238275620 accounting policies changes in accounting estimates and errors ias 8

8/19/2019 238275620 Accounting Policies Changes in Accounting Estimates and Errors IAS 8

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IAS 8-Accounting Policies,

Changes in AccountingEstimates and Errors


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entop ConsultingFinancial and Management Consultants

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Objectives and Scope

Objectives The objective of this Standard is to prescribe the criteria for selecting

and changing accounting policies, together with the accounting

treatment and disclosure of changes in accounting policies, changes

in accounting estimates and corrections of errors

Scope

Prescribes criteria to be applied in selecting and applying accounting

policies, and accounting for changes in accounting policies, changes

in accounting estimates and corrections of prior period errors.


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Definitions

Accounting policies: The specific principles, bases, conventions, rules and

practices applied by an entity in preparing and presenting financial

statements.

Change in accounting estimate: 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 expectedfuture 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.

Impracticable: Applying a requirement is impracticable when the entity

cannot apply it after making every reasonable effort to do so.


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Definitions (contd)

Prior period errors: Omissions from, and misstatements in, the entity’s

financial statements for one or more prior periods arising from a failure touse, or misuse of, reliable information that was available at the time andcould reasonably be expected to have been obtained and taken into accountin the preparation and presentation of FS.

Retrospective application: Applying a new accounting policy totransactions, other events and conditions as if that policy had always been

applied. Retrospective restatement: Correcting the recognition, measurement and

disclosure of amounts of elements of financial statements as if a prior perioderror had never occurred.

Prospective application: of a change in accounting policy and ofrecognising the effect of a change in an accounting estimate, respectively,

are: applying the new accounting policy to transactions, other events and

conditions occurring after the date as at which the policy is changed; and

recognising the effect of the change in the accounting estimate in the currentand future periods affected by the change.


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Selection and application of Accounting Policies

When an IFRS specifically applies to a transaction, other event or condition,

the accounting policy or policies applied to that item shall be determined byapplying the IFRS.

In the absence of an IFRS that specifically applies to a transaction, other

event or condition, management shall use its judgement to develop and

apply an accounting policy that results in information that is relevant and

reliable. Reliable information exists when the financial statements:• represent faithfully the financial position, financial performance and cash flows

of the entity;

• Reflect the economic substance of transactions, other events and conditions,

and not merely the legal form

• are neutral, ie free from bias;

• are prudent; and

• are complete in all material respects.


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Accounting Policies (contd )

In making the judgment, management shall refer to, and consider theapplicability of, the following sources in descending order:

the requirements in IFRSs dealing with similar and related issues; and

the definitions, recognition criteria and measurement concepts for assets,

liabilities, income and expenses in the Framework .

Management may also consider the most recent pronouncements of otherstandard-setting bodies that use a similar conceptual framework to developaccounting standards, other accounting literature and accepted industrypractices, to the extent that these do not conflict with the IASB standard andthe Framework.


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Consistency of Accounting Policies

Once selected, accounting policies must be applied consistently for similartransactions, other events, and conditions unless a Standard or

Interpretation specifically requires otherwise or permits categorisation of

items for which different accounting policies may be appropriate.

If a Standard or Interpretation requires or permits such categorisation, anappropriate accounting policy shall be selected and applied consistently to

each category.

An accounting policy may only be changed only if the change:

Is required by a Standard or an Interpretation; or Results in FS providing reliable and more relevant information.


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Change in Accounting policy These items are not considered changes in accounting policies:

The application of an accounting policy for transactions, other events, or

conditions that differs in substance from those previously occurring.

The application of a new accounting policy for transactions, other events, or

conditions, that did not occur previously or were immaterial.

Question: Are these a change in accounting policy?

At the end of its first year of acquisition of investment property, Top-Inv decided to

adopt the cost model after initial recognition in line with IAS 40, after the CFO has

made a case for the revaluation model.

Adopting the revaluation model of IAS 16 where the cost model was previously in use

After reassessing the useful life of its property, Sheraton Towers decides that

depreciation should now be over 55 years instead of the previous 50 years it was

being depreciated.


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Applying Changes in Accounting Policies

A change in accounting policy required by a Standard or Interpretation shall

be applied in accordance with the transitional provisions therein If a Standard or Interpretation contains no transitional provisions or if an

accounting policy is changed voluntarily, the change shall be applied

retrospectively.

Early application of an IFRS should not be construed to mean a change in

accounting policy

Retrospective Application: is applying a new accounting policy to transactions,

other events and conditions as if that policy had always been applied.

the entity adjusts the opening balance of each affected component of equity for

the earliest prior period presented and other comparative amounts disclosed foreach prior period presented as if the new accounting policy had always been

applied.

It need not be made if it is “impracticable” to determine either the period-specific

effects or the cumulative effect of the change


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Applying Changes in Accounting Policies An entity applies a change in accounting policy retrospectively by adjusting the

opening balance of each affected component of equity for the earliest prior

period presented and the other comparative amounts disclosed for each priorperiod presented as if the new accounting policy had always been applied

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 if:

The effects of the retrospective application or retrospective restatement are notdeterminable;

The retrospective application or retrospective restatement requires assumptions

about what management’s intent would have been in that period; or

The retrospective application or restatement requires significant estimates of

amounts and it is impossible to distinguish objectively information about those

estimates that:

provides evidence of circumstances that existed at that time; and

would have been available at the time


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Disclosures- Changes in Accounting Policies

When initial application of an IFRS has an effect on the current period or any

prior period, would have an effect but it is impracticable to determine the

amount of the adjustment, or might have an effect on future periods, an entityshall disclose:

The title of the IFRS;

If applicable, that the change in accounting policy is made in accordance with

its transitional provisions;

The nature of the change in accounting policy; If applicable, a description of the transitional provisions;

If applicable, the transitional provisions that might have an effect on future

periods;

For the current period and each prior period presented, to the extent

practicable, the amount of the adjustment:

for each financial statement line item affected; and

if IAS 33 Earnings Per Share applies to the entity, for basic and diluted

earnings per share;


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Changes in Accounting Estimates Many items in the FS cannot be measured with accuracy and are thus estimated.

Common examples of accounting estimates include:

Bad Debts

Inventory obsolescence

Useful lives of PPE

Fair values of financial assets or financial liabilities

Provision for warranty obligations

The use of reasonable estimates is an essential part of the preparation of

financial statements and does not undermine their reliability

Occasionally, it may be difficult to distinguish between changes in measurement

bases (i.e., accounting policies) and changes in estimate. In such cases, the

change is treated as a change in estimate

Changes in accounting estimate are to be adjusted prospectively in the period in

which the estimate is amended and, if relevant, to future periods if they are alsoaffected.

Changes in accounting estimate that give rise to changes in assets, liabilities or

equity shall be recognised by adjusting the carrying amount of the related asset,

liability or equity item in the period of the change.


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Disclosures-

Changes in Accounting Estimates

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 in future periods, except for the disclosure

of the effect on future periods when it is impracticable to estimate that

effect.

If the amount of the effect in future periods is not disclosed because

estimating it is impracticable, an entity shall disclose that fact.


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Errors

Errors can arise in respect of the recognition, measurement, presentation or

disclosure of elements of FS.

Example of errors are mathematical mistakes, misinterpretation of fact,

mistake in applying accounting policy, fraud, oversight etc

Potential current period errors discovered in that period are corrected before

the financial statements are authorised for issue.

An entity shall correct material prior period errors retrospectively in the first

set of financial statements authorised for issue after their discovery by:

restating the comparative amounts for the prior period(s) in which the error

occurred; or

if the error occurred before the earliest prior period, restating the opening

balances of assets, liabilities and equity for the earliest prior period presented

Discovery of materials errors relating to prior periods shall be corrected by

restating comparative figures in the FS for the year in which the error is

discovered, unless it is “impracticable” to do so


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Errors

When it is impracticable to determine the period-specific effects of an erroron comparative information for one or more prior periods, the entity shall

restate the opening balances of assets, liabilities and equity for the earliest

period for which retrospective restatement is practicable

Discussions :

Is an error that results in a wrong accounting estimate

(irrespective of materiality) an accounting error ?


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Disclosures- Correction of Prior-Period Errors

With respect to the correction of prior-period errors, IAS 8 requires disclosureof:

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; and

If IAS 33 applies to the entity, for basic and diluted earnings per share;

The amount of the correction at the beginning of the earliest prior periodpresented; and

If retrospective restatement is impracticable for a particular prior period, thecircumstances that led to the existence of that condition and a description ofhow and from when the error has been corrected

238275620 accounting policies changes in accounting estimates and errors ias 8

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