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5/24/2017 Suryani ikasari

Accounting changes and error analysis


A. Changes in accounting policy
By definition, a change in accounting policy involves a change from one accepted
accounting policy to another. Adoption of a new policy in recognitions of events that have
occurred for the first time or that were previously immaterial is not a change in
accounting policy. There are three possible approaches for reporting changes in
accounting policies; (1) report changes currently, in this approach, companies report the
cumulative effect of the change in the current year’s income statement. The company
does not change prior-year financial statement. (2) report changes retrospectively refers
to the application of a different accounting policy to recast previously issued financial
statement as if the new policy had always been used. In other words, company “goes
back” and adjusts prior years’ statements on a basis consistent with the newly adopted
policy. (3) report changes prospectively, previously reported result remain. Companies do
not adjust opening balances to reflect the change in policy.
Retrospective Accounting Change Approach
As a consequence, the IASB permits companies to change an accounting policy if:
1. It is required by IFRS
2. It results in the financial statements providing more reliable and relevant information
about a company’s financial position, financial performance, and cash flows.
When a company changes an accounting policy, it should report the change using
retrospective application. In general terms, here is what it must do:
1. It adjusts its financial statements for each prior period presented.
2. It adjusts the carrying amounts of assets and liabilities as of the beginning of the first
year presented.
Retrospective application is considered impracticable if a company cannot determine the
prior period effects using very reasonable effort to do so. The rationale for this approach
is that companies should recognize, in the period the adoption occurs, the effect on the
cash flows that is caused by the adoption of the new accounting policy. That is, the
accounting change is a necessary “past event” in the definition of an asset or liability that
gives rise to the accounting recognition of the indirect effect in the current period.
B. Changes in accounting estimate
To prepare financial statements, companies must estimate the effects of future
conditions and events.
Prospective Reporting, companies report prospectively changes in accounting estimates.
That is, companies should not adjust previously reported results for changes in estimates.
𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
depreciation charge = 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑙𝑖𝑣𝑒

disclosure, a company should disclose the nature and amount of a change in an
accounting estimate that has an effect in the current period or is expected to have an
effect in future periods.
C. Correction of errors
Accounting error types
Accounting Category Type of Restatement
Expense recognition Recording expenses in the incorrect period or for an
incorrect amount.
Revenue recognition Improper revenue accounting. This category includes
instances in which revenue was improperly recognized,
questionable revenues were recognized, or any other
number of related errors that led to misreported revenue.
Misclassification Misclassifying significant accounting items on the statement
of financial position, income statement, or statement of
cash flow. These include restatements due to
misclassification of current or non-current accounts or those
that impact cash flows from operations.
Equity-other Improper accounting for EPS, restricted shares, warrants,
and other equity instruments.
Reserves/contingencies Errors involving accounts receivables bad debts, inventory
reserves, income tax allowances and loss contingencies.
Long-lived assets Asset impairments of property, plant, and equipment;
goodwill; or other related items.
Taxes Errors involving correction of tax provision, improper
treatment of tax liabilities, and other tax-related items.
Equity-other Improper accounting for comprehensive income equity
comprehensive income transactions including foreign currency items, revaluations
of plant assets, unrealized gains and losses on certain
investments in debt, equity securities and derivatives.
Inventory Inventory costing valuations, quantity issues, and cost of
sales adjustments.
Equity-share options improper accounting for employee share options.
Other Any restatement not covered by the listed categories,
including those related to improper accounting for
acquisitions or mergers.


Three types of errors can occur:
1. Statement of financial position errors, which affect only the presentation of an asset,
liability, or equity account.
2. Income statement errors, which affect only the presentation of revenue, expense, gain,
or loss accounts in the income statement.

3. Statement of financial position and income statement errors, which involve both the
statement of financial positions and income statement.
Error are classified into two types:
1. Counterbalancing errors are offset or corrected over two periods
2. Non-counterbalancing errors are not offset in the next accounting period and take longer
than two periods and take longer than two periods to correct themselves.