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

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

2. Seminar on Sri Lanka Public Sector Accounting Standards (SLPSAS) Conducted By : Association of Public Finance Accountants of Sri Lanka (Public Sector wing CA Sri Lanka)

3. Accounting Policies, Changes in Accounting Estimates and Errors (SLPSAS 03) • P. Ariyasena (B.Com (Sp),ACA,DPFM) • Chief Accountant • Ministry of Foreign Employment Promotion and Welfare

4. 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

5. Introduction Accounting Policies Specific Principles, bases, conventions, rules or practices in preparing and presenting financial statements

6. 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

7. Prior Period Errors Prior 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.

8. objective 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

9. Scope Applies in selecting and applying accounting policies, changes in accounting policies, accounting estimates and correction of prior period errors 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

10. Key Definitions Prospective application It 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.

11. Key Definitions: Cont. Retrospective application Appling a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.

12. Key Definitions: Cont. Retrospective Restatements Correcting the recognition, measurement and disclosure of amount of elements of financial statements as if prior period errors had never been occurred

13. Key Definitions :Cont. Impracticable Applying 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

14. Selection and application of accounting policies 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 .

15. Cont. 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. Relevance to the decision making need of users Reliable in that the financial statements Represent faithfully the financial position, financial performance and cash flows

16. 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.

17. Cont. In Making the judgment, the management shall consider the applicability of the following sources Requirement & guidance in SLPSAS in dealing with similar issues The definitions, recognitions and measurement criteria for assets, liabilities, revenue and expenses describe in other SLPSAS The management may consider most recent pronouncement of other standard setting bodies and accepted private & public sector practices.

18. Consistency of accounting policies 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

19. Changes in accounting policies 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

20. Cont. 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

21. Instances not treated as Changes in accounting policies The application of an accounting policy for transaction, event or condition that differ in substance from those previously occurring The 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

22. Applying changes in accounting policies 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 standard When 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

23. Retrospective application 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

24. Limitations on Retrospective Application. 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

25. Cont. 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

26. 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 Comparison • Prospective application Retrospective application

27. Disclosure: Initial Application For initial application of SLPSAS Should be disclosed Title of the standard Change in accounting policy under transitional provision The nature of changing accounting policy A description of transitional provision The effect of prior period presented etc Above disclosure need not be repeated subsequently

28. Disclosure Voluntary change in accounting policy The nature of the accounting policy changed The reason for applying new accounting policy 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

29. Changes in Accounting Estimates Estimation involves judgments based on latest available, reliable information Examples: Tax dues, bad debts, Provision for inventory obsolescence, Depreciations

30. Errors Errors 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

31. Disclosure - Changes in Accounting Estimates 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 period.

32. Disclosure of prior period errors 1. The nature of prior period error 2. The amount of correction 3. Description of how and from the error has been corrected

33. 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 - 8 SLPSAS - 3

34. 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

35. 20122011 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 11,00013,500 Correction of prior period error/ Retrospective restatement)

36. Contributed Accu Total Capital Surplus Balance 31.12.2010 5,000 20,000 25,000 Surplus for Y/E 31.12.2011 13,50013,500 Balance as at 31.12.2011 5,000 33,500 38,500 Surplus for Y/E 31.12.2012 11,00011,000 Balance as at 31.12.2012 5,000 44,50049,500 Statement of Changes in Equity

37. 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

38. 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 information Capitalized borrowing cost 2011 Rs 2,600 Capitalized borrowing cost before 2011 Rs 5,200 Surplus before interest 2012 Rs,30,000,interest Rs 3,000 The 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

39. 2012 2011 Surplus before interest 30,000 18,000 Interest expense (3,000)(2,600) Surplus 27,00015,400 Statement of Financial Performance

40. Contributed Accumulated Total Capital Surplus Balance at 31.12.2010 10,000 20,000 30,000 Changes of A/P with rep to Interest (Note 1) ( 5,200)(5,200) Balance at 31.12.2010 10,000 14,800 24,800 Surplus for Y/E 31.12.2011 15,40015,400 Balance as at 31.12.2011 10,000 30,200 40,200 Surplus for the year 27,00027,000 Closing at 31.12.2012 10,00057,20067,200 Statements of changes in equity

41. 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

42. 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

43. Property, Plants & Equipments Cost 25,000 Depreciation (14,000) Net book value 11,000 Depreciation on old basis 1,500 Due to non availability of cost of each components The management decide to apply the new depreciation policy

44. Property, Plants & Equipments Survey Valuation 17,000 Estimated residual value 3,000 Avg remaining assets life (Years) 7 Depreciation on new basis 2,000 Depreciation on new accounting policy – Revaluation Model component basis

45. Three areas – AP, Estimates, Errors Selection of AP Retrospective application Prospective application Accounting estimates Prior period errors Disclosures Applicable LKAS Summary

46. Questions ?