Accounting Policies, changes in accounting estimates and Errors

Question 1

Accounting policy

Answer 1

Adoption of specific principles, bases, conventions, rules and practices by entity when preparing & presenting
financial statements

Question 2

Changes in accounting policies

Answer 2

take place only if:
1.1 t is required by a Standard or an Interpretation; or

  1.2 the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

Question 3

Why do changes in accounting policies rarely occur

Answer 3

They are not expected to occur often as it negates the goal of comparable financial statements that the enhancing qualitative characteristics requires of entities.

Question 4

When are changes in accounting policies applied

Answer 4

1. retrospectively
2. this means that financial statements are adjusted to show the new accounting policy being applied to transactions as if the new accounting policy had always been in use.
3. Therefore, the financial statements, including the comparative amounts, would need to be adjusted to reflect the new policy

Question 5

Estimate

Answer 5

Estimation involves judgements by management based on the latest reliable information that is available when
the financial statements are prepared

professional judgment is required in the drafting of financial statements.

The exercise of judgement may prove to have been incorrect at a later date but this does not imply that an error was made.

Question 6

change in accounting estimate

Answer 6

occur in the form of an adjustment of the carrying amount of the asset or the liability or where there is an adjustment to the periodic consumption of an asset

The preparer of the financial statements merely used the information available at the date of the estimate with reasonable care, in order to come to a conclusion that was proved over time to be incorrect

Question 7

when do change in accounting estimate

Answer 7

prospectively.

This means that the effect of the change will be adjusted for in the current and future periods.

Prior periods will not be adjusted

Question 8

Prior period error

Answer 8

1. Are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use (or misuse) reliable information that
   1.1. was available when the financial statements for those periods were authorized for issue and

     1.2. could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Question 9

Prior period errors examples

Answer 9

1. the effects of mathematical mistakes,
2. mistakes in applying accounting policies,
3. oversights or misinterpretations of facts, and
4. fraud.

Question 10

When are prior period omissions or misstatements of items is MATERIAL

Answer 10

if it could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.

materiality depends on the size and/or nature of the omission or misstatement judged in the surrounding circumstances

Question 11

How are prior period corrected

Answer 11

corrected retrospectively and therefore comparative amounts for the prior period presented in which the error occurred should be restated