PAS 8

PAS 8: Accounting Policies, Changes in Accounting Estimates and Errors

PAS 8, issued by the Philippine Accounting Standards Board (PASB), provides guidance on the selection, application, and changes in accounting policies, as well as the accounting and disclosure of changes in accounting estimates and the correction of errors. It aims to enhance the relevance, reliability, and comparability of financial statements.

1. Accounting Policies

- Definition: Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. They are the foundation of financial reporting, ensuring consistency and comparability across periods and entities.

- Selection and Application:

- Hierarchy: When selecting and applying accounting policies, an entity must refer to a hierarchy:

1. PFRSs: Philippine Financial Reporting Standards (PFRSs) take precedence.

2. Judgment: If no specific PFRS addresses a transaction, management must exercise judgment, considering:

- Requirements in other PFRSs dealing with similar transactions.

- Conceptual Framework.

- Pronouncements issued by other standard-setting bodies.

- Other accounting literature and industry practices.

- Consistency: PAS 8 emphasizes the importance of consistent application of accounting policies. Changes are only permitted if:

- Required by a PFRS: New or amended PFRSs may necessitate a change in accounting policy.

- Results in more reliable and relevant information: A change may be justified if it provides more reliable and relevant information, even if not explicitly required by a PFRS.

2. Changes in Accounting Policies

- Definition: A change in accounting policy refers to a change in the measurement basis or method used to account for a particular item.

- Examples:

- Changing from FIFO to weighted average cost for inventory valuation.

- Changing from the cost model to the fair value model for measuring investment property.

- Changing from the cost model to the revaluation model for measuring property, plant, and equipment.

- Changing the method of recognizing revenue from long-term construction contracts.

- Changing to a new policy due to a new PFRS requirement.

- Accounting Treatment:

- Transitional Provisions: If a PFRS provides specific transitional provisions for a change, those provisions take precedence.

- Retrospective Application: In the absence of transitional provisions, the change is typically accounted for retrospectively. This means adjusting the opening balance of equity for the earliest period presented and restating comparative amounts as if the new policy had always been applied.

- Prospective Application: If retrospective application is impracticable (e.g., due to unavailability of prior period information), the change is applied prospectively, recognizing the effects only from the date of change.

3. Changes in Accounting Estimates

- Definition: A change in accounting estimate is an adjustment to the carrying amount of an asset or liability, or the amount of periodic consumption of an asset, resulting from new information or developments. It reflects a revised assessment of the present status and future benefits or obligations associated with assets and liabilities.

- Examples:

- Changing the estimated useful life of a depreciable asset.

- Adjusting the allowance for doubtful debts based on new credit risk assessments.

- Revising estimated warranty obligations based on actual experience.

- Accounting Treatment: Changes in accounting estimates are accounted for prospectively, meaning the effects are recognized in the current and future periods affected. Previous financial statements are not restated.

4. Correction of Errors

- Definition: Errors include misapplications of accounting policies, mathematical mistakes, oversights, misinterpretations of facts, and fraud. They result in financial statements that do not comply with PFRSs.

- Types of Errors:

- Current Period Errors: Errors discovered during the current period or after the period but before financial statements are authorized for issue. These are corrected by adjusting entries in the current period.

- Prior Period Errors: Errors discovered in one or more prior periods that were only identified during the current period or after the period but before financial statements are authorized for issue. These are corrected by retrospective restatement.

- Retrospective Restatement: This involves restating comparative amounts for the prior periods in which the error occurred. If the error occurred before the earliest period presented, the opening balances of assets, liabilities, and equity are restated for the earliest period presented.

Key Points:

- Consistency: PAS 8 emphasizes the importance of consistent application of accounting policies.

- Retrospective vs. Prospective: Changes in accounting policies are generally accounted for retrospectively, while changes in accounting estimates are accounted for prospectively.

- Materiality: Errors are corrected based on their materiality. Material errors require retrospective restatement, while immaterial errors may be corrected prospectively.

- Disclosure: PAS 8 requires disclosures about changes in accounting policies, changes in accounting estimates, and corrections of errors.

Overall, PAS 8 provides a framework for ensuring that financial statements are prepared and presented in a consistent, reliable, and comparable manner. It helps companies navigate the complexities of accounting changes and errors, promoting transparency and accountability in financial reporting.