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IPSAS 3

• Accounting Policies, Changes inAccounting
  Estimates and Errors

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Scope of IPSAS
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Objectives of IPSAS 3

• To prescribe
• the criteria for selecting and changing
  accounting policies,
• the accounting treatment and disclosure of
  changes in accounting policies,
• the accounting treatment and disclosure of
  changes in accounting estimates, and
• the accounting treatment and disclosure of
  corrections of errors.

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Scope

• Does not consider the tax effects of corrections
  of prior period errors and of retrospective
  adjustments made to apply changes in accounting
  policies as they are not relevant for many public
  sector entities.
• International or national accounting standards
  dealing with income taxes contain guidance on the
  treatment of tax effects.

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Accounting Policies

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

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Accounting Policies

1. Selection and Application of Accounting Policies

• IPSASBs hierarchy of authoritative guidance

1. Specific IPSASs

1. IPSASs dealing with similar and related issues

1. Definitions, recognition and measurement criteria
   for assets, liabilities, revenue and expenses
   described in the Conceptual Framework

1. Most recent pronouncements of otherstandard-setti
   ng bodies (e.g., pronouncement of the IASB,
   IFRIC, or SIC)

1. Accepted public or private sector practices

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Accounting Policies

• In the absence of a directly applicable IPSAS
  management shall use judgment in developing and
  applying an accounting policy that results in
  information that is
• relevant to the accountability and
  decision-making needs of users,
• faithfully represents the financial position,
  financial performance, and cash flows of the
  entity,
• meets the qualitative characteristics of
  understandability, timeliness, comparability, and
  verifiability and
• takes account of the constraints on information
  and the balance between the qualitative
  characteristics.

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Accounting Policies

• Consistency of Accounting Policies
• An entity shall select and apply its accounting
  policies consistently for similar transactions,
  other events, and conditions.

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Accounting Policies

• Changes in Accounting Policies
• Definition
• A change from one basis of accounting to another
  basis of accounting
• A change in the accounting treatment,
  recognition, or measurement of a transaction,
  event, or condition within a basis of accounting

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Accounting Policies

• Rationale (WHY)
• An entity shall change an accounting policy only
  if the change
• Is required by an IPSAS (Mandatory Change) or
• Results in the financial statements providing
  faithfullyrepresentative and more relevant
  information (Voluntary Change).

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Accounting Policies

• Application (HOW)
• If a change in accounting policy is required by
  an IPSAS, follow that pronouncement s transition
  requirements.
• If none are specified, or if the change is
  voluntary, apply the new accounting policy
  retrospectively by restating prior periods as far
  back as is practicable.

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Accounting Policies

1. If restatement is impracticable, include the
   cumulative effect of the change in net
   assets/equity.
2. If the cumulative effect cannot be determined,
   apply the new policy prospectively from the
   earliest date practicable. It therefore
   disregards the portion of the cumulative
   adjustment to assets, liabilities, and net
   assets/equity arising before that date.

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Accounting Policies

• Disclosure
• Initial application of an IPSAS
• The title of the Standard
• When applicable, that the change in accounting
  policy is made in accordance with its
  transitional provisions
• The nature of the change in accounting policy
• When applicable, a description of the
  transitional provisions
• When applicable, the transitional provisions that
  might have an effect on future periods

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Accounting Policies

• For the current period and each prior period
  presented, to theextent practicable, the amount
  of the adjustment for each financialstatement
  line item affected
• The amount of the adjustment relating to periods
  before those presented, to the extent
  practicable and
• If retrospective application is impracticable the
  circumstances that led to the existence of that
  condition and a description of how and from when
  the change in accounting policy has been applied
• The reasons why applying the new accounting
  policy providesfaithfully representative and
  more relevant information

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Accounting Policies

• When an entity has not applied a new IPSAS that
  has been issued but is not yet effective, the
  entity shall disclose
• The title of the new IPSAS
• The nature of the impending change or changes in
  accounting policy
• The date by which application of the Standard is
  required
• The date as at which it plans to apply the
  Standard initially and
• Either
• A discussion of the impact that initial
  application of the Standardis expected to have
  on the entitys financial statements or
• If that impact is not known or reasonably
  estimable, a statementto that effect.

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Example
During 2015, an entity changed its accounting
policy for the treatment of borrowing costs that
are directly attributable to the acquisition of a
health station (clinic) that is under
construction. In previous periods, the entity had
capitalized such costs. The entity has now
decided to expense, rather than capitalize them.
Management judges that the new policy is
preferable, because it results in a more
transparent treatment of finance costs making the
entitys financial statement more comparable.
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Example (Continued)

• The entity capitalized borrowing costs incurred
  of Br. 26,000 during 2014 and Br. 52,000 in
  periods prior to 2014.
• The accounting records for 2015 show surplus
  before interest of Br. 300,000 and interest
  expense of Br. 30,000 (which relates to 2015).
• The entity has not recognized any depreciation on
  the health station because it is not yet in use.

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Example (Continued)
In 2014, the entity reported
Surplus before interest 180,000
Interest expense -
Surplus 180,000
2014 opening accumulated surpluses was Br.200,000
and closing accumulated surpluses was Br.
380,000. The entity had Br. 100,000 of
Contributed capital throughout, and no other
components of net assets/equity except for
accumulated surplus.
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Example (Continued)
Entity Statement of Financial Performance
2015 2014(restated)
Surplus before interest 300,000 180,000
Interest Expense 30,000 26,000
Surplus 270,000 154,000
Accumulated Surpluses78,000
CIP-Health Station.78,000
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Example (Continued)
Entity Statement of Changes in Equity
ContributedCapital AccumulatedSurpluses Total
Balance as at 31 December 2013 aspreviously reported 100,000 200,000 300,000
Change in accounting policy with respect to the capitalisation of interest - (52,000) (52,000)
Balance as at 31 December 2013 100,000 148,000 248,000
Surplus for the year ended 31 December 2014 (restated) - 154,000 154,000
Balance as at 31 December 2014 100,000 302,000 402,000
Surplus for the year ended Dec. 31, 2015 - 270,000 270,000
Balance as at 31 December 2015 100,000 572,000 672,000
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Example (Continued)

• Extracts from Notes to the Financial Statements
• During 2015, the entity changes its accounting
  policy for the treatment of borrowing costs
  related to a health station (clinic) .
  Previously, the entity capitalized such costs.
  They are now written off as expenses as incurred.
  Management judges that this policy provides
  reliable and more relevant information, because
  it results in a more transparent treatment of
  finance costs and is consistent with local
  industry practice, making thefinancial
  statements more comparable.

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Example (Continued)
Tabulated effect on the financial statements
Effect on 2014
(Increase) in interest expense 26,000
(Decrease) in surplus 26,000
Effect on periods prior to 2014(Decrease) in surplus 52,000
(Decrease) in assets in the course ofconstruction and in accumulated surplus 78,000
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Changes in Accounting Estimates

• Definition of Accounting Estimate
• Items included in financial statements through
  judgments based on the latest available, reliable
  information.
• cannot be measured with precision due to
  uncertainties inherent in conducting economic
  activities, i.e. approximations
• The use of reasonable estimates is an essential
  part of the preparation of financial statements
  and does not undermine the reliability of
  financial statements.

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Changes in Accounting Estimates

• For example, estimates may be required of
• Tax revenue due to government
• Bad debts arising from uncollected taxes
• Inventory obsolescence
• The fair value of financial assets or financial
  liabilities
• The useful lives of, or expected pattern of
  consumption of future economic benefits or
  service potential embodied in, depreciable
  assets, or the percentage completion of road
  construction and
• Warranty obligations.

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Changes in Accounting Estimates

• A change in Accounting Estimate
• 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, more experience, or
  new developments ,
• are not correction of errors as the revision of
  an estimate does not relate to prior periods.

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Changes in Accounting Estimates

• When it is difficult to distinguish a change in
  an accounting policy from a change in an
  accounting estimate, the change is treated as a
  change in an accounting estimate.
• Accounting Treatment
• The effect of a change in an accounting estimate
  shall be recognized prospectively by including it
  in surplus or deficit in
• The period of the change, if the change affects
  the period only or
• The period of the change and future periods, if
  the change affectsboth.

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Changes in Accounting Estimates

• Disclosure
• An entity shall disclose
• the 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 periods,
• the fact that the amount of the effect in future
  periods is not disclosed because estimating it is
  impracticable.

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Example

• An entity has depreciated a machine over its
  expected useful life of 5 years. No residual
  value is expected at the end of the machine's
  useful life. The cost of machine was Br100,000
  and annual depreciation charge was therefore
  Br20,000.
• Three years later, the remaining useful life of
  the machine was estimated to be only 1 year.
• The entity should account for the change in
  estimate prospectively by allocating the net
  carrying amount of the asset over its remaining
  useful life. No adjustment is required to restate
  the depreciation charge in previous accounting
  periods.

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Example (Continued)
Depreciation expense for the machine would
therefore be as follows
Depreciation Expense Accumulated Depreciation Working
Year 1 20,000 20,000 (100,000/5)
Year 2 20,000 40,000 (80,000/4)
Year 3 30,000 70,000 (60,000/2)
Year 4 30,000 100,000 (30,000/1)
Although expected useful life of the machine has
reduced at the end of third year, depreciation
expense recorded in previous years is not
affected. Instead, the depreciation expense is
increased accordingly in years 3 and 4.
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Prior Period Errors

• Definition
• errors in recognition, measurement, presentation,
  or disclosure that are not discovered until a
  subsequent period
• Example
• Misapplication of accounting policies
• Fraud e.g. overstating program costs by issuing
  fake invoices
• Arithmetical/mathematical mistakes
• Oversights Omission of transactions and events
  from the financial statements. e.g. not writing
  off a receivable who had been announced as
  insolvent before the authorization of financial
  statements.

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Prior Period Errors

• Retrospective Restatement
• an entity shall correct material prior period
  errors retrospectively as far back as is
  practicable in the first set of financial
  statements authorized for issue after their
  discovery by
• Restating the comparative amounts for prior
  period(s) presentedin which the error occurred
  or
• Restating the opening balances of assets,
  liabilities and net assets/equity for the
  earliest prior period presented if the error
  occurred before the earliest prior period
  presented.
• The correction of a prior period error is
  excluded from surplus or deficit for the period
  in which the error is discovered.

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Prior Period Errors

• Disclosure of Prior Period Errors
• an entity shall disclose
• The nature of the prior period error
• For each prior period presented, to the extent
  practicable, the amount of the correction for
  each financial statement line item affected
• The amount of the correction at the beginning of
  the earliest prior period presented and
• 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.
• Financials of subsequent periods need not repeat
  these disclosures.

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Example
During 2015, an entity discovered that revenue
from donations was incorrect. Donations of
Br.65,000 that should have been recognized in
2014 were incorrectly omitted and recognised as
revenue in 2015. The entitys accounting records
for 2015 show revenue from donations of Br.
600,000 (including donation that should have been
recognised in theopening balances), and expenses
of Br. 865,000.
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Example (Continued)
In 2014, the entity reported
Revenue from donations 340,000
User charges 30,000
Other operating revenue 300,000
Total Revenue 670,000
Expenses (600,000)
Surplus 70,000
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Example (Continued)

• The 2014 opening accumulated surplus was
  Br.200,000, and closing accumulated surplus was
  Br.270,000.
• The entity had no other revenue or expenses.
• The entity had Br.50,000 of contributed capital
  throughout, and no other components of net
  assets/equity except for accumulated surplus.

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Example (Continued)
Entity Statement of Financial Performance
2015 2014(restated) 2014 (OLD)
Revenue from donations 535,000 405,000 340,000
User charges 40,000 30,000 30,000
Other operating revenue 400,000 300,000 300,000
Total Revenue 975,000 735,000 670,000
Expenses (865,000) (600,000) (600,000)
Surplus 110,000 135,000 70,000
Revenue from donations.65,000
Accumulated Surpluses..65,000
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Example (Continued)
Entity Statement of Changes in Equity
ContributedCapital AccumulatedSurpluses Total
Balance as at 31 Dec. 2013 50,000 200,000 250,000
Surplus for the year ended 31 Dec. 2014 as restated - 135,000 135,000
Balance as at 31 Dec. 2014 50,000 335,000 385,000
Surplus for the year ended 31 Dec. 2015 - 110,000 110,000
Balance as at 31 Dec. 2015 50,000 445,000 495,000
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Example (Continued)
Extracts from Notes to the Financial
Statements 1. Revenue from donation of Br. 65,000
was incorrectly omitted from the financial
statements of 2014. The financial statements of
2014 have been restated to correct this error.
The effect of the restatement on those financial
statements is summarised below. There is no
effect in 2015.
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Example (Continued)
Tabulated effect on the financial statements
Effect on 2014
Increase revenue 65,000
Increase in surplus 65,000
Increase in debtors 65,000
Increase in net assets/equity 65,000
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IPSAS 3 Summary
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IPSAS 3

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