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

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Introduction

The basic purpose of this standard is to provide guidance regarding the selection and then application of the selected accounting policies. This standard also provides guidance about how to treat the changes made with regards to the accounting estimates and policy which the entity adopts along with the guidance regarding the correction of errors occurred in the previous periods.

Scope

This standard basically covers the information regarding the criteria with reference to the selection and application of an accounting policy. This standard also gives out information regarding the treatment with regards to the change in an accounting estimate and policy and also gives out information on how to account for an error that relates to a prior period.

Definition of some important terms

Retrospective Effect

It is a concept in which the effect of the change in the policy is not only incorporated in the period in which it has occurred but the effect of the change also gets incorporated in the previous periods of the entity.

Retrospective Correction/Restatement

This concept basically enables an entity to restate the figures of the elements of the entity’s financial statements with reference to its previous periods so that to eliminate the error which is being carried forward in the current period from the entity’s previous periods

Prospective Application

It is a concept in which the effect of the change in an accounting estimate and accounting policy gets incorporated in the period in which it has occurred (current period) and the change and its impact on the entity also gets incorporated by the entity in its future periods.

Impracticable

When it is not possible for an entity to apply a particular rule specified by the standard, despite making all the efforts, then such a scenario is defined as being impracticable to deal with. The example of this can be a situation where an entity is unable to determine the impact of the change in policy that is to be applied retrospectively.

Accounting Policies

These are basically the specific rules, principles, conventions, bases and procedures adopted by the entity’s management to help them in aiding them in the preparation and overall presentation of the entity’s financial statements.

Selecting and Applying the Accounting Policies

In case of selecting and applying an accounting policy, with reference to a specific event or transaction, the entity should consider whether the policy being selected and applied is in line with the requirement of the relevant applicable accounting standard.

Where no accounting standard specifically applies, with reference to an event or a transaction, then the entity’s management should formulate and establish policies that accounts for the treatment of such specific transactions or events and in a way that the proposed treatment is not only reliable and consistent but it is also relevant to needs of the users of the entity’s financial statements. .

When an entity is developing an accounting policy to tackle a certain kind of situation or event, then the entity’s management should make sure that the policy being developed does not conflict and is in line with the following existing sources:

• Requirements and information mentioned in IASs and IFRSs (accounting standards) catering similar kind of situations and events;
• The Definition and recognition and measurement bases in relation to a specific asset, liability, income and expenditure mentioned in the frame work of the IASB;
• The declarations or announcements made by other standard setters that uses and follows a framework which is similar to the framework that is used by the IASB; and
• The practices that are being used and applied in the Industry.

The IAS 8 requires an entity to consistently apply all its policies, for similar kind of transactions and events. When an accounting standard or an interpretation permits the entity to adopt different kinds of accounting policies to cater and tackle each category of an item that is presented in the entity’s financial statements. In that scenario the entity should adopt a different policy for each separate category of an item and should ensure that the selected policy is applied consistently across different accounting periods.

Changes in Accounting Policies

The entity should make changes in its accounting policies with reference to specific transactions, events or conditions, only if either the change is commanded by the IASs/IFRSs or the change aids the entity in providing more reliable and relevant information regarding those specific transactions, events or conditions in its financial statements.

When a change in an accounting policy is basically made so that to comply with the requirements of a specific accounting standard or an interpretation then such a change should be dealt by the entity in accordance with the transition provision, if any exists, for that specific standard or interpretation.
The entity can take in to account the effect of the changes made in the policy either prospectively or retrospectively. Where the standard or interpretation is quiet and does not specify any transitional provision then in that case the changes should be applied retrospectively. For example, when a new standard to be applied specifically states that it should be applied prospectively thus eliminating the need to make prior period adjustments to cater the effect of the changes made in the policy.

When an entity voluntarily makes changes in its accounting policy, then in that case the entity should retrospectively apply the changes made in the policy and for that the entity should make prior period adjustments in order to incorporate the effect of changes in the previous periods of the entity. This rule is applicable unless it is impracticable for the entity to determine the period to which the change specifically relates to or the cumulative impact of the change in policy.

Applying the Changes in the Accounting Policy

Where an entity retrospectively applies the changes made in a policy, then in that scenario as per IAS 8 the entity is required to adjust the opening balance of each component of equity that is impacted by that specific change so that to incorporate the prior period effect in the current financial statements of the entity. The entity is also required to adjust the comparative amounts with reference to those assets, liabilities, income and expenses which are impacted by the changes made in the accounting policies. The comparative amounts are basically the amounts that are disclosed in the components of an entity’s financial statements (profit or loss account, balance sheet, statement of changes in equity, cash flow statement and notes to accounts) for each previous period presented. All this is to make sure that the users of the financial statements can be aided in grasping the effect of the changes made in the policy, on the entity’s financial performance and position, not only with reference to the current period but also with reference to the previous periods. This rule is applicable unless it is basically impracticable for the entity’s management to determine the period to which the impact of the change relates to or the cumulative effect with reference to the change in the policy.

The presentation policies of an entity are also a part of the entity’s accounting policies and therefore any change with regards to the classification or change in the way an item is presented in the financial statements will be treated as a change in the accounting policy and will be dealt by the entity in accordance with the requirements of IAS 8. This rule is applicable only if the period-specific effects or cumulative effect of the change in policy is determinable.

Disclosures

IAS 8 requires an entity to disclose the following when a change in policy occurs:

• The effect or impact the change will have on the current period or on any previous period.
• The change that has such an impact on the entity that it is not possible to determine the amount with regards to the adjustment that arises as result of that specific change in the policy.
• The change that may have an impact on the entity’s financial activities in the future periods.

When a change in policy is retrospectively applied by the entity and the change has an effect that is material with reference to the information presented in the financial statements at the beginning of the previous period, then the entity is also required to present those adjusted financial statements but the notes to the adjusted financial statements is not required.

When a new standard or an interpretation is issued or an existing standard or interpretation gets revised by the IASB, that basically impacts the entity’s activities, but it is not yet effective and the entity has not early adopted it then in that situation the entity should disclose all this matter.

Accounting Estimates

These estimates basically come in to play where there is no precise means of measurement and are basically the approximations and assumptions which an entity’s management makes based on their judgment and past experience. Below are some of the examples of an accounting estimate:

• The Residual/Scrap Value in relation to an asset
• The useful life of an asset
• Method of Depreciation which is used for depreciating an asset
• The Fair or Market Value of an item of the entity
• The Provision being made in relation to a liability

Change in Accounting Estimates

A change in an accounting estimate can basically be defined as an adjustment in the carrying amount of an asset or a liability resulting from the review of the present status of the expected future obligations and benefits connected with the same asset and liability class of the entity.

A change in an estimate basically occurs as a result of the availability and the presence of new information or market developments that basically affects the way in which an entity is carrying the amounts of its assets and liabilities.

As per IAS 8 an entity should recognize the change in an accounting estimate prospectively and that means the effect of the change should be taken in to account in the current period and in the future periods, if the future financial information of the entity also gets affected as a result of the changes made in the accounting estimates.

Disclosures

In case of the changes made by the entity with reference to the accounting estimates, IAS 8 requires an entity to disclose the details regarding the nature of the change and the effect in terms of amount that results from that particular change that basically has impact on the current as well as on the future periods.

When an estimate with respect to an amount reported in the interim period of the entity gets significantly changed in the final interim period of the entity’s financial year, then the entity should disclose the details regarding the nature and the impact ( in terms of amount) of the change in its financial statements.

Prior Period Error

These can basically be defined as the omissions, misstatements and errors, in an entity’s financial statements, basically resulting from the failure to use the information or misuse of the information that was made available to the entity’s management or the information that could have easily been obtained by the entity’s management when preparing the previous periods financial statements that had omissions misstatements and errors and that of material nature that effects the financial statements objective of giving a true and fair view of an entity’s financial performance.

The example of an error may include mistakes like mathematical errors or misapplication of a policy, misrepresentation of facts or fraud.

Accounting for Error

In order to eliminate the effect of the error present in the previous period, the entity will restate or correct the comparative figures, the corresponding effect of the change in comparative figures will be made in the opening balances of the component of equity that gets affected by the change in the comparative figures.

If the error relates to the earliest previous period then the entity should restate or correct the opening figures of the assets, liabilities and equity with reference to the earliest period presented.

Where it is not possible for the entity to either determine the period to which the error specifically relates to or the cumulative impact (both in quantitative and in qualitative terms) of the error that is related to the previous periods.

Disclosures

As per IAS 8, when an error exists in the entity’s financial statements of the previous periods then in that case the entity is required to give disclosures regarding the following:

• The Details of the nature and amount of the error only if the error is of material nature
• Information regarding situations where it is not possible to correct the errors retrospectively basically because of being unable to determine the cumulative impact or the period to which the error is associated with.

 

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