PAS 8 – CHANGES IN

ACCOUNTING POLICIES,
CHANGES IN
ACCOUNTING ESTIMATES,
AND ERRORS
LEARNING OBJECTIVES:
 To understand the concept of a change in
accounting policy, change in accounting estimate,
and prior period error
 To know the recognition and reporting of a change
in accounting policy, change in accounting estimate,
and prior period error
CHANGE IN ACCOUNTING POLICIES
 Accounting policies – are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.

 Accounting policies must be applied consistently for similar transactions and events.

 A change in accounting policy arises when an entity adopts a generally accepted

accounting principle which is different from the one previously used by the entity.
 A change in accounting policy shall be made only when:
a. Required by accounting standard
b. The change will result in more relevant and faithfully represented information about
the financial position, financial performance, and cash flows of the entity.
CHANGE IN ACCOUNTING POLICY
 PAS 8, paragraph 10, provides that 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.
 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 a similar
Concept Framework, other accounting literature and accepted industry practices
CHANGE IN ACCOUNTING POLICIES
 Examples of change in accounting policy are:
a) Change in the method of inventory pricing from the FIFO to weighted average method
b) Change in the method of accounting for long-term construction contract from cost
recovery method to percentage of completion method
c) The initial adoption of policy to carry assets at revalued amount is a change in
accounting policy to be dealt with as revaluation
d) Change from cost model to fair value model in measuring investment property
e) Change to a new policy resulting from the requirement of a new PFRS
REPORTING CHANGE IN ACCOUNTING POLICY
 If the standard or interpretation contains no transitional provisions or if an accounting
policy is changed voluntarily, the changed shall be applied retrospectively.

 Retrospective application means that any resulting adjustment from the change in
accounting policy shall be reported as an adjustment to the opening balance of
retained earnings. The amount of the adjustment is determined as of the beginning of
the year change.
 If comparative information is presented, the financial statements of the prior period
presented shall be restated to conform with the new accounting policy.
CHANGE IN ACCOUNTING POLICY
An entity has used FIFO method of inventory valuation since it began operations in 2019.

The entity decided to change to the weighted average method for determining inventory
cost at the beginning of 2020.

FIFO Weighted Ave

December 31, 2019 1,000,000.00 750,000.00
December 31, 2020 1,500,000.00 1,200,000.00
CHANGE IN ACCOUNTING ESTIMATE
 A change in accounting estimate is a normal recurring correction or adjustment of an asset
or liability which is the natural result of the use of an estimate.
 Estimation involves judgment based on the latest available and reliable information.
 Revision of the estimate does not relate to prior periods and is not a correction of an error.

 Examples of accounting estimate

a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value and expected pattern of consumption of benefit of depreciable
asset
d. Warranty cost
e. Fair value of asset and liability
 REPORTING CHANGE IN ACCOUNTING ESTIMATE
 The effect of change in accounting estimate shall be recognized currently and
prospectively by including it in income or loss of:
a. The period of change if the change affects that period only
b. The period of change and future periods if the change affects both

 Changes in accounting estimates are to be handled currently and prospectively, if

necessary.
 Prospective recognition means that the change is applied to transactions, other events
and conditions from the date of change in estimate.
CHANGE IN ACCOUNTING ESTIMATE
A depreciable asset costing Php500,000 is estimated to have a life of 5 years.
At the beginning of the third year, the original life is changed to 8 years.

Depreciation to be recorded yearly

Year 1

Depreciation expense 100,000.00

Accumulated Depreciation 100,000.00

Year 2

Depreciation expense 100,000.00

Accumulated Depreciation 100,000.00

What will be the depreciation for the third year?

PRIOR PERIOD ERRORS
 Prior period errors are omissions and misstatements in the financial statements for
one or more periods arising from a failure to use or misuse of reliable information.

 Errors may occur as a result of mathematical mistakes, mistakes in applying accounting

policies, misinterpretation of facts, fraud or oversight.
RECOGNITION OF PRIOR PERIOD ERROR
 Prior period errors shall be corrected retrospectively by adjusting the opening
balances of retained earnings and affected assets and liabilities.

 If comparative statements are presented, the financial statements of the prior period
shall be restated so as to reflect the retroactive application of the prior period errors as
a retrospective restatement.
PRIOR PERIOD ERROR

During the year ended Dec. 31, 2020, the following events occurred at
Harbor Company:

- It was decided to write off Php800,000 from inventory which was

over two years old as it was obsolete.

- Sales of Php600,000 had been omitted from the financial statements

for the year ended Dec. 31, 2019.

How much should be shown as prior period error in the financial

statements for the year ended Dec 31, 2020?
DISCLOSURES NEED FOR PRIOR PERIOD ERRORS
 An entity shall disclose the following:
a. The nature of the prior period error
b. The amount of correction for each prior period presented
c. The amount of correction at the beginning of the earliest prior period presented
d. 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.
END OF PRESENTATION