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Accounting Policies, Changes in Accounting Estimates & Errors – IAS 8Accounting Estimates & Errors IAS 8

Introduction

Accounting Policies, Changes in Accounting Estimates and Errors

IFRSIAS 8 Accounting Policies, Changes in Accounting Estimates and Errorsg g g

Indian GAAPAS 5 N t P fit L f th P i d P i P i d It d Ch i A tiAS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting

Policies

Institute has classified IAS 8 under category IV - the adoption of which would require changes in laws/regulations because compliance with such IFRSs is not possible until the regulations/laws are amended.

Slide 2

Objective and Scope


• Prescribes criteria for selecting and applying accounting policies

• Deals with accounting treatment and disclosure requirements of changes ing q gaccounting policies, accounting estimates and correction of prior period errors

• Qualitative characteristics of Financial StatementsQualitative characteristics of Financial Statements• Relevant• Reliable• UnderstandableUnderstandable• Comparable

Wh ti t d d it tit t d t f t lt ti• Where an accounting standard permits an entity to adopt one of two alternative accounting treatments, it is important that the entity clearly indicates the alternative that has been adopted and it should be applied consistently

Slide 3

IAS 8 – ChangesIAS 8 Changes

AccountingAccounting Changes & Errors

Accounting Changes ErrorsChanges

Changes in Accounting Estimates

Accounting Policy

- Balance Sheet Errors- Income Statement Errors- Cash Flow Errors

Selection of Accounting Policy - Hierarchy

Accounting Policies, Changes in Accounting Estimates & Errors

• Prescribed Standard or Interpretation – IFRS, IAS, IFRIC, SIC

• Any relevant Implementation Guidance issued by the IASB for the Standard ory p yInterpretation – (technically not a part of the standards)

• Guidance for similar or related issue

• Framework of IFRS

• Most recent pronouncements of other standard-setting bodies

Oth ti lit t d t d i d t ti• Other accounting literature and accepted industry practices

• Onus on management - select policy to make financials relevant & reliable

Slide 5

Selecting accounting policies

Accounting policies are the specific

I. IFRS standards and interpretations principles, bases, conventions, rules

and practices applied II. Apply management judgement

p ppby an entity in preparing and

presenting financiala) Similar areas covered by IFRS

Media Company

presenting financial statements.

b) The Framework -Intangible v/s inventory-How to amortise !Common control transaction

III. Other standard setters or accepted industry practices

transaction

Accounting Policy g yAn entity shall disclose in the summary of significant

accounting policies:(a) the measurement basis (or bases) used in preparing the

financial statements, and

(b) the other accounting policies used that are relevant to an understanding of the financial statements.

f• particular accounting policies is especially useful to users when those policies are selected from alternatives allowed in IFRSs.

• nature of its operations and the policies that the users of its• nature of its operations and the policies that the users of its financial statements would expect to be disclosed for that type of entity.

Is this accounting policy acceptable?Is this accounting policy acceptable?

Operating lease rentals are recognised in the incomeOperating lease rentals are recognised in the income statement as incurred

Operating lease rentals are recognised in the income statement on a straight-line basis over the lease term.

Is this accounting policy acceptable?Is this accounting policy acceptable?

Receivables are stated net of a provision for badReceivables are stated net of a provision for bad debts.

Trade receivables are recognised initially at fair valueTrade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for , pimpairment.

Notes to financial statements

Presentation of Financial statements

Key judgments

An entity shall disclose in the summary of significant accounting policies or otherAn entity shall disclose, in the summary of significant accounting policies or other notes, the judgment that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.”g

Estimation uncertainty

“An entity shall disclose information about the assumptions it makes about the future, and other sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year In respect of thoseamounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of:(a) their nature, and (b) their carrying amounts as at the end of the reporting period. ”

Slide 10

What’s the big change?


Accounting policies change: retrospective application

A ti ti t h P ti li tiAccounting estimate change: Prospective application

• Change in depreciation method = prospective

Correction of errors: retrospective application

Management cannot assert compliance with IFRS if financial statements does g pnot comply with all prescribed accounting standards

Slide 11

Change in Acco nting Polic


Change in Accounting Policy

- Change in method of amortizing actuarial gains and losses - Change in method of presenting the statement of cash flows (i.e., direct vs. indirect)

Following are not changes in accounting policies:Accounting policy for transactions that differ in substance from those previously occurring; andoccurring; and

Application of a new accounting policy for transactions that did not occur previously or were immaterial.

Retrospective application to all prior periods unless impracticable

Slide 12

Correction of Error in previously Issued Financial Statements


Errors discovered subsequent to issuance of financial statement reported as a prior-period adjustment by restating previously issued financial statements.p j y g p y

Example• Corrections of mistakes in the application of IFRS• Corrections of mistakes in the application of IFRS• Corrections of mathematical mistakes• Oversight or misuse of facts that existed at the time the financial statements were

preparedprepared.

Slide 13

Correction of Error in previously Issued Financial Statements


Restatement of Prior Period

• Cumulative effect of the error on Prior periods if materialCumulative effect of the error on Prior periods, if material

• An offsetting adjustment, if any, to the opening balance of retained earnings

• Financial statements for each individual prior period presented shall be adjusted toFinancial statements for each individual prior period presented shall be adjusted toreflect correction of the period-specific effects of the error.

• Effect presented in line items affected and EPS

Slide 14

Retrospective Application Vs. Restatement


Common confusion:

Retrospective application = Restatement

Retrospective application is applying a new accounting policy to transactions, otherevents and conditions as if that policy had always been applied.

Retrospective restatement is correcting the recognition, measurement anddisclosure of amounts of elements of financial statements as if a prior period errorhad never occurred.

Slide 15

Example: Change in policy or estimate?Example: Change in policy or estimate?

Would the following be a change in accounting policy orWould the following be a change in accounting policy or change in accounting estimate?

- Change in depreciation method

Ch i b i f h d

Estimate

- Change in basis of overhead absorption for inventory Estimate

- Changing from writing off actuarial gains / losses to

Corridor approach PolicyCorridor approach Policy

Case Study: Lets put this into practice!

Drafting ofDrafting of Accounting Policy

Case study

Th C t h l i d fti ti liThe Company wants your help in drafting an accounting policy for property, plant and equipments (PPE). The Company has informed you that:y

- They have used fair value as deemed cost exemption as on the date of transition to IFRS for some of plant and machinery.

- Rest all the assets are measures in accordance with IFRS

- Subsequently all the assets are depreciated over their useful life. The depreciation is computed after considering the residual value.

Y h 10 i t t d ft ti liYou have 10 minutes to draft accounting policy.

GAAP Differences


Nature of Difference

IFRS Indian GAAP

Changes in Changes in accounting policy are accounted for The cumulative amount of the change is gaccounting policy

g g p yretrospectively. Comparative information is restated, and the amount of the adjustment relating to prior periods is adjusted against the opening balance of retained earnings of the earliest year presented.

grecognised and disclosed in the income statement in the period of the change. Transition provisions of certain new standards require adjustment of the cumulative amount of the change to opening retained earnings (reserves).

Changes in accounting estimates

Changes in accounting estimates are accounted for in the income statement when identified.

Similar to IFRS. However, the impact of change in depreciation method is determined by retrospectively computing depreciation under the new method, and is recorded in the period of change whereasand is recorded in the period of change whereas on revision of asset life, the unamortiseddepreciable amount is charged over the revised remaining asset life.

Non-compliance with standard

IAS 8 specifically provides that financial statements do not comply with IFRSs if they contain either

No such specific requirement under AS 5.with standard do not comply with IFRSs if they contain either

material errors or immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

Slide 19

GAAP Differences


Nature of Difference

IFRS Indian GAAP

Treatment of Prior IAS 8 requires that except when it is impractical to AS 5 requires prior period items to be included in period items

q p pdo so, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by (i) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (ii) if th d b f th li t i

q p pthe determination of net profit or loss for the current period.

(ii) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

Slide 20

Any questions?

Thank YouArpit mundra@in pwc [email protected]

This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice You should not act upon the information contained in this presentation without obtaining specific professionaladvice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, Arpit Mundra or the Firm / Company for which he works, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior written permission of Arpit Mundra, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents. Moreover, the presensation has to be considered alongwith the session given by Arpit Mundra and not on as it is, standalone or any other basis.

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