PAS 8 - ACCOUNTING POLICIES, ACCOUNTING POLICIES, CHANGES...

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Unformatted text preview: ACCOUNTING POLICIES, ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES and ERRORS (PAS 8) MODULE OBJECTIVES MODULE OBJECTIVES ► Understand the bases for the development by an enterprise of accounting policies. ► Understand the nature of the change in accounting policies and their accounting treatment ► Define prior period errors and understand accounting treatment for their corrections ► Define changes in accounting estimates and their accounting treatment. ► Identify disclosure requirements relating to accounting policies, changes in accounting policies, changes in accounting estimates, and prior period errors. SCOPE SCOPE ► Applied in Selecting and applying accounting policies Accounting for changes in accounting policies Accounting for changes in accounting estimates Accounting for correction of prior period errors. ACCOUNTING POLICIES ACCOUNTING POLICIES ► Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. ► Examples: The use of FIFO method to measure the cost of inventory Measurement of accounts receivable at amortized BASES FOR APPLICATION OF BASES FOR APPLICATION OF ACCOUNTING POLICIES ► When a Standard or an Interpretation specifically applies to a transaction Apply the specific Standard or Interpretation and any Implementation Guidance ► In the absence of a Standard or an Interpretation Management shall develop its accounting policies that result to relevant and reliable information, considering (in descending order) ► The requirements and guidance of a Standard or Interpretation dealing with similar issues; ► The definitions, recognition criteria and measurement concepts in the Framework. ACCOUNTING CHANGES ACCOUNTING CHANGES ► CHANGE FOR AN ACCOUNTING TREATMENT FOR A CERTAIN ITEM OR TRANSACTION Change in Accounting Policies Change in Accounting Estimate Correction of Errors Let’s analyze them together… Let’s analyze them together… Change in Accounting DEFINITION; EXAMPLES Policies Correction of Prior Period Error Change in Accounting Estimates ACCOUTING TREATMENT k? CHANGE IN ACCOUNTING POLICY CHANGE IN ACCOUNTING POLICY Change from an accounting policy that is generally accepted to an accounting method that is generally accepted. Examples: Change from FIFO to weighted average to determine cost of inventory Change from expensing borrowing costs to capitalizing borrowing costs that meet the criteria for capitalization in under PAS 23. TYPES OF CHANGE TYPES OF CHANGE An entity shall change its accounting policy only if the change (a) is required by a Standard or an Interpretation (involuntary change) (b) results in the FS providing reliable and more relevant financial information about the enterprise. (voluntary change) NOT CHANGE IN ACCOUNTING POLICY NOT CHANGE IN ACCOUNTING POLICY The application of an accounting policy for transactions, other events, or conditions that differ in substance from those previously occurring; The application of a new accounting policy for transactions, other events, or conditions, that did not occur previously or were immaterial. ACCOUNTING TREATMENT ACCOUNTING TREATMENT INITIAL APPLICATION OF AN ACCOUNTING STANDARD • as provided in the transitional provision, if any; INITIAL APPLICATION OF AN ACCOUNTING STANDARD WITH NO TRANSITIONAL PROVISION AND VOLUNTARY CHANGE IN ACCOUNTING POLICY • Retrospectively, unless it is impracticable to do so. Retrospective application means that new policy is applied to transactions, other events, and conditions as if the policy has always been applied. RETROSPECTIVE APPLICATION RETROSPECTIVE APPLICATION The comparative financial statements of all prior years presented shall be restated as if the new policy had always been applied. The cumulative effect of change in accounting policy, net of applicable income tax, shall be treated as an adjustment to the beginning balance of retained earnings in the earliest prior period presented. LIMITATIONS OF RETROSPECTIVE LIMITATIONS OF RETROSPECTIVE APPLICATION Retrospective application of the change in accounting policy need not be made, if it is IMPRACTICABLE to do so. A procedure is considered impracticable if The effects of the retrospective application are not determinable; ► The retrospective application requires assumptions about what management’s intentions would have been at the time; ► The retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively, from other information, information about those estimates that provides evidence of circumstances that existed at that time and would have been available at that time. ► WHEN RETROSPECTIVE APPLICATION IS WHEN RETROSPECTIVE APPLICATION IS IMPRACTICABLE When it is impracticable to make retrospective application, the entity applies the change to the earliest period to which it is possible to apply the change, which normally is the beginning of the current period. mag­exercise po tayo… =) Let’s read and analyze Exercise A… DEFINITION; EXAMPLES DEFINITION; EXAMPLES PRIOR PERIOD ERRORS Omissions from, and misstatements in, financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available at the time and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of FS. CORRECTION OF PRIOR PERIOD ERRORS Occurrence of the error: Prior year(s) Year of discovery: Current year Examples Expensing an item of property, plant and equipment in a prior year. Omission of adjustment for accrual of an expense in a prior year. ACCOUNTING TREATMENT ACCOUNTING TREATMENT Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. RESTATEMENT OF PRIOR YEAR COMPARATIVE FINANCIAL STATEMENTS The comparative financial statements of all prior years presented shall be restated as if a prior period had never occurred. The cumulative effect of correction of prior period error(s) , net of applicable income tax, shall be treated as an adjustment to the beginning balance of retained earnings in the earliest prior period presented. mag­exercise po tayo… =) Let’s read and analyze Exercise B… DEFINITION; EXAMPLES DEFINITION; EXAMPLES CHANGE IN ACCOUNTING ESTIMATE An adjustment of the carrying amount of an asset or a liability, or the amount of 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. Examples: estimating a. bad debts b. inventory obsolescence c. the fair value of financial assets or liabilities d. the useful lives of, residual value of, or expected pattern of consumption of the future economic benefits of depreciable assets e. warranty obligations ACCOUNTING TREATMENT ACCOUNTING TREATMENT Prospective application means that the change is applied to transactions, other events and conditions from the date of the change in estimate. May affect only the current period’s profit or loss (examples a, b, c, e) ; or the profit or loss of both the current period and future periods (example d). NO restatement, adjustment of prior year figures. mag­exercise po tayo… =) Let’s read and analyze Exercise C… REQUIRED DISCLOSURES REQUIRED DISCLOSURES Change in Accounting Policies Correction of Prior Period Error Change in Accounting Estimates k? REQUIRED DISCLOSURES – CHANGE IN REQUIRED DISCLOSURES – CHANGE IN ACCOUNTING POLICY ► ► ► ► ► ► ► ► ► The title of the Standard or Interpretation If applicable, that the change is made in accordance with transitional provisions The nature of the change If applicable, a description of the transitional provisions If applicable, the transitional provisions that might have an effect on future periods The amount of the adjustment for each FS item for current and prior period presented The amount of the adjustment relating to periods before those presented (or the cumulative effect) If retrospective application is impracticable, the circumstances making it impracticable and the date from which the accounting policy has been applied. (in Voluntary change cases) A description of the reason why the new accounting policy would result to more relevant and reliable information. REQUIRED DISCLOSURES – REQUIRED DISCLOSURES – CORRECTION OF ERRORS The nature of the prior period error For each period presented, to the extent practicable, the amount of the correction: The amount of the correction at the beginning of the earliest prior period presented; and For each financial statement line item affected; For entities to which IAS 33 applies, for basic and diluted earnings per share. 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. REQUIRED DISCLOSURES – CHANGE IN REQUIRED DISCLOSURES – CHANGE IN ACCOUNTING ESTIMATE • An entity should disclose amounts and nature of changes in accounting estimates. In addition, it should also disclose changes relating to future periods, unless it is impracticable to determine the effects in the future periods. MODULE OBJECTIVES MODULE OBJECTIVES ► Understand the bases for the development by an enterprise of accounting policies. ► Understand the nature of the change in accounting policies and their accounting treatment ► Define prior period errors and understand accounting treatment for their corrections ► Define changes in accounting estimates and their accounting treatment. ► Identify disclosure requirements relating to accounting policies, changes in accounting policies, changes in accounting estimates, and prior period errors. Let’s have a break..­Take kitkat! L et’s ...
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This note was uploaded on 11/30/2011 for the course ECON 310 taught by Professor Johnsmith during the Spring '11 term at Kentucky.

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