MFRS 108 :

ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND ERRORS

Lecture outline:
• Accounting policies
• Retrospective change
• Prospective change
• Accounting estimates
• Errors

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 INTRODUCTION
• Sometimes there will be situations
when an entity
1. may need to change their accounting
policies and/or estimates; or
2. find material errors in the prior year’s
financial statements.
• Can entity change their accounting
policies?
• What should they do with the material
errors identify?
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 INTRODUCTION (cont..)
• MFRS 108 provides guidelines for such
situations.
• Objective of MFRS 108
• “ to prescribe the :
• CRITERIA for:
− (i) selecting and
− (ii) changing accounting policies,
• ACCOUNTING TREATMENT and
• DISCLOSURE
– of changes in accounting policies,
– changes in accounting estimates ;
– and correction of errors”.

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 ACCOUNTING POLICIES
What is Accounting Policies?
• According to MFRS 108, accounting
policies is the 
• SPECIFIC PRINCIPLES,
• BASES,
• CONVENTIONS,
• RULES AND
• PRACTICES
adopted by an entity in preparing and
presenting financial statements.

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 HOW TO SELECT WHICH
ACCOUNTING POLICIES TO
APPLY?
1. Refer to relevant standards or
interpretation in order to apply
accounting policies to
Transactions or Event
2. Refer guidance issued by MASB

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 HOW TO SELECT WHICH
ACCOUNTING POLICIES TO
APPLY? (cont..)
Example:
According to MFRS 116, the entity can
select the COST MODEL or
REVALUATION MODEL as its
accounting policy
According MFRS 102, inventories are to
be measured at the lower of cost and
net realisable value
MFRS 140, entity can choose either
cost model or fair value model for
the measurement of their IP
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 WHEN THE ACCOUNTING
POLICIES ARE SELECTED:
• Information provided is RELEVANT for
users to make economic decision
• Information conveyed is RELIABLE
where the Financial Statements:
• Present FAITHFULL information
• Reflect the economic SUBSTANCE of
transactions not merely based on legal form
• NEUTRAL, NOT BIAS
• PRUDENCE
• COMPLETE in all material aspects
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 CAN ENTITY CHANGE ITS
ACCOUNTING POLICIES ?
• An entity must select and apply its
accounting policies CONSISTENTLY
from period to period or for similar
transactions, events and
conditions.
• CONSISTENCY allows users to
analyze the trends in financial
position, performance and cash
flow.
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 SO…. CAN ENTITY CHANGE ITS
ACCOUNTING POLICIES ???

• Entity CAN CHANGE its

accounting policies if it met the
following CRITERIA:
• The change is NECESSARY
• since it is required by the STANDARDS or
an INTERPRETATIONS, or
• With the change, entity will provide
MORE RELIABLE and RELEVANT
INFORMATION
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 TWO EVENTS WHICH ARE NOT
CONSIDERED AS CHANGE IN
ACCOUNTING POLICIES:
1. Application on transactions/events/
condition that DIFFER in substance
from those previously occurring
2. Applying NEW accounting policy for
transactions/events /conditions
that did not occur previously or
were immaterial

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 IF THE COMPANY CHANGE ITS
ACCOUNTING POLICIES, WHAT SHOULD
THE COMPANY DO ?

Apply the change

RETROSPECTIVELY
When the change is decided in Year 5,
apply also the change for Year 4, Year
3, Year 2, Year 1..
 Adjustment is done AS IF the NEW
accounting policy had always been
applied before.
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 CHANGES IN ACCOUNTING
ESTIMATES
• Due to the uncertainties inherent in
business activities, many financial
statement items cannot be measured
with precision but can only be
estimated.
• The estimation process involves
judgment based on the latest
information available.

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 CHANGES IN ACCOUNTING
ESTIMATES (cont..)
• Among the estimates are:
• Provision for doubtful debts
• Economic life of PPE
• Depreciation rates

• The estimates may have to be

revised and need to be change.

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 CHANGES IN ACCOUNTING
ESTIMATES (cont..)
According to MFRS 108
• a change in accounting estimate is defined
as “ an adjustment of :
• the carrying amount of an asset or liability, or
• the amount of the periodic consumption of an
asset,
• that results from the assessment of the
present status of, and expected future
benefits and obligations associated with,
assets and liabilities.
• Changes in accounting estimates result
from new information or new development
and, accordingly, are not correction of
errors”. 16
 CHANGES IN ACCOUNTING
ESTIMATES : Actg Treatment
• The effect of a change in accounting
estimate should be included
PROSPECTIVELY in the income
statement in:
• the period of the change, if the change
affects the period only; or (eg. – change
in estimate of the amount of bad debts.)
• the period of the change and future
periods, if the change affects both.
• (eg. – change in estimated useful life
of PPE)
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 FUNDAMENTAL ERRORS
• An entity may discover errors during
the current period which relates to a
prior period.
• MFRS 108 defines Prior period
ERRORs as omissions from, and
misstatements in, the entity’s
financial statements for one or
more prior periods arising from a
failure to use, or misuse of,
reliable information. 18
 FUNDAMENTAL ERRORS
(cont..)
• These errors include:
• Mathematical mistakes
• Mistakes in applying accounting policies
• Misinterpretation of facts
• Fraud
• Oversights

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 FUNDAMENTAL ERRORS
(cont..)
Accounting Treatment
• Prior period errors
• correct the MATERIAL error
RETROSPECTIVELY in the first set
of financial statements authorized for
issue after their discovery
• HOW ??

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 FUNDAMENTAL ERRORS
(cont..)
Accounting Treatment
• Restating the comparative amounts
for the period (s) presented in which
the error occurred; or
• If the error occurred before the
earliest prior period presented,
restating the opening balances of
assets, liabilities and equity for the
earliest prior period presented
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 FUNDAMENTAL ERRORS
(cont..)
Accounting Treatment
• If it IMPRACTICABLE to determine the
period-specific effects of an error or
comparative information for one or
more prior periods presented, the
entity shall restate the opening
balances of assets, liabilities and
equity for the earliest period for
which retrospective restatement is
practicable. 22
 FUNDAMENTAL ERRORS
(cont..)
Accounting Treatment
• If it is impracticable to determine the
cumulative effect at the beginning of
the current period of an error on all
prior periods, the entity is to restate
the comparative information to
correct the error prospectively from
the earliest date practicable

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