2. 8.1 Introduction
8.2 Accounting Policies
8.3 Selection and Application of accounting policies
8.4 Consistency of accounting policies
8.5 Factors governing changes in accounting policies
8.6 Applying changes in accounting policies
8.7 Limitations of Retrospective Application
8.8 Disclosures with respect to changes in accounting policies
8.9 Changes in accounting estimates
8.10 Correction of prior period errors
Contents
4. • “Comparability” is one of the four qualitative attributes (or characteristics) of
financial statements according to the International Accounting Standards Board
(IASB) Framework.
• For users of financial statements, it is important to be able to compare not only the
financial statements of an entity from one period to another but also the financial
statements of different entities.
• Such information is needed in order to make relative comparisons of financial
performance and financial position and changes in financial position.
5. • IAS 8 prescribes criteria for selecting and changing accounting policies and the
disclosures thereof and also sets out the requirements and disclosures for
changes in accounting estimates and corrections of errors. In doing so it purports
to achieve these objectives:
To enhance the relevance and reliability of an entity’s financial statements;
To ensure the comparability of the financial statements of an entity over
time as well as with financial statements of other entities
7. Accounting policies are essential for a
proper understanding of the
information contained in the
financial statements prepared by the
management of an entity.
8. An entity should clearly outline all significant accounting policies it
has used in preparing the financial statements.
Because under International Financial Reporting Standards (IFRS)
alternative treatments are possible, it becomes all the more
important for an entity to clearly state which accounting policy it
has used in the preparation of the financial statements.
For instance, under IAS 2 an entity has the choice of the weighted-
average method or the first-in, first-out (FIFO) method in valuing
its inventory.
10. Accounting Policies can be changed only:
• when the adoption of a different accounting policy is
required by statute; or
• for compliance with an Accounting Standard; or
• when it is considered that the change would result in a
more appropriate presentation of the financial statements
of the enterprise.
11. The following are not changes in accounting policies:
(a) The adoption of an accounting policy for events or
transactions that differ in substance from previously
occurring events or transactions, e.g., introduction of a
formal retirement gratuity scheme by an employer in place
of ad hoc ex-gratia payments to employees on retirement;
(b) The adoption of a new accounting policy for events or
transactions which did not occur previously or that were
immaterial.
12. Explain whether the following will constitute a change in
accounting policy or not as per IAS 8.
(i) Introduction of a formal retirement gratuity scheme by an employer in
place of ad hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have
retired after completing 5 years of service in the organisation. Such
employees will get pension of 20,000 per month.
Earlier there was no such scheme of pension in the organisation.
13. As per IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, the
adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in
accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in
place of ad hoc ex-gratia payments to employees on retirement is not a change in
an accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions which
did not occur previously or that were immaterial will not be treated as a change in
an accounting policy.
