ACCOUNTING CHANGES

TWO (2) CATEGORIES:

● Change in Accounting Policies
● Change in Accounting Estimate

ACCOUNTING POLICIES
-“the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements” (PAS 8.5)

Hierarchy of reporting standards:

1.PFRS
2.Judgement
When making the judgment:
● management shall consider the following:
a. Requirements in other PFRS dealing with the same transaction
b. Conceptual Framework
● management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices

CHANGE IN ACCOUNTING POLICY

- arises when an entity adopts a generally accepted accounting principle that is
different from the one previously used by the entity.

PAS 8 permits a change in accounting policy only if the change:

a. Required by a PFRS or an Interpretation of standard; or
b. Results in a reliable and more relevant information

The following are not changes in accounting policies:

a. Application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring.
b. Application of new accounting policy for transactions , other events or
conditions that did not occur previously or were immaterial.

ACCOUNTING FOR CHANGES IN ACCOUNTING POLICIES:

(shall be applied in accordance of the order of the priority)

Order of priority:
1. Transitional provision in a PFRS, if any.
 2. Retrospective application, in the absence of a transitional
provision.
3. Prospective application, if retrospective application is
impracticable.

RETROSPECTIVE APPLICATION
— means adjusting the opening balance of each affected component of
equity for the earliest prior period presented and other comparative amounts
disclosed for each prior period presented as if the new accounting policy had
always been applied.

LIMITATION OF RETROSPECTIVE APPLICATION

–Retrospective application of a change in accounting policy is not required if it
is impracticable to determine the cumulative effect of the change.
It is impracticable to apply a change in an 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.
c. The retrospective application requires significant estimate.

VOLUNTARY CHANGE IN ACCOUNTING POLICY

— Is when the other standard-setting body amends the adopted pronouncement
and the entity decides to adopt the amended version.
— accounted for by retrospective application (or retroactively).

PROSPECTIVE APPLICATION
–means that the new accounting policy is applied to events and transactions
occurring after the date at which the policy is changed.
–When it is impracticable for an entity 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 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. —actually a change in accounting policy (shall be treated retrospectively
or retroactively)

— limitations:
 ● Presenting consolidated or combined financial statements in place of
financial statements of individual entities
● Changing specific subsidiaries that make up the group of entities for which
consolidated financial statements are presented
● Changing the entities included in combined financial statements

ACCOUNTING ESTIMATES
— is a monetary amount in the financial statements that is subject to a
measurement uncertainty.
— the use of reasonable estimates is necessary in order to provide relevant
information.
–does not relate to prior periods and is not a correction of an error.

● Measurement uncertainty – arises when monetary amounts in the

financial statements cannot be observed directly and must instead be
estimated.

The Standard enumerated the following typical examples of accounting

estimate:
a. A loss allowance for expected credit loss
b. The net realizable value of inventory and inventory obsolescence
c. The fair value of asset or liability
a. The depreciation expense
e. A provision for warranty obligation

The following necessarily requires estimation:

● Net Realizable Value (NRV) of inventories
● Depreciation
● Bad debts
● Fair Value of financial assets/liabilities
● Provisions

CHANGE IN ACCOUNTING ESTIMATES

— 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 benefit and obligations associated
with, assets and liability.
— results from new information or new developments; –a normal, recurring
correction or adjustment which is the natural result of the use of estimates.
Examples:
● Change in depreciation or amortization method
● Change in estimated warranty obligations and other provision

The effect of a 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.

NOTE:
IF THE CHANGE IS DIFFICULT TO DISTINGUISH BETWEEN THE 2
CATEGORIES, THE CHANGE IS TREATED AS A CHANGE IN ACCOUNTING
ESTIMATE.

ERROR CORRECTION
ERROR
–can arise in respect of the recognition, measurement, presentation or disclosure
of elements of financial statements.

Intentional errors are considered fraud even if it’s material errors or immaterial
errors.
Intentional misstatement of financial statements is called fraudulent financial
reporting.

Types of Errors:
● Current Period Errors
—current errors that were discovered before the financial
statements were authorized for issue.
—corrected simply by correcting entries.
● Prior Period Errors
–errors in one or more periods that were only discovered before
the financial statements are authorized for issue.
–corrected by retrospective statement
Retrospective Restatement
-adjustment of the beginning balance of retained earnings of the earliest period
presented.
-correcting a prior period error as if the error had never occurred.
-applying a new accounting policy as if the policy had always been applied.

Note:
● if it is impracticable to determine the effect of PPE at the beginning of the
current period, they are allowed to correct the error prospectively from
the earliest date practicable.

The types of errors:

1. ERRORS IN PRINCIPLE
–Intentional or unintentional lack of knowledge of accounting
standards or procedures, misuse of available information, or
misinterpretation of accounting standards.
2. CLERICAL AND SIMILAR ERRORS
–includes mathematical mistakes, oversights or misinterpretation of facts.
● Errors in Real Accounts
–errors affecting the statement of financial position only.
–improper classification of an asset, liability and capital
account.
● Errors in Nominal Accounts
–errors affecting the income statement and are corrected
through reclassification entries in the same year it is
committed.

Combined Statement of Financial Position and Income Statement errors

–errors that affect both the statement of financial position and income statement.
–result in misstatement of net income.

Effects are:
a. Salaries Expense Understated
b. Liability Understated
 c. Net Income Overstated
d. Retained Earnings Overstated

COUNTERBALANCING ERRORS:
–errors that if not detected, are automatically corrected in the next
accounting period.
–will be offset or corrected (or correct themselves) over two periods.
Effects of counterbalancing errors:
a. The income statements for two successive periods are incorrect.
b. The statement of financial position at the end of the first period is incorrect.
c. The statement of financial position at the end of the second period is correct.

NON-COUNTERBALANCING ERRORS:
–if not detected, not automatically counterbalanced or corrected in the next
accounting period (opposite of counterbalancing error).
–if the net income of one year is understated or overstated, the net income for
the subsequent year is not affected.
Normally includes the misstatement of the ff:
a. Inventory, including purchases and sales
b. Prepaid Expense
c. Accrued Expense
d. Deferred Income
e. Accrued Income
Effects of non-counterbalancing errors:
a. The statement of financial position of the year of error and succeeding statement
of financial position are incorrect until the error is corrected.

RELATIONSHIP BETWEEN ACCOUNTS:

–In a periodic inventory system, relationships between accounts can provide
determining effects of counterbalancing errors on profit or loss.
1. Inverse Relationship:
–if an account is understated, the related account is overstated.
2. Direct Relationship:
–If ending inventory is understated, profit is also understated.
RELATED PARTY TRANSACTIONS
–A related party transaction is a transfer of resources or obligations between
related parties, regardless of whether a price is charged.

Objectives Of PAS24: RELATED PARTY TRANSACTIONS

–to ensure that an entity's financial statements contain the disclosures necessary
to draw attention to the possibility that its financial position and profit or loss may
have been affected by the existence of related parties and by transactions and
outstanding balances, including commitments, with such parties.

RELATED PARTY
–Parties are considered to be related if one party has:
a. The ability to control the other party
b. The ability to exercise significant influence over the party
c. Joint control over the entity.

● Control
–is the power over the investee or the power to govern the financial and
operating policies of an entity so as to obtain benefits
● Significant influence
–is the power to participate in the financial and operating policy decisions of an
entity, but not control of those policies.
● Joint control
–is the contractually agreed sharing of control over an economic activity

EXAMPLE OF RELATED PARTIES:

1. Affiliates -meaning the parent, the subsidiary, and the fellow subsidiaries.
a. Parent –if an investor owns more than 50% of an investee, and the
investee is known as the subsidiary.

2. Associate –an entity over which one party (or the investor) has significant
influence.
–If an Investor owns at least 20% of the Investee
–includes the subsidiary or subsidiaries of the associate.

3. Venturers in a joint venture –because they have joint control of the

activities of the joint venture.
OTHER RELATED PARTIES:
1. KEY MANAGEMENT PERSONNEL
–those persons having authority and responsibility for planning, directing
and controlling the activities of the entity, directly or indirectly
2. Close Family members of Key Management Personnel
a. The Individual’s spouse and children
b. Children of the Individual’s spouse
c. Dependents of the individual or the individual’s spouse
3. Individuals or Shareholders owning at least 20% of reporting entity
–owning directly or indirectly an interest in the voting power of the
reporting entity that gives them significant influence over the entity.
And close family members of such individuals.
4. Post-employment Benefit Plan
–for the benefit of the employees of an entity, or any entity that is a related
party to that entity

Example of Related party transactions:

PAS 24, paragraph 20, provides the following examples of related party
transaction:

1. Purchase and Sale of Goods

2. Purchase and Sales of property and other asset.
3. Rendering or receiving services
4. Leases
5. Transfer of research and development
6. License agreement.
7. Finance arrangement, including loans and equity contributions in cash or
in kind
8. Guarantee and collateral
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of
another party

Related Party Disclosures

PAS 24, paragraph 12, requires disclosure of related party relationships where
control exists irrespective of whether there have been transactions between the
related parties
:
Disclosure of related party transaction:
 As a minimum, the disclosures of related party transactions shall include:

1. The amount of transaction

2. The amount of outstanding balance, terms and conditions, whether
secured or unsecured, and nature of consideration to be provided in
settlement
3. The allowance for doubtful accounts related to the outstanding
balance
4. The doubtful accounts expense recognized during the period in
respect of the amount due from related parties

KEY MANAGEMENT PERSONNEL COMPENSATION:

Pas 24, paragraph 16, provides that an entity shall disclose key management
personnel compensation in total and for each of the following categories:
(SPOTS)

a. SHORT-TERM EMPLOYEE BENEFITS

–example: salaries, bonuses, and monetary benefits–such as medical
care, housing, car, and free or subsidized goods
b. POST-EMPLOYMENT BENEFITS
–example: retirement pensions
c. OTHER LONG-TERM BENEFITS
–such as: long-term paid absences and long-term disability benefit
d. TERMINATION BENEFITS
—such separation or severance pay
e. SHARE BASED PAYMENT TRANSACTIONS
–for example: Share Options

UNRELATED PARTIES:
1. Two entities simply because they have a director or key management
personnel in common.
2. Providers of finance, trade unions, public utilities and government
agencies in the course of their normal dealings with an entity by virtue only of
those dealings.
3. A single customer, supplier, franchisor or general agent with whom an
entity transacts a significant volume of business merely by virtue of the normal
dealing with the reporting entity.
4. Two venturers simply because they share joint control over a joint venture.
 ● Fellow venturers are unrelated to each other but the
● venturers are related to the joint venture.

Related Party Disclosures not required:

Paragraph 4 provides that intragroup related party transactions and
outstanding balances are eliminated in the preparation of consolidated
financial statements of the group.

PAS 24, paragraph 3:

requires disclosure of related party transactions and outstanding balances in the
separate financial statements of a parent, subsidiary, associate or venture.

RELATED PARTY TRANSACTIONS: Pricing policies

–Accounting recognition of a transfer of resources is normally based on the price
agreed upon between the parties.

● Unrelated parties –the price is an arm's length price.

● Related parties –there may be a degree of flexibility in the price setting process
that is not present between unrelated parties
PAS 24 did not provide for the measurement of related party transactions. However, a
variety of methods is used to price transactions between related parties:
a. Uncontrolled price method
–This sets the price by reference to comparable goods sold in an
economically comparable market to a buyer unrelated to the seller.
b. Resale price method
–This method is often used where goods are transferred between related parties
before a sale to an independent party is made.
–reduces the resale price by a margin, representing an amount from which the
reseller would seek to recover costs and make an appropriate profit.
c. Cost plus method
–This method seeks to add an appropriate markup to the supplier's cost.
d. No price method
–Literally, no price is charged, as in the case of free provision of management
services and the extension of free credit on a debt.

EVENTS AFTER REPORTING PERIOD:

 –"those events, favorable and unfavorable, that occur between the end of the
reporting period and the date when the financial statements are authorized
for issue." (PAS 10.3)

The Date of Authorization:

–Financial statements are authorized for issue when the Board of Directors
reviews the FS and authorizes them issue.
● When an entity is required to submit its FS to the shareholders for
approval after the FS have been issued:
–The FS are authorized for issue on the date of issue by the
BOD.

TWO TYPES OF EVENTS AFTER REPORTING PERIOD:

a. Adjusting Events
–are those that provide evidence of conditions that exist at the end of the
reporting period.
–pre-existing events
b. Non Adjusting Events
–are those that are indicative of conditions that arise after the end of the
reporting period.

EXAMPLES OF ADJUSTING EVENTS:

1. Settlement after the reporting period of a court case because it confirms that
the entity already had a present obligation at the end of the reporting period.
2. Bankruptcy of a customer which occurs after the reporting period.
3. The determination after the reporting period of the cost of assets purchased
or the proceeds from assets sold before the end of reporting period.
4. The determination after the reporting period of the profit sharing or bonus
payment if the entity has the present obligation at the end of reporting period to
make such payment.
5. The discovery of fraud or errors that show the financial statements were
incorrect.

EXAMPLES OF NON ADJUSTING EVENTS:

1. Business combination after the reporting period.
2. Plan to discontinue an operation.
3. Major purchase and disposal of assets or expropriation of major assets by
the government.
4. Destruction of a major production plant by a fire after the reporting period.
 5. Major ordinary share transactions and potential ordinary share
transactions after the reporting period.
6. Announcing or commencing the implementation of a major restructuring.
7. Abnormally large changes after the reporting period in asset prices or
foreign exchange rates.
8. Entering into significant commitments or contingent liabilities, for example,
by issuing guarantees.
9. Commencing major litigation arising solely from events that occurred after
the reporting period.
10. Change in tax rate enacted or announced after the end of reporting period
that has a significant effect on current and deferred tax asset and liability.

Dividend
–Dividends declared after the reporting period are not recognized as liability at
the end of the reporting period because no present obligation exists at the end
of the reporting period.

Going concern
–PAS 10 prohibits the preparation of financial statements going concern basis if
management determines after the reporting period either that it intends to
liquidate the entity or to cease trading, or that it has no realistic alternative but to
do so.

The End of Reporting Period

–is the cutoff date for finalizing financial activities.

Events After the Reporting Period

–are significant occurrences between this date and when the financial statements
are authorized for issue.