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  1. 1. IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Roshankumar S Pimpalkarroshankumar.2007@rediffmail.com
  2. 2. This standard is applied when selecting an accounting policy, accounting forchanges in an accounting policy and making changes to estimates and errors.Objectives:To prescribe the Selection criteria used in determining the accounting policies, as well as accounting treatment and disclosure of changes to accounting policies. Requirements for changes to accounting estimates and accounting treatment and disclosure of such changes. Definition of errors and the accounting treatment and disclosure of errors.Accounting Policies are the specific set of principles, rules, bases and conventionsadopted by an entity in preparation and presentation of financial statement. E.g.whether an entity decides to use FIFO or weighted average method of inventoryvaluationErrors are omission from, and other misstatements of, the financial statements of anentity for one or more periods that are discovered in the current period and relate toreliable information that: That was available when those prior period financial statement were prepared, and Could reasonably be expected to have been obtained and taken into account while preparing and presenting those financial statements.It includes mathematical mistakes, mistakes in applying accounting policies,oversights and misrepresentation of facts and fraud.Selection of an Accounting PolicyThere are two situations: 1. When IFRS applies to the specific item in the financial statements 2. When no specific IFRS or interpretation of IFRS applies to an item in the financial statement exists.Situation 1: Management should consider following sources in descending orderwhen deciding which accounting policy to use The requirement in IFRS and Appendices dealing with related and similar issues. The definition, recognition criteria and measurement concepts assets, liabilities, income and expenses set out in the Framework for Preparation and Presentation of Financial Statements. Pronouncements of other standard setting bodies, that use similar conceptual framework, but only to the extent they are in line with the above two points.roshankumar.2007@rediffmail.com
  3. 3. While selecting an accounting policy reasonableness of an accounting policy in terms of regulatory guidelines need not be considered.Situation 2: in such case the accounting policy should result in the information that is Relevant to the decision making need of the users, and Reliable.Consistency of Accounting PolicyAccounting policies for a period should be selected and applied consistently forsimilar transactions, events and circumstances unless IFRS requires or permits acategorisation of items for which different policies may be appropriate. In suchsituation, an appropriate accounting policy should be selected and appliedconsistently.Changes in Accounting PolicyA change in Accounting policy shall be made only if it: Is required by an IFRS; or Results in more reliable and relevant presentation in the financial statement of effect of transactions and events on entity’s financial position, performance and cash flows.The following are not changes in Accounting Policy The adoption of accounting policy for transactions and events that differ in substance from those occurring previously; and The adoption of new accounting policy for transactions and events that did not occur previously or were immaterial.Change in Accounting Policy could occur in two ways Adoption of an IFRS Voluntary change 1. Adoption of IFRS a. Transitional Provision exist i. A change in accounting policy should be accounted for in terms of transitional provision of an IFRS ii. Comparative information need not be restated if it is impracticable. In such case 1. The entity should apply new accounting policy to the carrying amounts of assets and liabilities as at earliestroshankumar.2007@rediffmail.com
  4. 4. period for which the retrospective application is possible, and 2. Adjust the opening balance of affected component of equity for that period. b. No Transitional Provision exist i. In such case change should be applied retrospectively. ii. This means that the opening balance of the retained earnings of the earliest prior period presented and other comparative amounts disclosed for each prior period presented shall be adjusted as if the new accounting policy had always been in use. 2. Voluntary Change a. In this case accounting policy should be applied retrospectively. The following should be adjusted as if the new accounting policy had always been in use i. The opening balance of the retained earnings for the earliest period presented, and ii. The comparative amounts disclosed for each prior period. b. Disclosure i. Reasons for the change. ii. Amount of adjustment for current period and each prior period presented. iii. Amount of adjustments relating to periods prior to those presented, and iv. That comparative information has been restated, or that restatement for a particular prior period has not been made because it would be impracticable.Note: in any case retrospective application of new accounting policy is not needed ifit is impracticable to do so.Accounting EstimatesWhy do we need to make estimates?Due to the uncertainties inherent in the business activities, financial statement itemscannot be measured with precision but can only be estimated.When would an estimate be required?Estimate is required when management judgement is required, for example, for Bad debts Inventory obsolescence The fair value of financial assetsroshankumar.2007@rediffmail.com
  5. 5. Do initial estimate ever require revision?An estimate may need revision if changes occur regarding circumstances on whichthe estimate was based. This may result from new information or subsequentdevelopment.What is the difference between change in accounting policy and change inaccounting estimate?If there is change is measurement basis or method applied this is change inaccounting policy and not change in accounting estimate. When it is difficult todistinguish between a change in accounting policy and change in accountingestimate, then the change is treated as change in accounting estimate, with properdisclosure.Accounting for changes in Accounting EstimatesThe effect of change in accounting estimate should be recognised prospectively byincluding it in profit and loss in The period of change if the change affects that period only. E.g. change in estimation of bad debts. The period of change and future periods, if the change affects both. E.g. change in estimated useful life of depreciable asset would affect the depreciation expense for the remainder of the current period, as well as the future period during the asset’s remaining useful life.Disclosure:The nature and amount of change in an accounting estimate that has an effect in thecurrent period, or is expected to have an effect in subsequent periods, should bedisclosed.The amount of effect on subsequent periods need not be disclosed if estimating itwould be impracticable to so. However in such case that fact should be disclosed.Accounting for ErrorsThe amount of correction of an error should be accounted for retrospectively byeither: Restating the comparative amounts for the prior period(s) in which the error occurred, or If the error occurred before earliest period presented, restating the opening balance of retained earnings for the earliest prior period presented.This ensures that the financial statements are presented as if the error had neveroccurred before.roshankumar.2007@rediffmail.com
  6. 6. However restatement of comparative information is not required if it is impracticableto do so. In such case the opening balance of the retained earnings for the nextperiod should be restated for the cumulative effect of the error before the beginningof that period.The correction of an error is excluded from the profit and loss in the period in whicherror is discovered. The financial statements are presented as if the error had neveroccurred before by making the adjustment as stated above.Disclosure: The nature of the error The amount of the correction for each prior period presented The amount of correction relating to periods prior to those presented in comparative information That comparative information has been restated or not due to being impracticable.roshankumar.2007@rediffmail.com