CFAS CHAP 2, 3,4,5,6,7

Chapter 3: Reporting Financial Performance

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

Accounting Policies

  • Definition: Principles, bases, conventions, rules, and practices adopted in preparing and presenting financial statements.

Change in Accounting Estimate

  • Definition: Adjustment of carrying amounts of assets/liabilities or consumption of assets based on new information or developments.

  • Note: Not to be confused with corrections of errors.

Materiality

  • Definition: Omissions or misstatements of financial information are considered material if they could influence users’ economic decisions.

Prior Period Errors

  • Definition: Omissions or misstatements from prior financial statements resulting from the failure to use reliable information available when the statements were authorized. These may include:
      - Mathematical mistakes
      - Misapplications of accounting policies
      - Oversights
      - Misinterpretations
      - Fraud

Retrospective Application

  • Definition: The process of applying a new accounting policy as if it had always been used.

Retrospective Restatement

  • Definition: Correcting prior period errors as if they never occurred.

Treatment of Changes
Changes in Accounting Policies

  • Rule: Should be applied retrospectively unless impracticable.

  • Adjustment Requirement: Adjust opening balances of equity and comparative figures.

Changes in Accounting Estimates

  • Rule: Should be applied prospectively (affecting only current and future periods).

  • Example: Changing the useful life of machinery would affect depreciation calculations going forward.

Errors

  • Correction Method: Should be made by retrospective restatement, adjusting comparative figures and opening balances.

Big Picture Summary

  • Policies: Represent foundation rules for consistency in financial reporting.

  • Estimates: Involve adjustments based on new information and are future-oriented.

  • Errors: Focus on correcting past mistakes and are backward-looking.

  • Materiality: Plays a crucial role in determining whether changes or corrections are significant enough to warrant disclosure.

Prospective Application

  • Change in Accounting Policy (Prospective): The new policy applies only to transactions, events, and conditions after the date of change.

  • Change in Accounting Estimate (Prospective): Recognition of the effect of the change occurs in the current and affected future periods.

Key Insight

  • Prospective application prevents alteration of past financial statements; only future statements are impacted.

Impracticability

  • Definition: Applying a requirement is considered impracticable when, despite reasonable efforts, the entity cannot apply it. Situations rendering retrospective application or restatement impracticable include:
      1. Effects cannot be determined.
      2. Assumptions about past management intent are required.
      3. Distinguishing objectively between evidence of circumstances existing at the time and information available when prior statements were authorized.

  • Reminder: If retrospective application is impracticable, prospective application is required.

Accounting Policies Determination

  • Guidance: Apply relevant Philippine Financial Reporting Standards (PFRS) and Implementation Guidance.

  • **If no applicable PFRS exists