International Accounting Standard-8

Accounting Policies, Changes in Accounting Estimates and Errors

Slides Prepared By: Zain Tareen

Effective date of IAS-8This standard was applied to

annual periods begun on or immediately after

1st January, 2005.

Objective Of IAS 8

It prescribes the criteria for:   Selection of accounting policies;   Changes in accounting policies;   Accounting treatment;  Disclosure of changes in

accounting policies; Changes in accounting estimates;

And  Correction of errors;

The achievement of the objective would

result in Enhancement of:

Relevance and reliability of financial statements;

Comparability of financial statements with the financial statements of other entities and of prior periods of the same entity.

Key Concepts

Retrospective Application:

• Retrospective application is applying a new policy to transactions, other events & Conditions as if that policy had always been applicable.

Retrospective Restatement:

It is basically the after effect of Retrospective application on the Prior Periods presented along the current year’s Financial Statement.

Prospective Application

Prospective Application means applying the changes on current and future periods only.In the past what’s done is done no such alteration is required in the books of the accounts.

Impracticable Applying:

Applying a requirement is impracticable when the entity cannot apply it after making every possible effort.

Accounting Policies

What are Accounting Policies??

Basis;Rules;Conventions;Practices;Specific Principles;

That are applied in preparing and presenting financial Statements

Reasons for Change in Accounting Policies

Change in International Financial Reporting Standard

Change in Local LegislationFor More True & Fair View

Accounting Treatment of Change in

Accounting PolicyRetrospective

When a change in accounting policy is applied retrospectively, the entity shall adjust the opening balances of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.

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 shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.

Impracticable

DISCLOSURE REQUIREMENTS OF CHANGE IN ACCOUNTING POLICYNature of changeDescription of transitional provision if anyFor the current period and each prior period

presented, to the extent practicable, the amount of adjustment:◦        For each financial statement line item

affected;◦        Earnings per share – revised

Accounting Estimates

What is a Change in Accounting Estimates?

Change in Accounting Estimates is an Adjustment in Carrying value of an Asset ;or a liability;Or the amount of Periodic

consumption of an Asset;As a Result of Present

Conditions and Circumstances

What are the Reasons for Estimation??

When an item of financial statements cannot be measured precisely, it can only be estimated. This is because of:Uncertainties inherent in the

business;Where judgments are involved;

Where Estimation is Required??

Estimates may be required ofBad DebtsInventory obsolescenceFair value of financial assets or

financial liabilitiesThe useful lives of, or expected

pattern of consumption of the future economic benefits embodied in, depreciable assets

Warranty Obligations etc.

When Change in Accounting Estimate Becomes Necessary??

If changes occur in the circumstances on which the estimate was based◦As a result of a new information◦As a result of new development◦More Experience

What is the Recognition Criteria of Change in Accounting Estimate??

Adjusting the carrying amount of the related asset, liability or equity item in the period of change recognizes a change in an accounting estimate

Example:◦Management estimated that provision for

doubtful debts up to 5 percent of the total population of trade debts. However, upon identifying the age of the trade debts, it revealed that bad debts are about 6.5 percent of total population of trade debts. Management immediately recognizes the increase in bad debts expense in the books of accounts.

International Accounting Standard 8 Requires Recognizing the effect of the change in the accounting estimate in the

Current; and future periods;

affected by the change.

Accounting Treatment of Change in Accounting Estimates

Disclosures Required for Change in Accounting Estimates

If the effect of a change in estimate is immaterial (as is usually the case for changes in reserves and allowances), we do not disclose the alteration.

However, we disclose the change in estimate if the amount is material. Also, if the change affects several future periods, e.g., the effect on income from continuing operations, net income, and per share amounts.

Errors

What are Errors??Errors are Mistakes by literal

meanings.

They can be Classified as shown.

Err

ors Prior Period

Current Period

Errors Related To Prior Reporting Periods

Errors Related To Current Reporting

Period

What are Prior Period Errors?

Failure to use or misuse of reliable information that was available when financial statements for those periods were authorized for issue.

Failure to use or misuse of reliable information that could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

What are the Examples of Prior Period Errors??

Effect of mathematical mistakesMistakes in applying accounting

policiesOversightMisinterpretation of facts Fraud.

Change in accounting estimates result from New information or New developments are NOT corrections of errors

What is the Accounting Treatment for Rectification of Errors??

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:◦Restating the comparative amounts

for the prior period(s) presented in which the error occurred; or

◦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

What are the Disclosure Requirements of IAS-8??

Nature of the prior period errorTo the extent practicable, the amount of

the correction:◦For each financial statement line item affected;

and◦Revision in earnings per share (EPS)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.

End of Slides