PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Objective and Scope

PAS 8 prescribes the criteria for selecting, applying, and changing accounting policies and the
accounting and disclosure of changes in accounting policies, changes in accounting estimates
and correction of prior period errors.

Accounting policies
• Accounting policies are “the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.” (PAS 8.5)
• Accounting policies are the relevant PFRSs adopted by an entity in preparing and presenting its
financial statements

PFRSs
• Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted
by the Financial Reporting Standards Council (FRSC). They comprise the following:
1. Philippine Financial Reporting Standards (PFRSs);
2. Philippine Accounting Standards (PASs); and
3. Interpretations
• When it is difficult to distinguish a change in accounting policy from a change in accounting
estimate, the change is treated as a change in an accounting estimate.

• An entity shall change an accounting policy only if the change:

1. is required by a PFRS; or
2. results to a more relevant and reliable information about an entity’s financial position,
performance, and cash flows.

Examples of changes in accounting policy

1. Change from FIFO cost formula for inventories to the Average cost formula.
2. Change in the method of recognizing revenue from long-term construction contracts.
3. Change to a new policy resulting from the requirement of a new PFRS.
4. Change in financial reporting framework, such as from PFRS for SMEs to full PFRSs.
5. Initial adoption of the revaluation model for property, plant, and equipment and intangible assets.
6. Change from the cost model to the fair value model of measuring investment property.
7. Change in business model for classifying financial assets resulting to reclassification between
financial asset categories.

Examples of changes in accounting estimate

1. Change in depreciation or amortization methods
2. Change in estimated useful lives of depreciable assets
3. Change in estimated residual values of depreciable assets
4. Change in required allowances for impairment losses and uncollectible accounts
5. Changes in fair values less cost to sell of non-current assets held for sale and biological assets

Errors
• Errors include the effects of:
1. Mathematical mistakes
2. Mistakes in applying accounting policies
3. Oversights or misinterpretations of facts; and
4. Fraud
PAS 10 Events after the Reporting Period

Events after the Reporting Period

• Events after the reporting period are “those events, favorable or unfavorable, that occur
between the end of the reporting period and the date that the financial statements are
authorized for issue.” (PAS 10)

Two types of events after the reporting period

1. Adjusting events after the reporting period – are those that provide evidence of conditions that
existed at the end of the reporting period.
2. Non-adjusting events after the reporting period – those that are indicative of conditions that
arose after the reporting period

Date of authorization of the financial statements

• This date is the date when management authorizes the financial statements for issue
regardless of whether such authorization for issue is for further approval or for final issuance to
users.

Examples of adjusting events:

1. The settlement after the reporting period of a court case that confirms that the entity has a present
obligation at the end of reporting period.
2. The receipt of information after the reporting period indicating that an asset was impaired at the
end of reporting period. For example:
i. The bankruptcy of a customer that occurs after the reporting period may indicate that the
carrying amount of a trade receivable at the end of reporting period is impaired.
ii. The sale of inventories after the reporting period may give evidence to their net realizable
value at the end of reporting period
3. The determination after the reporting period of the cost of asset purchased, or the proceeds from
asset sold, before the end of reporting period.
4. The discovery of fraud or errors that indicate that the financial statements are incorrect.

Examples of non-adjusting events normally requiring disclosures:

1. Changes in fair values, foreign exchange rates, interest rates or market prices after the reporting
period.
2. Casualty losses (e.g., fire, storm, or earthquake) occurring after the reporting period but before the
financial statements were authorized for issue.
3. Litigation arising solely from events occurring after the reporting period.
4. Major ordinary share transactions and potential ordinary share transactions after the reporting
period.
5. Major business combination after the reporting period.
6. Announcing a plan to discontinue an operation after the reporting period.
7. Declaration of dividends after the reporting period

Disclosures
• Date of authorization for issue
• Adjusting events
• Material Non-adjusting events
PAS 16 Property, Plant and Equipment

Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in the production or supply of goods or
services, for rental, or for administrative purposes
c. Long-term in nature – items of PPE are expected to be used from more than a year

Examples of items of PPE

a. Land used in business
b. Land held for future plant site
c. Building used in business
d. Equipment used in the production of goods
e. Equipment held for environmental and safety reasons
f. Equipment held for rentals
g. Major spare parts and long-lived stand-by equipment
h. Furniture and fixture
i. Bearer plants

Recognition
The cost of an item of property, plant and equipment shall be recognized as an asset only if:
a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.

Initial measurement
• An item of PPE is initially measured at its cost
.
Elements of Cost
1. Purchase price, including non-refundable purchase taxes, after deducting trade discounts and
rebates.
2. Costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by the management.
3. Present value of decommissioning and restoration costs to the extent that they are
recognized as obligation

Examples of directly attributable costs

• Costs of employee benefits arising directly from the construction or acquisition of PPE;
• Costs of site preparation;
• Initial delivery and handling costs (e.g., freight costs);
• Installation and assembly costs;
• Testing costs, net of disposal proceeds of samples generated during testing; and
• Professional fees.

Cessation of capitalizing costs to PPE

• Recognition of costs in the carrying amount of an item of PPE ceases when the item is in the
location and condition necessary for it to be capable of operating in the manner intended by
management.
Measurement of Cost
• The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is
deferred beyond normal credit terms, the difference between the cash price equivalent and the
total payment is recognized as interest over the period of credit unless such interest is capitalized
in accordance with PAS 23 Borrowing Costs.

Acquisition through exchange

• If the exchange has commercial substance, the asset received from the exchange is measured
using the following order of priority:
a. Fair value of asset Given up
b. Fair value of asset Received
c. Carrying amount of asset Given up
• If the exchange lacks commercial substance, the asset received from the exchange is measured
at (c) above.

Subsequent measurement
• Subsequent to initial recognition, an entity shall choose either:
(a) the cost model or
(b) the revaluation model
as its accounting policy and shall apply that policy to an entire class of PPE.
Cost Model
• After recognition, an item of PPE is measured at its cost less any accumulated depreciation
and any accumulated impairment losses.

Depreciation
• Depreciation is the systematic allocation of the depreciable amount of an asset over its
estimated useful life.
• When computing for depreciation, each part of an item of PPE with a cost that is significant in
relation to the total cost of the item shall be depreciated separately.
• Depreciation begins when the asset is available for use, i.e., when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
• Depreciation ceases when the asset is derecognized or when it is classified as “held for sale”
under PFRS 5, whichever comes earlier.

Selection of depreciation method

• There are various methods of depreciation. The entity shall select the method that most closely
reflects the expected pattern of consumption of the future economic benefits embodied in
the asset.
• However, a depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate.

The Straight-line method of Depreciation

Straight line method – depreciation is recognized evenly over the life of the asset by dividing the
depreciable amount by the estimated useful life.

Depreciation = (Historical cost – Residual value) ÷

Estimated useful life

Changes in depreciation method, useful life, and residual value

• A change in depreciation method, useful life, or residual value is a change in accounting
estimate accounted for prospectively.
• Prospective accounting means the change affects only the current period and/or future periods.
The change does not affect past periods.

Revaluation Model
• After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be
carried at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.

Revaluation surplus
Fair value* xx
Less: Carrying amount (xx)
Revaluation surplus – gross of tax xx

*The fair value is determined using an appropriate valuation technique, taking into account the
principles set forth under PFRS 13.
Frequency of revaluation
• For items with significant and volatile changes in fair value, annual revaluation is necessary.
For items with insignificant changes in fair value, revaluation may be made every 3 or 5 years.

Revaluation applied to all assets in a class

• If an item of PPE is revalued, the entire class of PPE to which that asset belongs shall be
revalued.
• The items within a class of PPE are revalued simultaneously to avoid selective revaluation of
assets and the reporting of amounts in the financial statements that are a mixture of costs and
values as at different dates.

Subsequent accounting for revaluation surplus

• Revaluation is initially recognized in other comprehensive income unless the revaluation
represents impairment loss or reversal of impairment loss, in which case it is recognized in
profit or loss.
• Subsequently, the revaluation surplus is accounted for as follows:
1. If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is
transferred directly to retained earnings when the asset is derecognized.
2. If the revalued asset is depreciable, a portion of the revaluation surplus may be
transferred periodically to retained earnings as the asset is being used.

Derecognition
• The carrying amount of an item or PPE shall be derecognized:
1. on disposal; or
2. when no future economic benefits are expected from its use or disposal