IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Background

IAS 8 ‘’Accounting Policies, Changes in Accounting Estimates and Errors’’ prescribes the guidance for accounting policies and treatment of any change and error in implementation of those accounting policies. When an IFRS Standard or IFRS Interpretation specifically applies to a transaction, other event or condition, an entity must apply that Standard.

 

IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.

 

Objective

The objective of this Standard is to outlines 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. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.

Disclosure requirements for accounting policies, except those for changes in accounting policies, are set out in IAS 1 Presentation of Financial Statements

 

Scope

·       This Standard shall 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.

·       The tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with IAS 12 Income Taxes.

 

Key definitions

Accounting policies

Those are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

 

Change in accounting estimate

A change in accounting estimate is 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 expected future 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.

 

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 authorised 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.

 

Retrospective restatement

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

 

Accounting policies

Selection and application of accounting policies

When an IFRS specifically applies to a transaction, other event or condition, the accounting policy applied to that item will be determined by applying the corresponding IFRS.

 

In the absence of an IFRS that specifically applies to a transaction, other event or condition, management will use its discretion in developing and applying an accounting policy that results in information that is:

(a) relevant to the economic decision-making needs of users; and

(b) reliable, in which the financial statements:

(i) faithfully represent the entity's financial position, financial performance, and cash flows;

(ii) reflect the economic substance of the transactions, other events and conditions, and not simply the legal form;

(iii) they are neutral, that is, free of bias;

(iv) they are prudent; and

(v) are complete in all material respects.

 

Consistency of accounting policies.

An entity shall choose and apply accounting policy consistently for similar transactions and events unless an IFRS specifically requires a separate categorization of the transaction for the application of any specific guidance or policy.

 

Changes in accounting policies.

If the change is required following the following, the entity will change the accounting policy:

(a) bound by any IFRS; or

(b) Provide reliable and more relevant information on the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows.

 

The following are NOT changing in accounting policies:

(a) the application of an accounting policy for transactions, other events or conditions that differ substantially from those that occurred previously; and

(b) the application of a new accounting policy for transactions, other events or conditions that did not previously occur or that were not relevant.

 

Applying changes in accounting policies

In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management may apply an accounting policy based on the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards. If, after a modification of said pronouncement, the entity elects to change an accounting policy, that change is accounted for and is revealed as a voluntary change in accounting policy. Except in the following cases:

(a) the change is the result of the initial application of any IFRS in accordance with the specific transitional provisions of that standard (if applicable); and

(b) when the entity considered the retrospective impact of changes in accounting policy at the time of the initial application of an IFRS, excluding the specific transitional provisions that apply to that change, or the voluntary change in accounting policy, will apply the change in retrospect.

 

Retrospective application – If there is any retrospective change in accounting policy, the entity shall adjust the opening balance of each affected component of equity for the first prior period presented and the others comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.

Limitations on retrospection:

• Change in accounting policy will be applied retrospectively, except to the extent that it is impractical to determine the period-specific effects or cumulative effect of the change.

 

• If it is impracticable to determine the effect on specific period of changing an accounting policy on comparative information for one or more prior periods presented, then the entity will apply the new accounting policy to the carrying amounts of assets and liabilities at the start of the period plus early for which retrospective application is practicable, which may be the current period, and must make an adjustment corresponding to the opening balance of each component of equity affected for that period.

 

• If it is impractical to determine the cumulative effect, at the start of the current period, of applying a new accounting policy to all prior periods, the entity will adjust the comparative information to apply the new accounting policy prospectively from the earliest possible date.

Disclosure –

ü    If the initial application of an IFRS has an effect in the current period or any previous period, except the cases wherein it is impractical to determine the amount of the adjustment, or if any expected effect in future periods, an entity shall disclose:

(a) title of IFRS;

(b) if appropriate, any change in accounting policy accordance with its transitional provisions;

(c) nature of the change in accounting policy;

(d) description of the transitional provisions, where applicable;

(e) the transitional provisions that could have an effect in future periods, when applicable;

(f) the amount of the adjustment for the current period and each prior period presented, to the extent possible:

(i) each affected item of the financial statement; and

(ii) basic and diluted earnings per share, if IAS 33 Earnings per share applicable;

(g) adjustment amount related to periods prior to those presented, to the extent possible; and

(h) if the retrospective application required 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 change in accounting policy has been applied.

Subsequent period financial statements will not repeat these disclosures.

 

ü    Following disclosures are required for voluntary change in accounting policy:

(a) nature of change in accounting policy;

(b) reasons to justify that the application of the new accounting policy provides are reliable and more relevant information;

(c) the amount of adjustment for current and each prior period presented, to the extent possible:

(i) each affected item of the financial statement; and

(ii) basic and diluted earnings per share, if IAS 33 Earnings per share applicable;

(d) adjustment amount related to periods prior to those presented, to the extent possible; and

(e) if the retroactive application is impracticable for a particular previous period then reason for and since when the change in accounting policy has been applied.

Subsequent period financial statements shall not repeat these disclosures.

ü  Fact and reasonably estimated information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application an entity has not applied a new IFRS that has been issued but is not yet effective.

Changes in accounting estimates

As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required of:

(a) bad debts;

(b) inventory obsolescence;

(c) the fair value of financial assets or financial liabilities;

(d) the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and

(e) warranty obligations.

 

The effect of a change in an accounting estimate, other than a change to which paragraph 37 applies, shall be recognised prospectively by including it in profit or loss in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects both.

 

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

 

Disclosure - An entity required to disclose the nature and amount of any change in accounting estimate that has an effect in the current period or is expected to have an effect in future periods. However, the disclosure of the effect on future periods is not required when it is impracticable to estimate but that fact needs to disclose.

 

Error

Errors may arise regarding the recognition, measurement, presentation or disclosure of elements of the financial statements. An entity shall correct the material errors of the prior period retrospectively in the first set of financial statements authorized for issue after discovery by:

(a) restatement of comparative amounts of the prior periods wherein the error occurred;

(b) in case the error occurred before the first prior period presented, restatement of initial asset balances, liabilities and equity for the first prior period presented.

Limitations on retrospective restatement

An error from the previous period will be corrected by retrospective restatement, except to the extent that it is not possible to determine the period-specific effects or the cumulative effect of the error.

 When it is not feasible to determine the specific effects of an error on the comparative information, the entity will restate the initial balances of assets, liabilities and equity for the earliest period for which the hindsight (what may be the current period).

 When it is not possible to determine the cumulative effect of an error of all previous years, at the beginning of the current period, the entity will restate the comparative information to correct the error prospectively from the earliest possible date.

Disclosure of errors from previous periods

Following disclosures are required:

(a) nature of error of the previous period;

(b) for each prior period presented, amount of the correction (to the extent possible):

(i) for each item of the financial statement affected; and

(ii) if IAS 33 applies, for basic and diluted earnings per share;

(c) the amount of rectification at the beginning of first prior period presented; and

(d) if retrospective restatement is impracticable for a prior period, the circumstances that led to the existence of that condition, and a description of how and since when the error was corrected.

Subsequent period financial statements need not repeat these disclosures.

 

 

You may also refer the below standard:-

IAS 2 Inventories