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Association of Public FinanceAccountants of Sri Lanka
(Public Sector wing CA Sri Lanka)
APFASL
Conducted By :
Association of Public FinanceAccountants of Sri Lanka
(Public Sector wing CA Sri Lanka)
Seminar on Sri Lanka Public Sector Accounting
Standards (SLPSAS)
P. Ariyasena (B.Com (Sp),ACA,DPFM)Chief AccountantMinistry of Foreign Employment Promotion and Welfare
Accounting Policies, Changes in Accounting
Estimates and Errors(SLPSAS 03)
Introduction Comparison of SLPSAS-3 &
LKAS-8 Objectives The scope Important definitions Selection of accounting
policies
Coverage Consistency Accounting estimates Prior period errors Disclosures Examples Summary
Accounting Policies Specific Principles, bases,
conventions, rules or practices in preparing and presenting financial statements
Introduction
A Changes in Accounting Estimates Changes in accounting estimate an
adjustment of carrying amount of an asset or a liability ,or the amount of 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 developments. These changes are not correction of errors
Prior Period ErrorsPrior period errors are 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 that:(a) Was available when financial statements for those periods were authorized for issue; and(b) Could reasonably be expected to have been
obtained and taken into account in the preparation and presentation of those financial statements.
To describe the criteria for selecting and changing accounting policies, accounting treatments and disclosure of changes in accounting policies, changes in accounting estimates the correction of errors .The Standard is intended to enhance the relevance and reliability of an entity’s financial statements and comparability of those financial statements over time and with the financial statements of other entities
objective
Applies in selecting and applying accounting policies, changes in accounting policies, accounting estimates and correction of prior period errors
Scope
Applies in all public sector entities other than Government Business Enterprises (GBEs)
The tax effect of correction of prior period errors and of retrospective adjustment made to apply changes in accounting policies are not considered
Prospective applicationIt is a change in accounting policy and of recognizing the effect of a change in accounting estimates ; (a)Applying new accounting policy to transactions, other events and conditions occurring after the date as at which ,the policy is changed and (b) Recognizing the effect of the change in accounting estimate in the current and future periods affected by change.
Key Definitions
Key Definitions: Cont.Retrospective application
Appling a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.
Retrospective RestatementsCorrecting the recognition, measurement and disclosure of amount of elements of financial statements as if prior period errors had never been occurred
Key Definitions: Cont.
ImpracticableApplying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so, for a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error
Key Definitions :Cont.
When a SLPSAS specifically apply to a transaction, event or condition, the accounting policy of that item shall be determined by applying relevant standard (1 to 10 SLAPSAS)
Those policies need not be applied when the effect of applying them is immaterial .
Selection and application of accounting policies
In the absence of a SLPSAS that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy considering the following.1. Relevance to the decision making need
of users2. Reliable in that the financial statements3. Represent faithfully the financial
position, financial performance and cash flows
Cont.
Cont. 4.Refelect the economic substance of transactions, other events and conditions and not merely the legal form, Example : Finance Lease 5.Neutral i.e. free from bias 6.Prudent: Assets & Revenue not overstated, Liabilities & Expenses not under stated 7.Complete in all material respect In developing the accounting policies to ensure the FS provide information that meet qualitative characteristics.
In Making the judgment, the management shall consider the applicability of the following sources(a) Requirement & guidance in SLPSAS in
dealing with similar issues(b)The definitions, recognitions and
measurement criteria for assets, liabilities, revenue and expenses describe in other SLPSAS
(c) The management may consider most recent pronouncement of other standard setting bodies and accepted private & public sector practices.
Cont.
The entity shall apply its accounting policies consistently for similar transaction, other events and conditions, unless, a SLPSAS specially requires or permits for different policy, may be appropriated.If a standard requires or permits such categorization, an appropriate accounting policy shall be selected and applied consistently to each category
Consistency of accounting policies
An entity can change an accounting policy only if;(a) It is required by a SLPSAS or(b) Results in FS providing reliable and more
relevant information on the entities financial position, financial performance and cash flows
Users of FS need to be able to compare the FS of an entity over time to identify trends in financial position , financial performance and cash flows
Changes in accounting policies
A change from one basis of accounting to another basis of accounting is a changing accounting policy
A change in accounting treatment, recognition or measurement of a transaction, event or condition with in a basis of accounting is regarded as a change in accounting policy
Cont.
The application of an accounting policy for transaction, event or condition that differ in substance from those previously occurringThe application of a new accounting policy that did not occur previously or that was immaterial The initial application of a policy to revalue assets in accordance with SLPSAS 7,PPE or when adopted equivalent SLPSA
Instances not treated as Changes in accounting
policies
Shall account for a change in accounting policy resulting from initial application of a SLPSAS in accordance with specific transitional provisions if any in that standardWhen entity changes an accounting policy upon initial application of a SLPSAS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, It shall apply the change retrospectively
Applying changes in accounting policies
When change in accounting policy is applied retrospectively, the entity shall adjust the opening balance of each affected component of net asset/equity for the earliest period presented and the other comparatives amount disclosed for each period presented as if the new accounting policy had always been applied
Retrospective application
A changing accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period specific effects of the cumulative effect of the event
Limitations on Retrospective Application.
If it is impracticable to determine the cumulative effect, at the begging of the current period, of applying new accounting policy to all prior periods, comparative information should be adjusted applying the new accounting policy
Cont.
Applying new AP Adjust the effect of change
in AP in current & future period
Errors happened during the year correction is done in that year
Transitional provision available
Assumed new AP had always been applied
Correcting prior period errors
Adjust the Opening balance of each affected component of net assets/equity & other component
No transitional provisions available
ComparisonProspective application Retrospective application
For initial application of SLPSAS Should be disclosed1. Title of the standard2. Change in accounting policy under
transitional provision3. The nature of changing accounting
policy4. A description of transitional provision5. The effect of prior period presented etc Above disclosure need not be
repeated subsequently
Disclosure: Initial Application
1.The nature of the accounting policy changed
2.The reason for applying new accounting policy
3.The amount of adjustment for line items in FS etc
Above disclosure need not disclose subsequently in FS
When an entity has not applied a new SLPSAS , that has been issued but not yet effective also should disclose
Disclosure Voluntary change in accounting policy
Changes in Accounting Estimates
Estimation involves judgments based on latest
available, reliable information
Examples: Tax dues, bad debts, Provision for
inventory obsolescence, Depreciations
ErrorsErrors can be arisen in respect of recognition, measurement, presentation or disclosure of elements in financial statements
Examples: Mathematical mistakes, Mistakes in applying Accounting Policies, Oversight, Misinterpretation of facts, Fraud
Disclosure - Changes in Accounting EstimatesThe 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 on future period.
Disclosure of prior period errors
1. The nature of prior period error2. The amount of correction3. Description of how and from the
error has been corrected
Comparison
• Public sector• Statement of financial
position• Statement of financial
performance• Accumulated surplus• Net assets/equity• Revenue• No conceptual framework• EPS does not required
• Private sector/GBEs• Statement of financial
position• Statement of
Comprehensive Income• Retained earnings• Equity• Income• Conceptual framework
available• EPS applicable
LKAS - 8SLPSAS - 3
1.Retrospective Restatement of error – Rs 6,500 omitted
from 2011 accounts & recognized as revenue in 2012 2012 2011
Revenue from taxation 60,000 34,000
User Charges 4,000 3,000
Other revenue 40,000 30,000
Total Revenue 104,000 67,000
Expenses (86,500)(60,000)
Surplus 17,500 7,000
Example 1
2012 2011
Revenue from taxation (60,000-6,500) 53,500 (34,000+6,500) 40,500
User Charges 4,000 3,000
Other revenue 40,000 30,000
Total Revenue 97,500 73,500
Expenses (86,500) (60,000)
Surplus 11,000 13,500
Correction of prior period error/Retrospective restatement)
Contributed Accu Total
Capital Surplus Balance 31.12.2010 5,000 20,000
25,000Surplus for Y/E 31.12.2011 13,500
13,500Balance as at 31.12.2011 5,000 33,500
38,500Surplus for Y/E 31.12.2012 11,000
11,000Balance as at 31.12.2012 5,000 44,500
49,500
Statement of Changes in Equity
Revenue from taxation of Rs.6,500 was incorrectly omitted from F/S OF 2011.The F/S of 2011 have been restated to correct this error. The effect of restatement on the F/S is summarized bellow. There is no effect in 2012
effect on 2011
Increase Revenue 6,500
Increase Surplus 6,500
Increase Debtors 6,500
Increase net assets/equity 6,500
Extract from notes to the financial statements
During 2012,the entity changed its accounting policy for the treatment of borrowing costs .In previous periods, the entity had capitalized such cost . The entity has now decided to expense, rather than capitalized them.
Financial informationCapitalized borrowing cost 2011 Rs 2,600
Capitalized borrowing cost before 2011 Rs 5,200 Surplus before interest 2012 Rs,30,000,interest
Rs 3,000The entity has not recognized any depreciation on
power station, because it is not yet in used
Example 2 - Changes in accounting policy with retrospective application Summary
2012 2011Surplus before interest 30,000 18,000Interest expense (3,000) (2,600)Surplus 27,000 15,400
Statement of Financial Performance
Contributed Accumulated Total
Capital SurplusBalance at 31.12.2010 10,000 20,000
30,000Changes of A/P with rep to Interest (Note 1) ( 5,200)
(5,200)Balance at 31.12.2010 10,000 14,800
24,800Surplus for Y/E 31.12.2011 15,400
15,400Balance as at 31.12.2011 10,000 30,200
40,200Surplus for the year 27,000
27,000Closing at 31.12.2012 10,000 57,200
67,200
Statements of changes in equity
Effect on 2011(Increase) in interest expense (Rs 2,600)(Decrease) in surplus (Rs 2,600)Effect on period prior to 2011(Decrease) in surplus (Rs.5,200) (Decrease) in accu surplus (Rs.7,800)
Note to the accounts
During 2012,the entity changed its accounting policy for depreciation PPE, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model
At the end of 2011 company had done an engineering survey, which provided information on the components held and their fair value, useful lives, estimated residual value and depreciable amount at the beginning of 2012.However it did not provide the cost of those components
Example -3 :Prospective application of change in accounting policy when retrospective application is not practicable
Property, Plants & EquipmentsCost 25,000Depreciation (14,000)Net book value 11,000Depreciation on old basis 1,500
Due to non availability of cost of each components The management decide to apply the new depreciation policy
Property, Plants & Equipments
Survey Valuation 17,000Estimated residual value 3,000Avg remaining assets life (Years) 7Depreciation on new basis 2,000
Depreciation on new accounting policy – Revaluation Model component basis
Three areas – AP, Estimates, ErrorsSelection of APRetrospective applicationProspective applicationAccounting estimatesPrior period errorsDisclosuresApplicable LKAS
Summary
Questions ?