revision in accounting estimate or a correction of prior-period error.
Question Answer
a) Previously, A Berhad accounted for its PPE using the historical cost
basis. In the current period, however A Berhad has adopted the
revaluation model of IAS 16 to account for its PPE.

b) B Berhad previously had a policy of calculating depreciation on

machinery using the straight line method @10%. However, in light of
significant losses recognised on recent disposals the management
has decided to depreciate equipment by using the reducing balance
method @ 20% which shall accurately reflect the wear and tear of
equipment.

c) C Berhad has a policy of valuing inventory using the FIFO method.

The accountant noticed the value of inventory brought forward in the
current period has been changed because it had erroneously been
valued using the LIFO method last year.

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