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Accounting changes and Error correction (pas 8) - Coggle Diagram
Accounting changes and Error correction (pas 8)
Accounting changes
Accounting policies
Definition
specific principles, bases, conventions, rules and practices applied by an entity in preparing FS
when retrospectively applying new accounting policy or correcting a prior period error an entity must distinguish that:
provides evidence of circumstances that existed on date/s or which transaction/event
would have been available when the FS for that prior were authorized for issue
Examples
new policy because of new PFRS
change in fin. reporting framework such as PFRS for SMEs to full PFRS
initial adoption of revaluation model for PPE and intangible assets
method of recognizing revenue from long term construction contract
cost model to fv model of measuring investment property
business model for classifying fin. assets resulting to reclassification between financial asset categories
from FIFO to average cost formula
GN: retrospectively, XPN:
required by IFRS, transitional provisions
impracticable to determine either period specific effect or cumulative effect of change, in this case, apply prospectively for earliest period applicable
Accounting estimates
definition
monetary amounts in FS that are subject to measurement uncertainty
if it is difficult to distinguish a change in accounting policy from change in estimate, choose accounting estimate
affects P/L in current or future period
arises from new info. /new developments/retirement of previous estimates as new facts become known
not a correction of error, because estimate is based on best avalable info.
examples
estimated residual values
required allowances for impairment losses and uncollectible accounts
useful lives
FVLCTS on NCA held for sale and biological assets
change in dep'n or amortization methods
currency exchange rates for foreign currency denominator cash and receivables
some notes
entity shall change in accounting policy only if
required by PFRS; or
results to a more relevant and reliable info about entity's FS
Correction of errors
error vs. fraud
error - UNINTENTIONAL mistatement in FS including omission of an amount or a disclosure
incorrect accounting estimate arising from misinterpretation of facts
application of accounting principles
gathering and processing data
fraud - INTENTIONAL
Types of errors
as to period of occurence
current period errors
if discovered after reporting date but before FS are authorized for issue, should be corrected as adjusting events after reporting date
if open pa nominal accounts, pwede pa galawing, but if hindi na -- if sa RE and effect then sa RE na siya gagalawin
prior period error
(e.g mathematical mistales, mistakes in applying AP, misinterpretation of facts, fraud) from one or more period arising from failure to use or misuse of reliable info. that
was available when FS are authorized for issue; AND
could reasonably be expected to have been obtained and taken into account in preparation of FS
accounting treatment
correct retrospectively (as if prior period errors had never occured) in the first set of FS authorized for issue after discovery by
restating comparative amounts for prior periods presented which error occured; OR
if error occurred before the earliest period presented, restating the opening balances of ALE for earliest period presented
limitations
if impracticable to determine period specific effects, entity shall restate opening balances of ALE for earliest period for which retrospective restatement is practicable
as to element affected
SFP or BS error
if error discovered in error year, company reclassifies the item to proper position
if error in prior year is discovered in substantive period, restate the SFP in prior year for comparative purposes
real accounts
Income statement errors
nominal accounts
reclassification also if discovered in error year
if discovered pertains prior year, restated the income statement in prior year for comparative purposes
NI and RE DURING PERIOD ARE UNAFFECTED (if involved 2 nominal accounts (is itataas, is ibababa = no effect))
combined SFP and IS error
counterbalancing errors - error that will offset/be corrected over TWO accounting periods
omission of
accrued expense
deferred income (pre-collection, revenue method)
deferred expense (prepayment, expense method)
accrued income
over/understatement of
purchases not recorded in 1st year and subsequently recorded in following year or vice cersa
affecting ending inventory
sales not recorded 1st year and subsequently recorded following year or vice versa
non-counterbalancing - errors that do not offset in next accounting period. therefore, companies make correcting entries, even if they have closed the books
e.g
error in recording dep'n
improper capitalization of expense
pre-collection under liab. method
improper expensing of cap. expenditures
prepayment under asset method
errors in recording proceeds of sale of asset as other income