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Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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Page 1: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Association of Public FinanceAccountants of Sri Lanka

(Public Sector wing CA Sri Lanka)

APFASL

Page 2: Association of Public Finance Accountants 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)

Page 3: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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)

Page 4: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 5: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Accounting Policies Specific Principles, bases,

conventions, rules or practices in preparing and presenting financial statements

Introduction

Page 6: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 7: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 8: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 9: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 10: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 11: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Key Definitions: Cont.Retrospective application

Appling a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.

Page 12: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 13: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 14: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 15: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 16: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 17: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 18: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 19: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 20: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 21: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 22: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 23: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 24: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 25: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 26: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 27: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 28: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 29: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Changes in Accounting Estimates

Estimation involves judgments based on latest

available, reliable information

Examples: Tax dues, bad debts, Provision for

inventory obsolescence, Depreciations

Page 30: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 31: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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.

Page 32: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 33: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 34: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 35: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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)

Page 36: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 37: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 38: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 39: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

2012 2011Surplus before interest 30,000 18,000Interest expense (3,000) (2,600)Surplus 27,000 15,400

Statement of Financial Performance

Page 40: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 41: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 42: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 43: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 44: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

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

Page 45: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Three areas – AP, Estimates, ErrorsSelection of APRetrospective applicationProspective applicationAccounting estimatesPrior period errorsDisclosuresApplicable LKAS

Summary

Page 46: Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka) APFASL

Questions ?