Podcast
Questions and Answers
Do changes in accounting estimates result in adjustments to retained earnings?
Do changes in accounting estimates result in adjustments to retained earnings?
No
When are changes in accounting estimates typically made?
When are changes in accounting estimates typically made?
At the end of the financial period
What type of impact do changes in accounting estimates have?
What type of impact do changes in accounting estimates have?
Current and prospective impact
How do changes in accounting estimates affect future financial periods?
How do changes in accounting estimates affect future financial periods?
Why is there no adjustment to retained earnings when accounting estimates change?
Why is there no adjustment to retained earnings when accounting estimates change?
Why might management consider the FIFO method to more accurately reflect the usage and flow of inventories in an economic cycle?
Why might management consider the FIFO method to more accurately reflect the usage and flow of inventories in an economic cycle?
In what year did the company decide to change its inventory valuation method to FIFO?
In what year did the company decide to change its inventory valuation method to FIFO?
What accounting method was the company using before switching to FIFO?
What accounting method was the company using before switching to FIFO?
How can changing the inventory valuation method to FIFO potentially affect the financial statements?
How can changing the inventory valuation method to FIFO potentially affect the financial statements?
Is it justified to change the accounting policy if it provides a more accurate reflection of inventory usage? Why?
Is it justified to change the accounting policy if it provides a more accurate reflection of inventory usage? Why?
What two primary characteristics must be considered when selecting an accounting policy?
What two primary characteristics must be considered when selecting an accounting policy?
What does it mean for financial statements to represent the economic substance of transactions?
What does it mean for financial statements to represent the economic substance of transactions?
Why is neutrality important in financial statements?
Why is neutrality important in financial statements?
What does prudence mean in the context of financial statements?
What does prudence mean in the context of financial statements?
Why must financial statements be complete in all material aspects?
Why must financial statements be complete in all material aspects?
Under what conditions can an entity change an accounting policy to provide more reliable and relevant information?
Under what conditions can an entity change an accounting policy to provide more reliable and relevant information?
Is an accounting policy change allowed if it is required by new legislation?
Is an accounting policy change allowed if it is required by new legislation?
Can an entity change its accounting policy simply because a type of transaction newly occurs in its business?
Can an entity change its accounting policy simply because a type of transaction newly occurs in its business?
What is not considered a change in accounting policy?
What is not considered a change in accounting policy?
What are the three main conditions under which an entity is permitted to change its accounting policy?
What are the three main conditions under which an entity is permitted to change its accounting policy?
How is a change in accounting policy required by a new IASB standard accounted for?
How is a change in accounting policy required by a new IASB standard accounted for?
What should an entity do if a new IASB pronouncement lacks specific transition provisions?
What should an entity do if a new IASB pronouncement lacks specific transition provisions?
Which two IAS standards are exceptions to the retrospective application of a change in accounting policy?
Which two IAS standards are exceptions to the retrospective application of a change in accounting policy?
What adjustment is required when a change in accounting policy is applied retrospectively?
What adjustment is required when a change in accounting policy is applied retrospectively?
What does 'retrospective application' of an accounting policy change entail?
What does 'retrospective application' of an accounting policy change entail?
What must an entity disclose when there is a change in an accounting estimate affecting the current period?
What must an entity disclose when there is a change in an accounting estimate affecting the current period?
Why is it important for an entity to disclose the nature and amount of a change in an accounting estimate expected to affect future periods?
Why is it important for an entity to disclose the nature and amount of a change in an accounting estimate expected to affect future periods?
What should an entity do if it is impracticable to estimate the effect of an accounting estimate change on future periods?
What should an entity do if it is impracticable to estimate the effect of an accounting estimate change on future periods?
Can an entity avoid disclosing the effect of a change in accounting estimates on future periods? If so, under what condition?
Can an entity avoid disclosing the effect of a change in accounting estimates on future periods? If so, under what condition?
How does disclosing changes in accounting estimates impact financial statement users?
How does disclosing changes in accounting estimates impact financial statement users?
How should a change in an accounting estimate be recognized if it affects both the current period and future periods?
How should a change in an accounting estimate be recognized if it affects both the current period and future periods?
Name two examples of changes in accounting estimates.
Name two examples of changes in accounting estimates.
What action is required if a change in an accounting estimate results in a change in the carrying amount of an asset?
What action is required if a change in an accounting estimate results in a change in the carrying amount of an asset?
Define how changes in an accounting estimate are treated if they only affect the current period.
Define how changes in an accounting estimate are treated if they only affect the current period.
What happens to an item of equity if it is affected by a change in an accounting estimate?
What happens to an item of equity if it is affected by a change in an accounting estimate?
What should an entity do when selecting and applying its accounting policies for similar transactions?
What should an entity do when selecting and applying its accounting policies for similar transactions?
Under what condition can different accounting policies be applied to different items?
Under what condition can different accounting policies be applied to different items?
If a categorization is permitted by a Standard or an Interpretation, what must the entity do in terms of accounting policies?
If a categorization is permitted by a Standard or an Interpretation, what must the entity do in terms of accounting policies?
Describe the importance of consistent application of accounting policies.
Describe the importance of consistent application of accounting policies.
How should an entity approach accounting policies if no specific categorization is required by a Standard or Interpretation?
How should an entity approach accounting policies if no specific categorization is required by a Standard or Interpretation?
What should be disclosed about the standard or interpretation causing a change in accounting policy?
What should be disclosed about the standard or interpretation causing a change in accounting policy?
How should the nature of the change in accounting policy be described?
How should the nature of the change in accounting policy be described?
What information must be provided concerning transitional provisions when an accounting policy change occurs?
What information must be provided concerning transitional provisions when an accounting policy change occurs?
What should be disclosed if retrospective application of an accounting policy change is impracticable?
What should be disclosed if retrospective application of an accounting policy change is impracticable?
What adjustment figures must be disclosed for the current and prior periods when an accounting policy changes?
What adjustment figures must be disclosed for the current and prior periods when an accounting policy changes?
What constitutes prior period errors according to the key definitions?
What constitutes prior period errors according to the key definitions?
How is a change in accounting estimate defined?
How is a change in accounting estimate defined?
What are accounting policies?
What are accounting policies?
Why might prior period errors occur?
Why might prior period errors occur?
What is the outcome of a change in accounting estimate?
What is the outcome of a change in accounting estimate?
Study Notes
Changes in Accounting Estimates
- No adjustment of retained earnings is required, as changes have a current and prospective impact in future periods.
Changes of Accounting Policies
- An entity can change an accounting policy only if:
- required by a standard or interpretation
- necessitated by legislation
- provides more reliable and relevant information about financial position, performance, or cash flows
- Changes do not include applying an accounting policy to new transactions or events that did not occur previously or were immaterial.
Accounting Policies
- When selecting an accounting policy, consider its appropriateness in producing information that is:
- relevant to economic decision-making needs of users
- reliable, neutral, prudent, and complete in all material aspects
Accounting Treatment
- If a change in accounting policy is required by a new IASB standard or interpretation:
- apply retrospectively, changing current and previous years' figures (except for IAS 16 and IAS 38)
- requires adjustment of retained earnings
Disclosures Relating to Changes in Accounting Estimates
- Disclose:
- the nature and amount of a change in an accounting estimate that has an effect in the current period or future periods
- if the amount of the effect in future periods is not disclosed because estimating it is impracticable
Changes in Accounting Estimates
- A change in an accounting estimate is recognized prospectively by including it in profit or loss:
- in the period of the change, if it affects that period only
- in the period of the change and future periods, if it affects both
- Examples: depreciation method, provision for bad debt, determining net realisable value of inventory
Disclosures Relating to Changes in Accounting Policies
- Disclose:
- the title of the standard or interpretation causing the change
- the nature of the change in accounting policy
- transitional provisions, including those that might have an effect on future periods
- the amount of the adjustment for the current period and each prior period presented, to the extent practicable
Consistency of Accounting Policies
- An entity shall select and apply its accounting policies consistently for similar transactions, other events, and conditions, unless a Standard or an Interpretation specifically requires or permits categorization.
Key Definitions
- Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
- A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
- Prior period errors are omissions from and misstatements in an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz covers changes in accounting estimates, which are adjustments made at the end of a financial period that affect current and future periods. It does not involve adjustments to retained earnings. Test your understanding of these changes and their impact on financial reporting.
