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22-1
C H A P T E RC H A P T E R 88
MFRS 108 CHANGES IN ACCOUNTINGMFRS 108 CHANGES IN ACCOUNTING
POLICIES, ESTIMATIONS ANDPOLICIES, ESTIMATIONS AND
CORRECTION OF ERRORSCORRECTION OF ERRORS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

22-2
1. Identify the two types of accounting changes.
2. Describe the accounting for changes in accounting policies.
3. Understand how to account for retrospective accounting changes.
4. Understand how to account for impracticable changes.
5. Describe the accounting for changes in estimates.
6. Describe the accounting for correction of errors.
7. Identify economic motives for changing accounting policies.
8. Analyze the effect of errors.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

22-3
Changes in accounting
policy
Changes in accounting
estimate
Correction of errors
Summary
Motivations for change of
policy
Accounting Changes Error Analysis
Statement of financial
position errors
Income statement errors
Statement of financial
position and income
statement effects
Comprehensive example
Preparation of statements
with error corrections
Accounting Changes and Error AnalysisAccounting Changes and Error AnalysisAccounting Changes and Error AnalysisAccounting Changes and Error Analysis

22-4
Types of Accounting Changes:
1. Change in Accounting Policy.
2. Changes in Accounting Estimate.
Errors are not considered an accounting change.
LO 1 Identify the two types of accounting changes.
Accounting Alternatives:
 Diminish the comparability of financial information.
 Obscure useful historical trend data.
Accounting ChangesAccounting ChangesAccounting ChangesAccounting Changes

22-5
Changes in Accounting PolicyChanges in Accounting Policy
Accounting policies define as ‘specific principles’ bases,Accounting policies define as ‘specific principles’ bases,
conventions, rules and practices applied by an entity in preparingconventions, rules and practices applied by an entity in preparing
and presenting financial statements.and presenting financial statements.
An entity is only allowed to change its accounting policy underAn entity is only allowed to change its accounting policy under
one of the following two circumstances:one of the following two circumstances:
Initial application of a standard or interpretationInitial application of a standard or interpretation
The change is required by a standard or an interpretation.The change is required by a standard or an interpretation.
Voluntary changeVoluntary change
The change results in the financial statements providingThe change results in the financial statements providing
reliable and more relevant information about the effects ofreliable and more relevant information about the effects of
transactions, other events or conditions on the entity’s financialtransactions, other events or conditions on the entity’s financial
position, financial performance or cash flows.position, financial performance or cash flows.

22-6
 Average cost to LIFO.
 Completed-contract to percentage-of-completion.
Change from one accepted accounting policy to another.
Examples include:
Changes in Accounting PolicyChanges in Accounting PolicyChanges in Accounting PolicyChanges in Accounting Policy
LO 2 Describe the accounting for changes in accounting policies.
Adoption of a new policy in recognition of events that have occurred for
the first time or that were previously immaterial is not an accounting
change.

22-7
Three approaches for reporting changes:
1) Currently.
2) Retrospectively.
3) Prospectively (in the future).
IASB requires use of the retrospective approach.
Rationale - Users can then better compare results from one period to
the next.
LO 2 Describe the accounting for changes in accounting policies.

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Retrospective Accounting Change Approach
LO 3 Understand how to account for retrospective accounting changes.
IFRS permits a change in policy if:
1) It is required by IFRS; or
2) It results in the financial statements providing more
reliable and relevant information.

22-9
Retrospective Accounting Change Approach
Company reporting the change
1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting
policy.
2) Adjusts the carrying amounts of assets and liabilities as
of the beginning of the first year presented, plus the
opening balance of retained earnings.

22-10
Illustration: Denson Company has accounted for its income from
long-term construction contracts using the cost-recovery (zero-
profit) method. In 2011, the company changed to the percentage-
of-completion method. Management believes this approach
provides a more appropriate measure of the income earned. For
tax purposes, the company uses the cost-recovery method and
plans to continue doing so in the future. (Assume a 40 percent
enacted tax rate.)
Retrospective Accounting Change: Long-Term Contracts

22-11
Illustration 22-1

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MethodMethod
1.1. Get the Difference Pre- Income B/4 TaxGet the Difference Pre- Income B/4 Tax
before 2011and year 2011 under two methodbefore 2011and year 2011 under two method
2.2. Difference amount x tax rate 40%Difference amount x tax rate 40%
3.3. Journal entries beginning 2011Journal entries beginning 2011
Dr CIP 220,000 Cr Deferred tax 88,000 CrDr CIP 220,000 Cr Deferred tax 88,000 Cr
Retained earningsRetained earnings

22-13
Data for Retrospective Change
Illustration 22-2
Construction in Process 220,000
Deferred Tax Liability 88,000
Retained Earnings 132,000
Journal entry
beginning of
2010

22-14
Reporting a Change in policy
Major disclosure requirements are as follows.
1. Nature of the change in accounting policy;
2. Reasons why applying the new accounting policy provides reliable
and more relevant information;
3. For the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
1. For each financial statement line (Tutorial 2) item
affected; and
2. Basic and diluted earnings per share.
4. Amount of the adjustment relating to periods before those
presented, to the extent practicable.

22-15
LO 3
Illustration 22-3
Reporting a Change in policy

22-16
Retained Earnings Adjustment
Illustration 22-4
Retained earnings balance is €1,360,000 at the beginning of 2009.
Before Change

22-17
Illustration 22-5
After Change
Retained Earnings Adjustment

22-18
Retained Earnings After RetrospectiveRetained Earnings After Retrospective
ApplicationApplication
 Eg 2011 and 2010 Financial StatementsEg 2011 and 2010 Financial Statements
 20102010
2011 2010
Closing 2009 RE (OLD Policy)
Or Opening RE 2010 (OLD
Policy)
Add / Less (Diff of Net Income
Btw Old and New Policy)
New Policy RE of 2010
(Closing)
Net Income (New
Policy)
Closing Retained
Earnings
(New Policy)

22-19 LO 3 Understand how to account for retrospective accounting changes.
 Direct Effects - IASB takes the position that companies
should retrospectively apply the direct effects of a
change in accounting policy.
 Indirect Effect is any change to current or future cash
flows of a company that result from making a change in
accounting policy that is applied retrospectively.
Direct and Indirect Effects of Changes

22-20
Impracticability
LO 4 Understand how to account for impracticable changes.
Companies should not use retrospective application if one of the
following conditions exists:
1. Company cannot determine the effects of the retrospective
application.
2. Retrospective application requires assumptions about
management’s intent in a prior period.
3. Retrospective application requires significant estimates
that the company cannot develop.

22-21
Changes in EstimatesChanges in Estimates
 Many items in the financial statements are estimated.
Estimation involves judgment based on the most recent
available information that is reliable. These estimates may have
to be revised due to changes business activities.
 Revision of an estimate is called changes in estimates.
 Accounting estimates will change as new events occur, as
more experience is acquired, or new information is obtained.
Changes in estimates are handled prospectively; that is, in
current and future periods. No restatement of previous
financial statement is made.

22-22
Changes in Accounting EstimateChanges in Accounting EstimateChanges in Accounting EstimateChanges in Accounting Estimate
LO 5 Describe the accounting for changes in estimates.
Examples of Estimates
1. Bad debts.
2. Inventory obsolescence.
3. Useful lives and residual values of assets.
4. Periods benefited by deferred costs.
5. Liabilities for warranty costs and income taxes.
6. Recoverable mineral reserves.
7. Change in depreciation methods.
8. Fair value of financial assets or financial liabilities.

22-23
Prospective Reporting
Changes in accounting estimates are reported prospectively.
Account for changes in estimates in
1. the period of change if the change affects that period only,
or
2. the period of change and future periods if the change
affects both.
IASB views changes in estimates as normal recurring corrections
and adjustments and prohibits retrospective treatment.

22-24
Prospective ReportingProspective Reporting
 Companies should not adjust previouslyCompanies should not adjust previously
reported results for changes in estimates.reported results for changes in estimates.

22-25
Illustration: Arcadia High School purchased equipment for
$510,000 which was estimated to have a useful life of 10 years
with a salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line
basis. In 2010 (year 8), it is determined that the total estimated life
should be 15 years with a salvage value of $5,000 at the end of
that time.
Required:
 What is the journal entry to correct
prior years’ depreciation expense?
 Calculate depreciation expense for 2010.
No EntryNo Entry
RequiredRequired
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example

22-26
Equipment $510,000
Fixed Assets:
Accumulated depreciation 350,000
Net book value (NBV) $160,000
Balance Sheet (Dec. 31, 2009)
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example After 7 years
Equipment cost $510,000
Salvage value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
First, establish NBV
at date of change in
estimate.
First, establish NBV
at date of change in
estimate.

22-27
Net book value $160,000
Salvage value (if any) 5,000
Depreciable base 155,000
Useful life (15-7 yrs) 8 years
Annual depreciation $ 19,375
Change in Estimate ExampleChange in Estimate ExampleChange in Estimate ExampleChange in Estimate Example
Second, calculateSecond, calculate
depreciation expensedepreciation expense
for 2010.for 2010.
Second, calculateSecond, calculate
depreciation expensedepreciation expense
for 2010.for 2010.
Depreciation expense 19,375
Journal entry for 2010

22-28
Disclosures
Companies should disclose the nature and amount of a
change in an accounting estimate that has an effect in the
current period or is expected to have an effect in future periods.
Companies need not disclose changes in accounting estimate
made as part of normal operations, such as bad debt
allowances or inventory obsolescence, unless such changes are
material.

22-29
ErrorsErrors
 FRS 108 defines prior period errors as ‘omissionsFRS 108 defines prior period errors as ‘omissions
from, and misstatements in the entity’s financialfrom, and misstatements in the entity’s financial
statements for one or more prior periods arisingstatements for one or more prior periods arising
from a failure to use, or misuse of, reliablefrom a failure to use, or misuse of, reliable
information. A prior period error has to be correctedinformation. A prior period error has to be corrected
by retrospective restatement.by retrospective restatement.
 Types of errorsTypes of errors
1.1. Mathematical mistakesMathematical mistakes
2.2. Misclassification of expensesMisclassification of expenses
3.3. Misuse of factsMisuse of facts
4.4. An oversightAn oversight
5.5. Any changes in accounting policy against GAAPAny changes in accounting policy against GAAP

22-30
Correction of ErrorsCorrection of ErrorsCorrection of ErrorsCorrection of Errors
LO 6 Describe the accounting for correction of errors.
Types of Accounting Errors:
1. A change from an accounting policy that is not generally
accepted to an accounting policy that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. Failure to accrue or defer certain expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.

22-31
Correction of Errors (ImportantCorrection of Errors (Important) ***) ***Correction of Errors (ImportantCorrection of Errors (Important) ***) ***
 All material errors must be corrected.
 Record corrections of errors from prior periods as an
adjustment to the beginning balance of retained
earnings in the current period.
 Such corrections are called prior period adjustments.
 For comparative statements, a company should
restate the prior statements affected, to correct for
the error.

22-32
Comparative Statements
Company should
1. make adjustments to correct the amounts for all affected
accounts reported in the statements for all periods
reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest period it
reported.

22-33
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1 1,050,000$
Net income 360,000
Dividends (300,000)
Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2010, you discover
a $62,500 error that caused the 2009 inventory to be overstated (overstated
inventory caused COGS to be lower and thus net income to be higher in
2009). Would this discovery have any impact on the reporting of the
Statement of Retained Earnings for 2010? Assume a 20% tax rate.

22-34
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2010
Balance, January 1, as previously reported 1,050,000$
Prior period adjustment, net of tax (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 1,060,000$

22-35
Retained Earnings (RE) – Error in yearRetained Earnings (RE) – Error in year
20092009
2010 2009
RE 2009 Closing (Before
Error Adj)
Less : Add Error
Retained earnings (RE)
Closing 2009
(After adjustment)
RE 2009 Opening (2008
RE Closing)
Net Income Net Income
(After Adj error)
(Dividend) (Dividend)
Retained Earnings
2010 (Closing)
Retained earning Closing
2009
(After adjustment)

22-36
Summary of Accounting Changes and ErrorsSummary of Accounting Changes and ErrorsSummary of Accounting Changes and ErrorsSummary of Accounting Changes and Errors
Illustration 22-23
LO 6

22-37
E22-19 (Error Analysis; Correcting Entries): A partial trial balance of
Dickinson Corporation is as follows on December 31, 2010.
Error Analysis ExampleError Analysis ExampleError Analysis ExampleError Analysis Example
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
Interest receivable 5,100
Prepaid insurance 90,000
Unearned rent 0
Accured interest payable 15,000
LO 8 Analyze the effect of errors.
Instructions: (a) Assuming that the books have not been closed, what are
the adjusting entries necessary at December 31, 2010?

22-38
Salaries and wages expense 2,900
Accured salaries and wages 2,900
Supplies expense 1,400
Supplies on hand 1,400
1. A physical count of supplies on hand on December 31, 2010, totaled
$1,100.
2. Accrued salaries and wages on December 31, 2010, amounted to
$4,400.
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2010?

22-39
Interest revenue 750
Interest receivable 750
Insurance expense 25,000
3. Accrued interest on investments amounts to $4,350 on December 31,
2010.
4. The unexpired portions of the insurance policies totaled $65,000 as
of December 31, 2010.

22-40
Depreciation expense 45,000
5. $24,000 was received on January 1, 2010 for the rent of a building for
both 2010 and 2011. The entire amount was credited to rental
income.
6. Depreciation for the year was erroneously recorded as $5,000 rather
than the correct figure of $50,000.
Retained earnings 12,000
Unearned rent 12,000

22-41
E22-19 (Error Analysis; Correcting Entries) A partial trial balance of
Dickinson Corporation is as follows on December 31, 2010.
Instructions: (b) Assuming that the books have been closed, what are
the adjusting entries necessary at December 31, 2010?
Dr. Cr.
Supplies on hand 2,500$
Accured salaries and wages 1,500$
Interest receivable 5,100
Unearned rent 0
Accured interest payable 15,000

22-42
Accured salaries and wages 2,900
Supplies on hand 1,400
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2010?
1. A physical count of supplies on hand on December 31, 2010, totaled
$1,400.
2. Accrued salaries and wages on December 31, 2010, amounted to
$4,400.

22-43
Retained earnings 750
Interest receivable 750
3. Accrued interest on investments amounts to $4,350 on December 31,
2010.
4. The unexpired portions of the insurance policies totaled $65,000 as
of December 31, 2010.
(b) Assuming that the books have been closed, what are the adjusting
entries necessary at December 31, 2010?

22-44
Unearned rent 12,000
5. $24,000 was received on January 1, 2010 for the rent of a
building for both 2010 and 2011. The entire amount was credited
to rental income.
6. Depreciation for the year was erroneously recorded as $5,000
rather than the correct figure of $50,000.
(b) Assuming that the books have been closed, what are the

22-45
FRS 108FRS 108
AccountingAccounting
Policies,Policies,
Changes inChanges in
AccountingAccounting
Estimates andEstimates and
ErrorsErrors

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