International Accounting International Accounting Standard (IAS-8)Standard (IAS-8)

Accounting Policies, Changes in Accounting Policies, Changes in Accounting Estimates and ErrorsAccounting Estimates and Errors

JOIN KHALID AZIZJOIN KHALID AZIZCOACHING CLASSESCOACHING CLASSESICMAP STAGE 1,2,3,4,5ICMAP STAGE 1,2,3,4,5ICAP MODULE A,B,C,DICAP MODULE A,B,C,D

PIPFAPIPFABBA & MBABBA & MBA

B.COM & M.COMB.COM & M.COMACCOUNTING OF O/A LEVELACCOUNTING OF O/A LEVEL

MA-ECONOMICSMA-ECONOMICS0322-33857520322-3385752

KARACHI, PAKISTANKARACHI, PAKISTAN

Objective Of IAS 8Objective Of IAS 8

            it prescribes the criteria for:it prescribes the criteria for: OO              selection of accounting policies;selection of accounting policies; OO              changes in accounting policies;changes in accounting policies; OO              accounting treatment;accounting treatment; OO            disclosure of changes in accounting policies;disclosure of changes in accounting policies; OO              changes in accounting estimates; Andchanges in accounting estimates; And OO              correction of errors;correction of errors;

The achievement of the objective would The achievement of the objective would

result in:result in:             enhancement of:enhancement of: OO relevance and reliability of financial relevance and reliability of financial

statements;statements; OO comparability of financial statements comparability of financial statements

with the financial statements of other entities;with the financial statements of other entities;

WHAT ARE ACCOUNTING POLICIES?WHAT ARE ACCOUNTING POLICIES?

These are:These are:             Specific principles;Specific principles;             Bases;Bases;             Conventions;Conventions;             Rules;Rules;             Practices;Practices; These are applied in preparing and presenting These are applied in preparing and presenting

financial statements.financial statements.

RETROSPECTIVE APPLICATIONRETROSPECTIVE APPLICATION

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

  RETROSPECTIVE RESTATEMENTRETROSPECTIVE RESTATEMENT Retrospective restatement is correcting the Retrospective restatement is correcting the

recognition, measurement and disclosure of recognition, measurement and disclosure of amounts of elements of financial statements as amounts of elements of financial statements as if a prior period error had never occurred.if a prior period error had never occurred.

IMPRACTICABLEIMPRACTICABLE

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

PROSPECTIVE APPLICATIONPROSPECTIVE APPLICATION Prospective application of a change in accounting Prospective application of a change in accounting

policy and of recognizing the effect of a change in policy and of recognizing the effect of a change in an accounting estimate, respectively, are:an accounting estimate, respectively, are: Applying the new accounting policy to Applying the new accounting policy to

transactions, other events and conditions transactions, other events and conditions occurring after the date as at which the policy is occurring after the date as at which the policy is changed; and.changed; and.

Recognizing the effect of the change in the Recognizing the effect of the change in the accounting estimate in the current and future accounting estimate in the current and future periods affected by the change.periods affected by the change.

Who will identify the change in financial Who will identify the change in financial statements is inevitablestatements is inevitable

USERS OF FINANCIAL USERS OF FINANCIAL STATEMENTSSTATEMENTS

USERS OF FINANCIAL STATEMENTS ARE USERS OF FINANCIAL STATEMENTS ARE ASSUMED TO HAVE A REASONABLE ASSUMED TO HAVE A REASONABLE KNOWLEDGE OF BUSINESS AND ECONOMIC KNOWLEDGE OF BUSINESS AND ECONOMIC ACTIVITY AND ACCOUNTING AND A ACTIVITY AND ACCOUNTING AND A WILLINGNESS TO STUDY THE INFORMATION WILLINGNESS TO STUDY THE INFORMATION WITH REASONABLE DILIGENCE.WITH REASONABLE DILIGENCE.

[Para 25 of Framework for the preparation and [Para 25 of Framework for the preparation and presentation of financial statements.].presentation of financial statements.].

CHARACTERISTICS OF AN CHARACTERISTICS OF AN ACCOUNTING POLICYACCOUNTING POLICY

In devising an accounting policy, it should be:In devising an accounting policy, it should be:             relevant; relevant;             reliable;reliable;             faithful;faithful;             havinghaving economic substance;economic substance;             neutral;neutral;             prudent;prudent;             complete;complete;

CHARACTERISTICS OF AN ACCOUNTING CHARACTERISTICS OF AN ACCOUNTING POLICY… continuedPOLICY… continued

Relevant to the economic decision making needs of user; Relevant to the economic decision making needs of user; andand

Reliable in that the financial statements:Reliable in that the financial statements: Represents faithfully the financial position, financial Represents faithfully the financial position, financial

performance and cash flows of the entity;performance and cash flows of the entity; Reflect the economic substance of transactions, other Reflect the economic substance of transactions, other

events and conditions, and not merely legal form;events and conditions, and not merely legal form; Are prudent; andAre prudent; and Are complete in all material respects.Are complete in all material respects.

CHARACTERISTICS OF AN ACCOUNTING CHARACTERISTICS OF AN ACCOUNTING POLICY… continuedPOLICY… continued

CONSISTENCYCONSISTENCY

What are not change in accounting What are not change in accounting policies?policies?

The following are not change in accounting policies:The following are not change in accounting policies: The application of an accounting policy for The application of an accounting policy for

transactions, other events or conditions that differ in transactions, other events or conditions that differ in substance from those previously occurring; andsubstance from those previously occurring; and

The application of a new accounting policy for The application of a new accounting policy for transactions, other events or conditions that did not transactions, other events or conditions that did not occur previously or were immaterial.occur previously or were immaterial.

Accounting treatment of change in Accounting treatment of change in accounting policyaccounting policy

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

When it is impracticable to When it is impracticable to determine the cumulative effect, determine the cumulative effect, at the beginning of the current at the beginning of the current period, of applying a new period, of applying a new accounting policy to all prior accounting policy to all prior periods, the entity shall adjust periods, the entity shall adjust the comparative information to the comparative information to apply the new accounting apply the new accounting policy prospectively from the policy prospectively from the earliest date practicable.earliest date practicable.

DISCLOSURE REQUIREMENTSDISCLOSURE REQUIREMENTS OF OF CHANGE IN ACCOUNTING POLICYCHANGE IN ACCOUNTING POLICY

            Title of the standard or interpretationTitle of the standard or interpretation             Transitional provision if applicableTransitional provision if applicable             Nature of changeNature of change             Description of transitional provisionDescription of transitional provision      For the current period and each prior period For the current period and each prior period

presented, to the extent practicable, the amount of presented, to the extent practicable, the amount of adjustment:adjustment:

oo              For each financial statement line item affected;For each financial statement line item affected; oo              Earnings per share – revisedEarnings per share – revised

WHAT IS A CHANGE IN ACCOUNTING WHAT IS A CHANGE IN ACCOUNTING

ESTIMATE?ESTIMATE?             An adjustment of carrying amount of an asset or liability;An adjustment of carrying amount of an asset or liability;         An adjustment of the amount of periodic consumption of an asset; An adjustment of the amount of periodic consumption of an asset;

that results from:that results from:                   The assessment of the present status of assets and The assessment of the present status of assets and

liabilitiesliabilities                 Expected future benefits of assetsExpected future benefits of assets                Obligations associated with liabilitiesObligations associated with liabilities             Change in accounting estimates result from:Change in accounting estimates result from:              New information; orNew information; or              New developmentsNew developments            Are NOT corrections of errors;Are NOT corrections of errors;

REASON FOR ESTIMATIONREASON FOR ESTIMATION

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

            Uncertainties inherent in the business;Uncertainties inherent in the business;             Where judgments are involved;Where judgments are involved;

Where estimation is required?Where estimation is required?

Estimates may be required of:Estimates may be required of:             Bad debts;Bad debts;             Inventory obsolescence;Inventory obsolescence;       Fair value of financial assets or financial Fair value of financial assets or financial

liabilities;liabilities;       The useful lives of, or expected pattern of The useful lives of, or expected pattern of

consumption of the future economic benefits consumption of the future economic benefits embodied in, depreciable assets; andembodied in, depreciable assets; and

            Warranty obligation etcWarranty obligation etc

When change in accounting estimate becomes When change in accounting estimate becomes necessarynecessary

            If changes occur in the circumstances on If changes occur in the circumstances on which the estimate was based; orwhich the estimate was based; or

            As a result of a new information; orAs a result of a new information; or             More experienceMore experience

Recognition criteria of change in accounting Recognition criteria of change in accounting estimateestimate

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

Example:Example: Management estimates that provision for doubtful debts is Management estimates that provision for doubtful debts is

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

DISCLOSURE REQUIREMENTS OF DISCLOSURE REQUIREMENTS OF CHANGE IN ACCOUNTING ESTIMATECHANGE IN ACCOUNTING ESTIMATE

Ø      Nature and amount of a change in Ø      Nature and amount of a change in an accounting estimate for the current an accounting estimate for the current year and future period if practicable;year and future period if practicable;

Ø      If estimation is impracticable, Ø      If estimation is impracticable, disclosure of this fact;disclosure of this fact;

ERRORSERRORS

WHAT ARE PRIOR PERIOD ERRORS?WHAT ARE PRIOR PERIOD ERRORS?

            Omissions from; orOmissions from; or             Misstatements inMisstatements in The financial statements for one or more The financial statements for one or more

prior periods arising from: prior periods arising from: Continued…………..Continued…………..

WHAT ARE PRIOR PERIOD ERRORS? WHAT ARE PRIOR PERIOD ERRORS? Continued………….Continued………….

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

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

ExamplesExamples of prior period errors are: of prior period errors are:

            Effect of mathematical mistakesEffect of mathematical mistakes             Mistakes in applying accounting policiesMistakes in applying accounting policies             Oversight and misinterpretation of facts and Oversight and misinterpretation of facts and

fraud.fraud.

Rectification CriteriaRectification Criteria

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

              Restating the comparative amounts for the Restating the comparative amounts for the prior period(s) presented in which the error prior period(s) presented in which the error occurred; oroccurred; or

            If the error occurred before the earliest If the error occurred before the earliest prior period presented, restating the opening prior period presented, restating the opening balances of assets, liabilities and equity for the balances of assets, liabilities and equity for the earliest prior period presented.earliest prior period presented.

LIMITATION ON RETROSPECTIVE LIMITATION ON RETROSPECTIVE RESTATEMENTRESTATEMENT

Limitation on period Limitation on period specific effectspecific effect

When it is impracticable to When it is impracticable to determine the period specific determine the period specific effects of an error on effects of an error on comparative information for comparative information for one or more prior periods one or more prior periods presented, the entity shall presented, the entity shall restate the opening balances of restate the opening balances of assets, liabilities and equity for assets, liabilities and equity for the earliest period for which the earliest period for which retrospective restatement is retrospective restatement is practicable (which may be the practicable (which may be the current period).current period).

Limitation on Limitation on cumulative effectcumulative effect

When it is impracticable to When it is impracticable to determine the cumulative effect, determine the cumulative effect, at the beginning of the current at the beginning of the current period, of an error on all prior period, of an error on all prior periods, the entity shall restate periods, the entity shall restate the comparative information to the comparative information to correct the error prospectively correct the error prospectively form the earliest date form the earliest date practicable.practicable.

DISCLOSURE REQUIREMENTSDISCLOSURE REQUIREMENTS

            Nature of the prior period errorNature of the prior period error        To the extent practicable, the amount of the To the extent practicable, the amount of the

correction:correction: oo              For each financial statement line item affected; andFor each financial statement line item affected; and oo              Revision in earnings per share (EPS)Revision in earnings per share (EPS)         The amount of the correction at the beginning of the The amount of the correction at the beginning of the

earliest prior period presented; andearliest prior period presented; and       If retrospective restatement is impracticable for a If retrospective restatement is impracticable for a

particular prior period, the circumstances that led to the particular prior period, the circumstances that led to the existence of that condition and a description of how and existence of that condition and a description of how and from when the error has been corrected.from when the error has been corrected.

EffectiveEffective date of IAS-8 date of IAS-8

This standard is applicable from annual periods This standard is applicable from annual periods beginning on or after 1 January 2005.beginning on or after 1 January 2005.

NEW CLASSES FOR NEW CLASSES FOR ICMAP STUDENTSICMAP STUDENTS

STAGE 1. FUNDAMENTALS OF FINANCIAL ACCOUNTINGSTAGE 1. FUNDAMENTALS OF FINANCIAL ACCOUNTINGSTAGE 1. ECONOMICSSTAGE 1. ECONOMICS

STAGE 2. FUNDAMENTALS OF COST ACCOUNTINGSTAGE 2. FUNDAMENTALS OF COST ACCOUNTINGSTAGE 3. FINANCIAL ACCOUNTINGSTAGE 3. FINANCIAL ACCOUNTING

STAGE 3. COST ACCOUNTING PERFORMANCE APPRAISALSTAGE 3. COST ACCOUNTING PERFORMANCE APPRAISAL

CRASH CLASSES FOR CRASH CLASSES FOR ICAP STUDENTSICAP STUDENTS

MODULE B. ECONOMICSMODULE B. ECONOMICSMODULE B. FINANCIAL ACCOUNTINGMODULE B. FINANCIAL ACCOUNTING

MODULE D. COST ACCOUNTINGMODULE D. COST ACCOUNTING