IAS 8 Accounting policies, changes in accounting estimates and errors.pdf

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

Agenda
Key definitions
Accounting policies - Hierarchy for selection
Key factors for accounting policy application
Changes in accounting policy and retrospective
application
Changes in accounting estimates
Accounting policy Vs. Accounting estimate
Errors – Overview
2

© 2015 Grant Thornton India LLP. All rights reserved.
© 2020 Grant Thornton India LLP. All rights reserved
Key definitions
• Accounting policies are specific principles, bases, conventions, rules and practices
adopted in preparing and presenting financial statements.
Accounting policies
• A change in accounting estimate is an adjustment to the carrying amount of an asset
(or liability) that results from a reassessment of its expected future benefits (and
obligations).
Changes in estimate
• 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 and available information.
Prior period errors
• Retrospective application is applying a new accounting policy to transactions,
other events and conditions as if that policy had always been applied
Retrospective
application

Key definitions
• Retrospective restatement is correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a prior period error
had never occurred
Retrospective
restatement
• Prospective application is:
• applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and
Prospective
application
• Applying a requirement is impracticable when the entity cannot apply it after making
every reasonable effort to do so
Impracticable
• Omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions that users make on the basis of the
financial statements
Material omissions

Change in
accounting
policies
Correction of
errors
Change in
accounting
estimates
Objective and scope
Criteria for selecting and applying accounting policies
How to account:
• Change in accounting policies
• Change in accounting estimates
• Correction of Errors
5

Selection and application of accounting policies
Process
• Refer to IFRSs dealing
with similar and related
issues
• Refer to framework
• Refer pronouncement of
other standard setters or
industry practices if
consistent with above
• Use judgement to
develop an accounting
policy that results in
relevant and reliable
information
In absence of a specific
IFRS
• Applying a specific IFRS
• Considering any
relevant implementation
guidance
If specific IFRS is
available
Accounting Policy- Accounting policies are specific principles, bases, conventions, rules and practices adopted in
preparing and presenting financial statements
6

Key factors for accounting policy application
IAS 2 Inventories requires that inventory be valued at lower of cost and net realizable value. In identifying cost it
allows alternative cost formulas; first-in first-out and weighted average. The same formula must be applied to
similar items of inventory, but a different formula can be applied to a different classification of inventory.
Example
Materiality
• Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence the decisions that the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information about a specific reporting entity.
• IAS 8 notes that policies need not be applied where the effect of applying them is immaterial
Consistency
• Application of accounting policies consistently for similar transactions, other events and conditions
unless permitted by IAS
• If an IAS requires/permits different policies, an entity shall apply its accounting policy consistently to
each category

Changes in accounting policies
Change in accounting policy can affect the way an item is recognized, measured, presented and / or disclosed
A carpet retail outlet sells and fits carpets to the general public, it recognizes revenue when the carpet is fitted, which on
average is six weeks after the purchase of the carpet.
It then decides to sub-contract out the fitting of carpets to self-employed fitters. It now recognizes revenue at the point-of-
sale of the carpet. Is this a change in the accounting policies ?
Change an accounting policy only if the change
• is required by an IFRS; or
• results in the financial statements providing reliable and
more relevant information
Mandatory
Voluntary
Example
This is not a change in accounting policy as the carpet retailer has changed the way that the carpets are fitted. Therefore
there would be no need to retrospectively change prior period figures for revenue recognized.
Solution
8

Applying changes in accounting policies
New IFRS -
Mandatory
change
Transition provision
issued
Apply transition
provision
Retrospectively
Voluntary
change
Retrospectively
Yes No
9

• When it is impracticable to determine the period-specific effects of an error on comparative information for
one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and
equity for the earliest period for which retrospective restatement is practicable (which may be the current period).
• When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error
on all prior periods, the entity shall restate the comparative information to correct the error prospectively from
the earliest date practicable.
Limitations to retrospective application
Retrospective restatement
Restate comparative periods presented in which the error occurred and restate the opening balances for the earliest prior
period presented.
Disclose nature and amount of any correction made or, if restatement is impracticable why this is the case.
Retrospective application

New Standard – Mandatory Change
► The title of the IFRS
► Nature of change in accounting policy
► Amount of the adjustment due to change in policy
► Change in accordance with transitional provisions along
with description
► Transitional provisions that have an effect on future
periods
► For current period and each prior period presented the
amount of the adjustment for each financial line item
affected and for basic and diluted earnings per share, if
IAS 33 applies;
► The amount of the adjustment relating to periods before
those presented, to the extent practicable
► If retrospective application is required but impracticable,
the circumstances and a description
Disclosures
Voluntary change
► reasons why the change provides reliable and more
relevant information
► the nature and amount of a change in a policy
► For current period and each prior period presented
the amount of the adjustment for each line item
affected and for basic and diluted earnings per share,
if IAS 33 applies;
► The amount of the adjustment relating to periods
before those presented, to the extent practicable
► If retrospective application is required but
impracticable, the circumstances and a description
► Need not repeat these disclosure in subsequent
periods.

Changes in accounting estimates
Accounting estimates
Judgments made by
management e.g. bad
debts, inventory
obsolescence, warranty
obligations, useful life of
PPE
Changes in accounting Estimates
Changes based on new
information or more
experience that does not
relate to prior periods
Principle
Recognise the change
prospectively in profit or
loss in:
Period of change, if it
only affects that period;
or
Period of change and
future periods (if
applicable)
.
► If difficult to distinguish between change in accounting estimate and in accounting policy - treat the
change as a change in accounting estimate.
Note : If there is a change in depreciation method then such change shall be accounted for as a
change in an accounting estimate.

Disclosures
► Disclose the nature and amount of a change in an estimate:
► that has an effect in the current period, or
► is expected to have an effect in the future periods
► If impracticable to quantify the amount, disclose that fact

Definition
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:
• was available when financial statements for those periods were authorized for issue; and
• could reasonably be expected to have been obtained and taken into account in the preparation and presentation of
those financial statements
Errors

Errors
Correction of material prior period errors
• Correct material prior period errors retrospectively in the first set of financial statements authorised for issue after
their discovery by:
• Restating the comparative amounts for the prior period presented in which the error occurred; or
• If the error occurred before the earliest prior period presented, restating the opening balances for the
earliest prior period presented
*Under IGAAP-The effect of prior period items is recognised in current year’s Statement of Profit and Loss

Errors
In the year ended 31 December 2017 a fraud of $12 million is identified. Of this amount $2
million relates to 2017, $3 million to 2016, $4 million to 2015 and $3million to 2014.
16
Solution
The opening retained earnings as at 1 January 2016 will be adjusted by the sum of the errors for 2014
and 2015 of $7 million; profit for 2016 will be adjusted for the error of $3 million and the $2 million
relating to 2017 will be reflected in that year’s profit or loss.
The fraud is a prior period error, not a change in estimate or change in accounting policy; although the
treatment of the fraud (i.e. retrospective adjustment) is the same that is applied to a change in
accounting policy.
Example

Disclosures
► When an entity restates, IAS 1 requires an entity to prepare an additional statement of financial position as at the
beginning of the comparative period
► Extensive disclosure requirements:
► nature of the prior period error;
► for each prior period presented, the amount of the correction for each line item affected and for basic and
diluted earnings per share, if IAS 33 applies
► the amount of the correction at the beginning of the earliest prior period presented
► if retrospective restatement is impracticable, the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
► Need not repeat these disclosure in subsequent periods

Example (Errors)

Definition of Material
(Amendment to IAS 8)
2

©2020 Grant Thornton India LLP. All rights reserved.
 In October 2018, the IASB issued ‘Definition of Material’ making amendments to IAS 1 ‘Presentation of Financial
Statements’ and IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.
 The amendments are a response to findings that some companies experienced difficulties using the previous definition
when judging whether information was material for inclusion in the financial statements. In fact, up to now, the wording of
the definition of material in the Conceptual Framework for Financial Reporting differed from the wording used in IAS 1
and IAS 8. The existence of more than one definition of material was potentially confusing, leading to questions over
whether the definitions had different meanings or should be applied differently.
Definition of material (Amendments to IAS 8)

The old definition
 Omissions or misstatements of items are material if they could, individually or collectively, influence the economic
decisions that users make on the basis of the financial statements.
The new definition
 Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that
the primary users of general purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.
Grant Thornton International Ltd insight – ‘obscuring’
 Including ‘obscuring’ in the definition of material addresses concerns that the former definition could be perceived by
stakeholders as focusing only on information that cannot be omitted (material information) and not also on why it may be
unhelpful to include immaterial information. However, this does not mean that entities are prohibited from disclosing
immaterial information.
 The amendments give a number of examples of circumstances that may result in material information being obscured.

Grant Thornton International Ltd insight – ‘reasonably be’
 This wording reflects wording broadly previously used in IAS 1 and helps to address concerns raised by some parties
that the threshold ‘could influence’ in the existing definition of material is too low and might be applied too broadly.
Grant Thornton International Ltd insight – ‘primary users’
 The amendments note that many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial statements for much of the
financial information they need. Consequently, they are the primary users to whom general purpose financial statements
are directed.
Transition
 The changes are effective from 1 January 2020, but companies can decide to apply them earlier

Thank you for your attention
Any questions?
2

IAS 8 Accounting policies, changes in accounting estimates and errors.pdf

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