Accounting policies, estimates and errors

Under TAS 8 and TFRS for NPAEs, changes in accounting consist of:
(a) changes in accounting policies;
(b) changes in accounting estimates; and
(c) corrections of errors made in prior periods.

Keywords: Mazars, Thailand, Accounting, TAS 8, TAS 2, TFRS, NPAEs, LIFO

16 December 2015

Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.  

A change in accounting policies is a change in an accounting treatment which is accordance with generally accepted accounting standards to another accounting treatment which also in accordance with generally accepted accounting standards.

An entity must change an accounting policy only if the change:

(a) is required by the Thai Financial Reporting Standards; and

(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events, or conditions related to the entity’s financial position and financial performance.

When a change in accounting policy is applied retrospectively, the entity must adjust the opening balance of each affected component of equity for the earliest prior period presented, and the other comparative amounts disclosed for each prior period presented, as if the new accounting policy had always been applied.

For example:

(i) A company has valued inventory using the LIFO method. As a result of a change to TAS 2 “Inventories”, the use of the LIFO method has been disallowed. As a result, the company’s management changed the valuation of inventories from the LIFO method to the FIFO method.

(ii) A company must account for a change in accounting policy resulting from a change in the requirements of the TAS or TFRS for NPAEs in accordance with the transitional provisions, if any, specified in that amendment, such as:

  • first-time adoption of deferred tax in the company’s financial statements; or
  • employee benefit obligations being recognized based on calculations performed by a qualified actuary using the projected unit credit method.

A change in accounting estimates is an adjustment of the carrying amount of an asset or a 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 developments and, accordingly, are not corrections of errors.

The entity must recognize the effect of a change in an accounting estimate prospectively by including it in profit and loss in the period of the change, as well as in future periods affected by the change. 

The following are situations in which there is likely to be a change in accounting estimate:

(a) An allowance is made for doubtful accounts.

(b) A reserve is set up for obsolete inventory.

(c) There are changes in the useful life of depreciable assets.

For example:

In 2013, an entity recognized an allowance for a doubtful debt of a trade receivable from a customer that was in financial difficulties. However, the company has changed the recognition of the allowance based on an aged debtor analysis, and set aside an allowance of 100% for a debtor aged more than 365 days.  

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods, where the information: (a) was available when the financial statements for those periods were authorized to be issued; and (b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.   

An entity must correct material errors made in prior periods retroactively in the first set of financial statements authorized to be issued after their discovery, by doing the following:

(i) restating the comparative amounts for the prior year presented in which the error occurred; or

(ii) if the error occurred before the earliest prior year period presented, restating the opening balance of assets, liabilities, and equity for the earliest prior period presented.

For example:

In 2013, a company over-recorded accrued expenses of 2.5 million baht in its financial statements.

The correction of errors has been applied retroactively, and the 2013 financial statements, which are included for comparative purposes, have been restated accordingly.

  As previously reported Increase (decrease) As restated
  (in thousands of baht)
Statement of financial position
Accrued expenses 5,700 (2,500) 3,200
Statement of income
Selling expenses 8,500 (2,500) 6,000
Profit for the year 7,300 2,500 9,800
Statement of changes in shareholders’ equity
Retained earnings as at 1 January 2014 11,000 2,500 13,500

References: IAS 8, TAS 8, and TFRS for NPAEs