IA3: Module 4

a. Change of Accounting Policy

Accounting Changes

Change of PPE valuation method from cost model to revaluation model

a. Change of Accounting Policy

b. Change in Accounting Estimates

b. Change in Accounting Estimates

Accounting Changes

Change of depreciation method, useful life, and residual value

a. Change of Accounting Policy

b. Change in Accounting Estimates

b. Change in Accounting Estimates

Accounting Changes

Change of percentage of inventory obsolescence

a. Change of Accounting Policy

b. Change in Accounting Estimates

a. Change of Accounting Policy

Accounting Changes

Change from FIFO to weighted average

a. Change of Accounting Policy

b. Change in Accounting Estimates

a. Change of Accounting Policy

Accounting Changes

Change from LIFO to FIFO

a. Change of Accounting Policy

b. Change in Accounting Estimates

False

When a specific IFRS applies, it must be followed, not overridden by preference

Accounting Changes: Selection of an Accounting Policy

T or F

An entity may ignore a specific IFRS if management believes another method is more relevant.

True

Accounting Changes: Selection of an Accounting Policy

T or F

In the absence of a specific IFRS, management must rely on judgment to develop an accounting policy.

False

Relevance is about usefulness for economic decisions, not just compliance

Accounting Changes: Selection of an Accounting Policy

T or F

Relevance in accounting policy selection refers only to compliance with standards.

True

Accounting Changes: Selection of an Accounting Policy

T or F

Reliability includes neutrality and completeness in all material respects.

False

Substance over form is required, even without a specific IFRS

Accounting Changes: Selection of an Accounting Policy

T or F

Substance over form is not a requirement when developing accounting policies without an IFRS.

False

Prudence = caution, not deliberate bias (no intentional understatement/overstatement)

Accounting Changes: Selection of an Accounting Policy

T or F

Prudence implies deliberate overstatement of liabilities and understatement of assets.

True

Accounting Changes: Selection of an Accounting Policy

T or F

Faithful representation is a component of reliability.

False

Policies must be consistent unless IFRS allows categorization

Accounting Changes: Selection of an Accounting Policy

T or F

Accounting policies must always be applied uniformly, even if IFRS allows categorization.

Acceptable

• If one policy is not acceptable, it is not considered a policy change

• A change in accounting policy is only valid when shifting between two acceptable policies under IFRS

Accounting Changes: A Change in Accounting Policy

A change in accounting policy refers to a change from one accepted accounting policy to another ____ accounting policy

Correction

• Moving from an unacceptable to acceptable policy corrects a prior mistake.

• Therefore, it is treated as a correction of an error, not a change in accounting policy

Accounting Changes: A Change in Accounting Policy

A change from an unaccepted accounting policy to an acceptable accounting policy is treated as a ____ of an error.

IFRS; reliable; relevant

Changes are allowed only when

• Required by IFRS, or

• They improve reliability and relevance of financial information

These ensure better representation of

• Financial position

• Financial performance

• Cash flows

Accounting Changes: A Change in Accounting Policy

An entity shall change an accounting policy only if it is required by ______ or if it results in more _____ and _____ information in the financial statements.

Standards

• These changes are not governed by IAS 8 rules on accounting policy changes

• Instead, follow IAS 16 or IAS 38 directly

Accounting Changes: Scope of Accounting Changes in IAS 8

The change of accounting policy for PPE (IAS 16) or Intangible Assets (IAS 38) shall be accounted for in accordance with their respective _____

Transitional Provisions

• Always prioritize the IFRS guidance if it exists

• IAS 8 is only applied when no specific guidance is provided

Accounting Changes: Scope of Accounting Changes in IAS 8

When an IFRS provides specific transitional provisions, the change in accounting policy shall be accounted for in accordance with those _____

Retrospectively

Retrospective application means:

• Adjust prior period financial statements

• As if the new policy had always been applied

Accounting Changes: Scope of Accounting Changes in IAS 8

In the absence of transitional provisions or in voluntary changes, accounting policy changes shall be applied _____

True

Accounting Changes: Retrospective Application of Changes in Accounting Policies

T or F

The opening balance of affected equity accounts must be adjusted for the earliest period presented.

False

Comparative statements must be restated to show what the results would have been under the new policy

Accounting Changes: Retrospective Application of Changes in Accounting Policies

T or F

Comparative financial statements are left unchanged during retrospective application.

False

When effects cannot be determined, the policy is applied from the earliest period practicable, not just the current year

Accounting Changes: Retrospective Application of Changes in Accounting Policies

T or F

If period-specific effects cannot be determined, the entity applies the new policy from the current year only

False

IFRS allows impracticability exceptions, so exact computation is not always required.

Accounting Changes: Retrospective Application of Changes in Accounting Policies

T or F

Retrospective application always requires exact computation of all prior period effects.

True

Accounting Changes: Retrospective Application of Changes in Accounting Policies

T or F

When cumulative effects are impracticable to determine, the policy is applied prospectively from the earliest practicable date.

True

Accounting Changes: Application of Accounting Estimates

T or F

As a result of the uncertainties inherent in business activities, many items in the financial statements cannot be measured with precision but can only be estimated

b. They are corrected before the financial statements are authorized for issue.

Current period errors must be corrected before the financial statements are issued, since they are discovered in the same period they occur

Error Correction

Which of the following is TRUE regarding current period errors?

a. They are corrected in the subsequent period only.

b. They are corrected before the financial statements are authorized for issue.

c. They are never material and do not require correction.

d. They are always disclosed in the notes but not adjusted in the accounts.

c. Are corrected retrospectively in the comparative information.

Prior period errors are retrospectively corrected in the comparative information, ensuring consistency and comparability

Error Correction

Prior period errors:

a. Are corrected prospectively in the period discovered.

b. Must always be ignored if immaterial.

c. Are corrected retrospectively in the comparative information.

d. Are included in the current period profit or loss.

b. Restate the opening balances of assets, liabilities, and equity for the earliest prior period presented.

For errors before the earliest period presented, IFRS requires adjusting the opening balances of assets, liabilities, and equity to reflect what they should have been

Error Correction

Which is an appropriate method to correct a prior period error that occurred before the earliest period presented?

a. Restate only the current year’s income statement.

b. Restate the opening balances of assets, liabilities, and equity for the earliest prior period presented.

c. Disclose the error in the notes without adjusting any balances.

d. Apply the correction prospectively from the current period.

b. The correction is excluded from profit or loss of the period in which the error is discovered.

Prior period error corrections are excluded from the current period P/L to avoid distorting results; they are applied retrospectively to comparative figures

Error Correction

Which of the following is TRUE regarding the effect of prior period error corrections on profit or loss?

a. The correction is always recognized in the current period’s profit or loss.

b. The correction is excluded from profit or loss of the period in which the error is discovered.

c. The correction is split equally between current and prior period profit or loss.

d. The correction is recognized as a deferred adjustment to equity.

d. Recognition, measurement, presentation, or disclosure

IAS 8 identifies errors as arising from any aspect of financial statements: recognition, measurement, presentation, or disclosure.

Error Correction

Errors in financial statements can arise in which of the following areas?

a. Recognition only

b. Measurement only

c. Presentation and disclosure only

d. Recognition, measurement, presentation, or disclosure