Question

Explain the accounting procedures for changes in accounting policies and estimates and the correction of errors.

(please do not write back word for word that you find on the internet, summarize or put in your own words)

Answer 1

The accounting procedures for changes in accounting policies and estimates and the correction of errors:

Accounting policies can be defined as rules, principles, practices,etc that are applied by an entity in preparing and presenting financial statements. Accounting policies are applied consistently. However, change in accounting policy is necessary, so as to enhance relevance and reliability of financial statements. This change can be app,lied by management voluntarily or required by IFRS.

General rule is that change in accounting policies should be applied retrospectively in the financial statements. Companies are required to adjust all comparative amounts presented in the financial statements that is affected by the change in accounting policies for each prior period that is presented.

However, change in retrospective application of accounting policies may be exempted in the following cases:

• If the effect of retrospective application of change is immaterial.
• If the retrospective application of change is impractical.
• In case the change in accounting policy is required by IFRS.

Following disclosures are required in case of change in accounting policies:

• Title of IFRS.
• Reason for change in accounting policy.
• In case the retrospective application is impractical, the reason for such impracticality should be disclosed.
• Nature of change in accounting policy.

In case of errors, we first need to determine the type of error. In case of a simple error, it can be corrected either by passing reverse for incorrect entry and then pass a correct entry or pass a single journal entry that is when combined with the original incorrect entry will fix the error.

Other times, the error can be fixed by directly correcting retained earning for prior period adjustments. In case the error is material or prior period financial statements are shown with the current year then restatement of financial statement is compulsory. For this adjust the balance of asset and liabilities at the beginning of the new financial period. Then retained earning will be adjusted. Lastly, the error on each comparative financial statement needs to be corrected.