Accounting Policies, Estimate, and Errors

• Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
• An entity is required to outline all significant accounting policies applied in preparing financial statements.
• The entity shall select and apply the same accounting policies each period in order to achieve comparability of financial statements or to identify trends in the financial position, performance, and cash flows of the entity.
• Once selected, accounting policies must be applied consistently for similar transactions and events.


  A change in accounting policies can only be made when:

  • Required by the accounting standard
  • The change will result in more relevant and faithful presentation of information.
• A change in accounting policy arises when an entity adopts a generally accepted accounting principle which is different from previously used ones by the entity.
• A change in accounting policy is required by a standard or an interpretation shall be applied in accordance with the transitional provisions therein.


  If the standards or interpretation contains no transitional provisions or if an accounting policy is changed voluntarily, the change shall be applied retrospectively or retroactively.
• Retrospective application means that any resulting adjustment from the change in accounting policy shall be reported as an adjustment to the opening balance of retained earnings.


  The amount of the adjustment is determined as of the beginning of the year of change.
• If comparative statements is presented, the financial statements of the prior period presented shall be restated to conform with the new accounting policy.
• A change in accounting estimate is a normal recurring correction or adjustment of an asset or liability which is the natural result of the use of an estimate.
• Prospective recognition of the effect of a change in accounting estimate means that the change is applied to transactions and other events from the date of change in estimate