Question

Explain the three accounting changes and correction of an error and the method used to disclose each one

Answer 1

The three accounting changes are :

1. Changes in accounting policy : These changes relate to accounting principles, conventions, rules and general practices by the entity. Example : change of accounting policy to charge depreciation from straight line to written down value method.

Disclosure: The effect of the change in accounting policy must be disclosed such that the users of the financial statements are able to identify. Also, a disclosure has to be made if the changes are retrospective or prospective, the reason for change and the difference in income or financial statements due to the changes.

2. Change in Accounting Estimate: Is adjusting the carrying amount of an asset, liability or expenses due to the re evaluation of the future benefits that will be derived. Example: The revision in estimated useful life of an asset.

Disclosure; The nature and amount of the estimate and the effect it will have on the current and future financial statements. If the amount for future financial statements cannot be estimated the same shall be disclosed as well.

3. Change in reporting entity : Usually is a result of change in the holding company or two or more companies have combined to form one entity or there is a change in the ownership pattern.

Disclosure; The amounts restated due to change in reporting entity must be appropriately disclosed so that the effect can be perceived.

Errors:

Errors that are material and pertain to current or previous periods must be corrected by the entity when discovered through:

(I) Restating the opening balances of assets , liabilities, related expenses if the errors pertain to the earliest period reported.

(ii) For prior periods in which the error has occurred restating the comparative amounts

Disclosure:

1. Nature of the error

2. The financial line item that has been effected

3. The Basic and diluted EPS changes

4. The amount of correction