PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 10

1. Which is correct concerning the proper treatment for accounting changes?

a. The effect of a change in the expected pattern of consumption of economic benefits of a depreciable asset should be
included in the statement of retained earnings as an adjustment to the beginning balance of retained earnings.
b. If it is difficult to distinguish between a change in accounting policy and a change in accounting estimate, the change is
treated as a change in accounting estimate.
c. As a benchmark treatment, a change in accounting estimate should be accounted for retrospectively
d. The effect of a change in accounting policy should be treated currently and prospectively.

2. An enterprise changes its method of accounting for depreciation during the current year because it believes that the
result will be a more appropriate presentation in the financial statements. In its income statement for the year, how
should the enterprise report the adjustment resulting from the change in accounting policy if the alternative treatment
allowed by the IAS is used?
a. Not disclosed in the financial statements.
b. Reported as an adjustment to beginning retained earnings.
c. Disclosed as a separate type of depreciation expense, directly following depreciation expense for the current year.
d. Included in the determination of net profit or loss for the current period

3. Accounting policies are

a. Concepts that underlie the preparation and presentation of financial statements for external users.
b. Attributes that make the information provided in financial statements useful to users.
c. Fundamental premises on which the accounting process is based
d. Specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting
financial statements.

4. The summary of significant accounting policies shall describe

I. The measurement basis used in preparing the financial statements.
II. The accounting policies used that are relevant to an understanding of the financial statements.
a. I only b. II only c. Both I and II d. Neither I nor II

5. Nonfinancial disclosures include all of the following, except

a. The domicile and legal form of the enterprise, its country of incorporation and the address of the registered office.
b. A description of the nature of the enterprise’s operations and its principal activities.
c. The name of the parent and the ultimate parent of the group.
d. Contingent liabilities and unrecognized contractual commitments

6. Which is incorrect concerning accounting changes?

a. The effect of a change in accounting estimate shall be treated currently and prospectively, if necessary.
b. The effect of a change in the expected pattern of consumption of economic benefits of a depreciable asset should be
included in the determination of income or loss of the period of change and future periods.
c. A change in accounting policy shall be accounted for retrospectively.
d. If it is difficult to distinguish between a change in accounting policy and a change in accounting estimate, the change is
treated as a change in accounting policy.

7. A change in accounting policy shall be made when

I. Required by a Standard or an interpretation of the Standard.
II. The change will result in more relevant or reliable information about financial position, performance and cash
flows.
a. I only b. II only c. Both I and II d. Neither I nor II

8. Prior period errors are omissions from and misstatements in the financial statements for one or more periods arising
from a failure or misuse of reliable information that
I. Was available when financial statements for those periods were authorized for issue.
II. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation
of those financial statements.
a. I only b. II only c. Both I and II d. Neither I nor II

9. A company has included in its consolidated financial statements this year a subsidiary acquired several years ago that
was appropriately excluded from consolidation last year. This results in
a. Accounting change that should be reported prospectively
b. Accounting change that should be reported by restating the financial statements of all prior periods presented
c. A correction of an error
d. Neither an accounting change nor a correction of an error

10. Accounting changes are often made and the monetary impact is reflected in the financial statements of a company
even though, in theory, this may be a violation of the accounting concept of
a. Materiality b. Consistency c. Conservatism d. Objectivity

11. Which type of accounting change should always be accounted for in current and future periods?
a. change in accounting principles c. change in accounting estimate
b. change in reporting entity d. Correction of an errors

12. When financial statements are being prepared, which of the following items requires that accountants estimate the
effects of future conditions and events?
a. The purchase price for an acquired building
b. The price of a marketable security
c. The amount of recoverable mineral reserves
d. The physical quantity of inventory

13. Proper application of accounting principles is most dependent upon the

a. existence of specific guidelines c. external audit function
b. oversight of regulatory bodies d. professional judgment of the accountant

14. XYZ Inc. changes its method of valuation of inventories from weighted-average method to first-in first-out (FIFO)
method XYZ Inc. should account for this change as
a. A change in estimate and account for it prospectively
b. A change in accounting policy and account for it prospectively
c. A change in accounting policy and account for it retrospectively
d. Account for it as a correction of an error and account for it retrospectively

15. If an item of income is not material, then the manner of presenting that information, or whether or not it is disclosed:
a. will have an impact on the economic decisions of users;
b. should not affect the economic decisions of users;
c. should not be included in the determination of profit or loss for the period;
d. will be included directly in retained earnings.

16. The level of rounding used in the financial statements refers to:
a. the truncation of the amounts presented;
b. the abbreviation of words used;
c. the shortening of the notes by removing comparative numbers;
d. the presentation of a concise financial report rather than a full financial report.

17. The following statement:

‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial
statements’
provided in IAS 8, defines:
a. IAS accounting standards;
b. accounting estimates;
c. management judgements;
d. accounting policies.

18. The qualitative characteristic of Reliability of financial information means that the information is:
I. Representationally faithful.
II. Neutral.
III. Prudent.
IV. Costless.
V. Complete in all material respects.
a. I, III and V only; b. II, III and IV only; c. I, III and IV only; d. I, II, III and V only.

19. An accounting policy:

a. comprises the principles applied in preparing the financial statements;
b. is a judgment applied in deciding whether to recognise a transaction;
c. is the application of judgment in deciding on the measurement of an item;
d. is the judgement used in deciding on whether to disclose a particular item.

20. The initial application of a policy to revalue assets in accordance with IAS 16 Property, Plant and Equipment, or with
IAS 38 Intangible Assets, must:
a. must be accounted for as a change in accounting policy;
b. must not be accounted for as a change in accounting policy;
c. may be accounted for in accordance with the requirements of the IAS Framework;
d. must be treated as an extraordinary event.

21. When an entity makes a voluntary change to its accounting policies that has an effect on the current period, it is
required to disclose:
I. The reasons why the change will provide more relevant information.
II. The amount of the adjustment for each financial statement line item affected.
III. The nature of the change.
IV. The reasons why the previous policy no longer provides reliable information.
a. I, II, and III only; b. II, III and IV only; c. I, II and III only; d. III and IV only.
22. If a change in accounting estimates affects balance sheet items, IAS 8 Accounting Policies, Changes in Accounting
Estimates, and Errors, requires that the following disclosures be made:
I. The nature of the change.
II. The amount of the change that has an effect in the current period.
III. The amount of the change that affects future periods.
IV. The effect of the change on comparative numbers.
a. I, II, III and IV; b. I, III and IV only; c. II, III and IV only; d. I, II and III only.

23. Where a material error occurs in the recording process, an adjustment:

a. must be made to the prior period comparative balances;
b. may be recognised directly in retained earnings;
c. may be deferred and recognised in a later accounting period;
d. is not necessary, but the item must be fully explained in the notes to the financial statements.

24. Type 1 events that provide evidence of conditions that existed at the balance sheet date are given the following
treatment:
a. note disclosure only, in the financial statements;
b. recognition in the financial statements;
c. adjustment in the cash flow statement;
d. ratification by shareholders at an annual meeting.

25. Type II events that are indicative of conditions that arose after the balance sheet date are given the following
treatment:
a. recognition in the income statement;
b. recognition in the balance sheet;
c. recognition in the cash flow statement;
d. note disclosure in the financial statements.

26. Events after balance sheet date are events that occur between the balance sheet date and the date on which the
financial statements are authorized for issue. An event after balance sheet date for which an adjustment is not necessary
is;
a. The determination after the balance sheet date of the cost of an asset purchased or the proceeds from assets sold
before the balance sheet date.
b. Sale of inventories after the balance sheet date that may give evidence about the net realizable value at balance sheet
date.
c. Entering into significant commitments or contingent liabilities, for example, by issuing guarantees.
d. Resolution after the balance sheet date of a court case.

27. IAS 10 Events after the Balance Sheet Date , states that if a dividend is declared after the balance sheet date but
before the financial statements are authorised for issue, the dividend is:
a. recognised as a liability at the balance sheet date;
b. not recognised as a liability at the balance sheet date;
c. recorded as a direct reduction of equity at the balance sheet date;
d. recorded as a reduction against the asset ‘cash’ at balance sheet date.

28. A change in accounting policy does not include

a. Change in useful life from 10 years to 7 years
b. Change of method of valuation of inventory
c. Change of method of valuation of inventory from weighted-average to FIFO
d. Change from the practice (convention) of paying as Christmas bonus one month’s salary to staff before the end of the
year to the new practice of paying one-half month’s salary only

29. When a public shareholding company changes an accounting policy voluntarily, it has to
a. Inform shareholders prior to taking the decision
b. Account for it retrospectively
c. Treat the effect of the change as an extraordinary items
d. Treat it prospectively and adjust the effect of the change in the current period and future periods

30. When it is difficult to distinguish between a change of estimate and a change in accounting policy, then an entity
should
a. Treat the entire change as a change in estimate with appropriate disclosure
b. Apportion, on a reasonable basis, the relative amounts of change in estimate and the change in accounting policy and
treat each one accordingly.
c. Treat the entire change as a change in accounting policy
d. Since this change is a mixture of two types of changes, it is best if it is ignored in the year of the change; the entity
should then wait for the following year to see how the change develops and then treat it accordingly

31. When an independent valuation expert advisers an entity that the salvage value of its plant and machinery had
drastically changed and thus the change is material, the entity should
a. Retrospectively change the depreciation charge based on the revised salvage value
b. Change the depreciation charge and treat it as a correction of an error
c. Change the annual depreciation for the current year and future years
d. Ignore the effect of the changes in salvage values would normally affect the future only since these are expected to be
recovered in future

32. ABC company decided to operate a new amusement park that will cost P1 million to build in the year 2005. Its
financial year end is December 31, 2005. ABC company has applied for a letter of guarantee for P700,000. The letter of
guarantee was issued on March 31, 2006. The audited financial statements have been authorized to be issued on April
18, 2006. The adjustment required to be made to the financial statement of the year ended December 31, 2005, should
be
a. Booking a P700,000 long-term payable
b. Disclosing P700,000 as a contingent liability
c. Increasing the contingency reserve by P700,000
d. Do Nothing

33. What types of companies or institutions are covered under IAS 8?

a. Financial service institutions
b. Manufacturing companies
c. Companies in existence before 2000
d. All companies

34. When selecting an accounting policy, what is initially considered by the company’s management?
a. The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework
b. The requirements and guidance in standards and interpretations dealing with similar and related issues
c. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the
Framework
d. Accepted industry practices and other accounting literature

35. Which of the following disclosures are made when applying a new Standard or Interpretation?
The title of the standard or interpretation and the nature of the change in accounting policies
The transitional provisions that might have an effect on future periods, when applicable
The amount of the adjustment for periods before those presented, to the extent practicable
a. I and II only b. I only c. II and III only d. All of these

36. When is the correction of immaterial errors done?

a. In the prior period c. In the current period
b. In the following year d. Within a two-year timeframe

37. What is it called when a company cannot apply a requirement after making every reasonable effort to do so?
a. Material b. Misstatement c. Impracticable d. Fundamental errors

38. According to IAS 8, applying a new accounting policy to transactions as if that policy had always been applied is the
definition of
a. Prospective application c. Prospective restatement
b. Retrospective restatement  d. Retrospective application 

39. What does the following definition describe?

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
a. Change in accounting policy c. Change in an accounting estimate
b. The impracticability of restatement d. The correction of prior-period errors

40. What does the following definition describes

Is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior
period error had never occurred.
a. Prospective application c. Prospective restatement
b. Retrospective restatement  d. Retrospective application 

ANSWER KEY:
1. B
2. D
3. D
4. C
5. D
6. D
7. C
8. C
9. B
10. B
11. C
12. C
13. D
14. C
15. B
16. A
17. D
18. C
19. A
20. B
21. C
22. D
23. A
24. B
25. D
26. C PAS 10 p.3 defines Events after the balance sheet date are those events, favourable and unfavorable, that occur
between the balance sheet date and the date when the financial statements are authorized for issue. Two types of
events can be identified:
a. those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the
balance sheet date); and
b. those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the
balance sheet date.)
p. 8 states that an entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after
the balance sheet date.
p.9 gives examples of items that requires adjustments:
a. the settlement after the balance sheet date of a court case that confirms that the entity had a present obligation at the
balance sheet date. The entity adjusts any previously recognized provision related to this court case in accordance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognizes a new provision. The entity does not merely
disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance
with paragraph 16 of IAS 37.
b. the receipt of information after the balance sheet date indicating that an asset was impaired at the balance sheet date,
or that the amount of a previously recognized impairment loss for that asset needs to be adjusted. For example:
i. the bankruptcy of a customer that occurs after the balance sheet date usually confirms that a loss existed at the
balance sheet date on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable;
and
ii. then sale of inventories after the balance sheet date may give evidence about their net realizable value at the balance
sheet date.
c. the determination after the balance sheet date of the cost of assets purchased, or the proceeds from assets sold,
before the balance sheet date.
d. the determination after the balance sheet date of the amount of profit-sharing or bonus payments, if the entity had a
present legal or constructive obligation at the date balance sheet date to make such payments as a result of events
before that date.
e. the discovery of fraud or errors that show that the financial statements are incorrect.
p.10 states An entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events
after the balance sheet date.
p.11 gives examples of non adjusting events after the balance sheet date.
a. decline in market of investments between the balance sheet date and the date when the financial statements are
authorized for issue.
p.22 provides additional non-adjusting events example
a. a major business combination after the balance sheet date (IFRS business Combinations requires specific disclosure in
such cases) or disposing of a major subsidiary:
b. announcing a plan to discontinue an operations
c. major purchases of assets, classification of assets as held for sale in accordance with IFRS 5 Non-current assets held
for sale and discontinued operations, other disposals of assets, or expropriation of major assets by government:
d. the destruction of a major production plant by a fire after the balance sheet date:
e. announcing or commencing the implementation of, a major restructuring
f. major ordinary share transactions and potential ordinary share transactions after the balance sheet date (IAS 33
Earnings per share requires an entity to disclose a description of such transactions, other than when such transactions
involve capitalization or bonus issue, share splits or reverse share splits all of which are required under IAS 33)
g. abnormally, large changes after the balance sheet date in asset prices or foreign exchange rates;
h. changes in tax rates or tax laws enacted or announced after the balance sheet date that have a significant effect on
current and deferred tax assets and liabilities (see IAS 12 Income Taxes):
i. entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees; and
j. commencing major litigation arising solely out of events that occurred after the balance sheet date.

27. B
28. A
29. B
30. A
31. C
32. D
33. D IAS 8 applies to all companies, with no scope exclusions
34. B
35. D
36. C The correction of immaterial errors can be dealt with in the current period. The correction of a prior-period error is
excluded from profit or loss for the period in which the error is discovered, provided it is material.

In the absence of a standard or interpretation, management must use its judgement in developing and applying an
accounting policy that results in information that is relevant and reliable.
Information is reliable when the financial statements:
1. Represent faithfully the financial position, financial performance, and cash flows of the entity;
2. Reflect the economic substance of transactions;
3. Are neutral;
4. Are prudent; and
5. Are complete in all material respects

In making the judgement, management considers the following sources in descending order:
1. The requirements and guidance in Standards and Interpretations dealing with similar and related issues
2. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the
Framework
Management may also consider:
1. The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to
develop accounting standards
2. Other accounting literature
3. Accepted industry practices, as long as these do not conflict with the sources mentioned above
An entity shall select and apply its accounting policies consistently for similar transactions, other events, and conditions
unless a standard or interpretation specifically requires or permits categorization of items for which different accounting
policies may be appropriate.
In these cases, an appropriate accounting policy must be selected and applied consistently to each category
An entity can change an accounting policy only if:
 The change is required by a standard or interpretation, or
 It results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events, or conditions on the entity’s financial position, financial performance, or cash flows
Note that when an entity chooses to adopt all IFRSs because that is to be its primary reporting basis for the future, the
treatment of the change is governed by IFRS 1, First-Time Adoption of International Financial Reporting Standards , rather
than by IAS 8.
Users of financial statements need to be able to compare the financial statements of an entity over time. Therefore, the
same accounting policies are applied within each period and from one period to the next, unless a change in accounting
policy meets the criteria above. .
The initial application of a policy to revalue assets in accordance with IAS 16, Property, Plant and Equipment or IAS 38,
Intangible Assets is a change in an accounting policy to be dealt with as a revaluation under IAS 16 or IAS 38, rather than
in accordance with IAS 8.

An entity must account for a change in accounting policy resulting from initial application of a standard or interpretation:
          - In accordance with the specific transitional provisions, if any, in that standard or interpretation  
          - Retrospectively, if the standard or interpretation does not include specific transitional provisions applying to that
change
Note that when the entity voluntarily changes an accounting policy, it must apply the change retrospectively. Entities are
exempt from this retrospective application when it is impracticable to determine either the period-specific effects or the
cumulative effect of the change.
When a change in accounting policy is applied retrospectively, the entity adjusts the opening balance of each affected
component of equity for the earliest prior period presented and the other comparative amounts disclosed for each period
presented as if the new accounting policy had always been applied.
When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative
information for one or more prior periods presented, the entity applies the new accounting policy to the carrying amounts
of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable (which
may be the current period) and makes a corresponding adjustment to the opening balance of each affected component of
equity for that period.
When it is impracticable to determine the cumulative effect at the beginning of the current period of applying a new
accounting policy to all prior periods, the entity adjusts the comparative information to apply the new accounting policy
prospectively from the earliest date practicable. It therefore disregards the portion of the cumulative adjustment to
assets, liabilities, and equity arising before that date.
When applying a new standard or interpretation, disclose all the following:
 The title of the standard or interpretation
 When applicable, that the change is made in accordance with its transitional provisions, giving a description of
these provisions
 The nature of the change in accounting policies, and, when applicable, a description of the transitional provision
 The transitional provisions that might have an effect on future periods, when applicable
 For the current period and prior periods presented, the amount of the adjustment for each line item affected, to
the extent practicable
 The amount of the adjustment for the periods before those presented, to the extent practicable
 If relevant, the circumstances that have made retrospective application impracticable and a description of how
and from when the change has been applied
The disclosure of the effect on the current period and prior periods presented requires the amount of the adjustment to
be given for each line item in the financial statements that is affected, and also the effect on basic and diluted earnings
per share (if IAS 33, Earnings Per Share applies).
In addition, if an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the
entity has to disclose this fact and give known or reasonably estimable information relevant to assessing the possible
impact that application of the new standard or interpretation will have on the entity’s financial statements in the period of
initial application. If the impact is not known or is not reasonably estimable, the entity has to disclose that fact.
For a voluntary change in accounting policy, disclose:
 The reasons why applying the new accounting policy provides reliable and more relevant information
 The nature of the change
 For the current period and prior periods presented, the amount of the adjustment for each line item affected, to
the extent practicable
 The amount of the adjustment for the periods before those presented, to the extent practicable
 The circumstances that have made retrospective application impracticable and a description of how and from
when the change has been applied
The disclosure of the effect on the current period and prior periods presented requires the amount of the adjustment to
be given for each line item in the financial statements that is affected, and also the effect on basic and diluted earnings
per share (if IAS 33, Earnings Per Share applies).

37. C
38. D Retrospective application is applying a new accounting policy to transactions, other events, or conditions as if that
policy had always been applied
39. C change in an accounting estimate is defined as 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.
40. B