IAS 08 Accounting Policies, Changes in Accouting Estimates and Errors

Terms
 Accounting policies – specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.
 Errors – mathematical mistakes, mistakes in applying accounting policy, oversight or misinterpretation of FS.
 Retrospective application – impletemented as if that policy had always been use.
 Prospective application – implemented as at which the policy is changed.

Accounting Policy
 Example – FIFO, weighted average
 Situations :
 IFRS applies to the specific item in the FS
 No specific IFRS applies to the specific item in the FS
i. In this situation management should apply its judgement that the selection should result in information that is relevant and reliable to decision making-needs of the users.
ii. Management should consider IFRS dealing with similar & related issues, framework for the preparation and presentataion of FS, pronouncement ot other standard setting bodies.
 Applied consistently for similar transaction, events, and circumstances unless an IFRS requires or permits otherwise.
 A change to an accounting policy shall be made only if :
 Required by IFRS or
 Result in a more reliable and relevant FS
 Situations are not deemed to be a change in accounting policy :
 Adoptions of an accounting policy for transaction and events that differ in substance those previously occurring, and
 The adoption of a new accounting policy for transaction or other events that did not occur previously or were immaterial.
 Methods for changing accounting policy :
Adoption of IFRS
i. Transitional provisions exist
Comparative information does not need to be restated if it is impracticable. In this situation, company should :
a. Apply the new accounting policy to the carrying amount of assets and liabilities as at the beginning of the earliest period for which retrospective application is applicable, and
b. Adjust the opening balance of affected component of equity for that period
ii. No- Transitional provisions exist
The change should be applied retrospectively if it is practicable to do.
Voluntary change
i. The following should be adjusted : (if it is practicable to do )
a. Opening balance of RE for the earliest period presented, and
b. Comparative amount disclosed for each prior perior presented
ii. The following should be disclosed if change has effect on the current period or any prior period presented, or may have an effect in subsequent periods :
a. Reason for the change
b. Amount of the adjustment for the current period and each prior period presented
c. Amount of the adjustment relating to periods prior to those presented, and
d. That comparative information has been restated or that restatement for a particular prior period has not been made because it is impracticable.

Accounting Estimates
 When it is difficult to distinguish between a change in accounting policy or accounting estimate, then the change is trated as a change in account estimate with proper disclosure.
 The effect of a change in accounting estimate should be recognized prospectively (never retrospectively).
 Effect :
 Current periods only – Ex. Change in the estimation of bad debts.
 Current and future periods – Ex. Change in the usefull life of depreciable assets.
 Disclosure :
 Nature of a change and amount of a change that has an effect in current period or expected to have in subsequent period (if it is practicable to do).
 Amount of the effect in in subsequent period need not be disclosed if estimating would be impracticable to do, then the fact should be disclosed.

Errors
 Amount of the correction of an error should be accounted for retrospectively by either :
 Restating comparative amount for the prior period(s) in which error occurred, or
 Errors occurred before the earliest prior period presented, restating the opening balance of RE for the earliest prior period presented
 If restated would be impracticable to do, then the opening balance of RE for the next period should be restated for the cumulative effect of the error before the beginning of that period.
 The correction of an error is excluded from the profit or loss in the period in which the error is discovered.