FINANCIAL ACCOUNTING & REPORTING 3

1
Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Module 015 Week005- FinAcct3 Statement of

Changes in Equity, Accounting Policies, Changes
in Accounting Estimates and Errors
Errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements.
Potential current period errors discovered in that period are corrected
before the financial statements are authorized for issue.
However, material errors are sometimes not discovered until a subsequent
period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.

At the end of this module, you will be able to:

1. Understand and define the concept of errors
2. Enumerate the kinds of potential errors could occur and explain its
impact on the financial reporting
3. Identify its relevant disclosures

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Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Kinds of Errors

Counterbalancing Errors
Counterbalancing errors are errors which, if not detected, are automatically
counterbalanced or corrected in the next accounting period.
In other words, these errors will be offset or corrected over two periods or these errors
correct themselves over two periods.
Effects of counterbalancing Errors
 The income statement for two successive periods are incorrect
 The statement of financial position at the end of first period is incorrect
 The statement of the financial position at then of the second period is correct

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Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Counterbalancing errors normally include the misstatement of the following:

 Inventory, including purchases and sales
 Prepaid expenses
 Accrued expenses
 Deferred income
 Accrued income
Non-counterbalancing Errors
Non-counterbalancing errors are errors which, if not detected are not automatically
counterbalanced or corrected in the next accounting period.
In other words, if the net income of one year is understated or overstated, the net income of
subsequent year is not affected.
Effects of non-counterbalancing errors
 The income statement of the period which the error is committed is incorrect but
the succeeding income statement is not affected.
 The statement of financial position of the year of error and succeeding statement of
financial position are incorrect until the error is corrected.
The best example of a non-counterbalancing error is the misstatement of
depreciation.
Error correction
Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements.
Potential current period errors discovered in that period are corrected before the financial
statements are authorized for issue.
However, material errors are sometimes not discovered until a subsequent period, and
these prior period errors are corrected in the comparative information presented in the
financial statements for that subsequent period.
Prior period errors
Prior period errors are omissions and misstatements in the entity’s financial statements
for one or more periods arising from a failure to use or misuse of reliable information that:
a. Was available when financial statements for these periods were authorized for
issue
b. Could reasonably be expected to have been obtained and taken into account in the
preparation of those financial statements

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Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Prior period errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretation of facts, and fraud.
Treatment of prior period errors
An entity shall correct material prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery by:
a. Restating the comparative amounts for the prior period presented in which the
error occurred.
b. Restating the opening balances of assets, liabilities and equity for the earliest prior
period presented if the error occurred before the earliest period presented
In other words, a prior period shall be corrected by retrospective restatement, meaning,
if comparative statements are presented, the prior year statements are restated to correct
the error.
The correction of a prior period error is excluded from the profit or loss for the period in
which the error is discovered but it is an adjustment of the beginning balance of retained
earnings of the earliest period presented.
Type of errors
a. Statement of financial position error
b. Income statement errors
c. Combined statement of financial position and income statement errors
Statement of financial position errors
Statement of financial position errors affect the statement of financial position or real
accounts only, meaning, the improper classification of an asset, liability and capital
account.
In such as case, an entry is simply made to reclassify the account balances.
Income statement errors
Income statement errors affect the income statement or nominal accounts only, meaning
the improper classification of revenue and expense accounts.
These errors have no effect on the statement of financial position and on net income.
Thus, a reclassifying entry is necessary only if the error is discovered in the same year it is
committed.
Otherwise, if the error is discovered in a subsequent year, no reclassifying entry is
necessary because the nominal accounts for the current year are correctly stated.

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Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Combined statement of financial position and income statement errors

These errors affect both the statement of financial position and income statement because
they result in a misstatement of net income.
Combined statement of financial position and income statement errors are classified as
counterbalancing errors and non-counterbalancing errors.

Disclosures
In respect for prior period errors, the entity shall disclose the following:
a. the nature of the prior period error;
b. for each prior period presented, to the extent practicable, the amount of the
correction:
(i) for each financial statement line item affected; and
(ii) if IAS 33 applies to the entity, for basic and diluted earnings per share;
c. the amount of the correction at the beginning of the earliest prior period
presented; and
d. if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how
and from when the error has been corrected.

References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.
Barry Elliot, Jamie Elliot; 2011; Financial Accounting and Reporting; Essex CM20 2JE,
England; Pearson Education Limited

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Statement of Changes in Equity, Accounting Policies, Changes in Accounting
Estimates and Errors

Online Supplementary Reading Materials:

International Financial Reporting Standards – IAS 8 Accounting Policies, Changes in

Accounting Estimates and Errors; http://www.ifrs.org/issued-standards/list-of-
standards/ias-8-accounting-policies-changes-in-accounting-estimates-and-errors/;
October 29, 2017

Preparing Statements of Changes in Owner’s Equity;

https://www.sophia.org/tutorials/preparing-statements-of-changes-in-owners-equity--3;
October 29,2017

Changes in Equity: Revenue and Expenses; http://www.understand-

accounting.net/revenue.html; October 29, 2017

ACCA Global; http://www.accaglobal.com/uk/en/member/discover/cpd-articles/audit-

assurance/material-misstatement.html; October 29, 2017

Online Instructional Videos:

Financial Statements- Lecture 6- Statement of Changes in Equity;

https://www.bing.com/videos/search?q=statement+of+changes+in+equity&&view=detail
&mid=4BD8DBCAFBD3B1A8E00F4BD8DBCAFBD3B1A8E00F&FORM=VRDGAR; January
10, 2018

Module 1 Video 5 – Preparing the Statement of Changes in Equity- Problem 1-3A ;

https://www.bing.com/videos/search?q=statement+of+changes+in+equity&&view=detail
&mid=F5B0ADB47BA15C699AA7F5B0ADB47BA15C699AA7&&FORM=VDRVRV ; January
10, 2018

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