IAS
8 - ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
ACCOUNTING
POLICIES
Accounting
policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
How
to select accounting policy?
1.
Apply the standard or interpretation dealing with the transaction
2.
If there is no specific standard or interpretation, then management needs to
use judgement in this order
a) Use
similar standard or interpretation
b) Use
conceptual framework for Financial Reporting
c) Use
GAAP and industry based approach
NB:
Apply
the accounting policy consistently to all transactions within the same category
or of the same type.
When
to change an accounting policy?
1.
When it is required by another IFRS
2.
When a new accounting policy provides a reliable and more relevant
information
How
can you change the accounting policy?
1.
Apply transitional guidance if the new IFRS contain them
2.
If there is no transitional guidance, apply retrospectively.
Retrospectively
is
going back to the previous reporting periods and restating every single
component of equity and comparatives as if the new policy had always been in
place.
Change in accounting estimate
Change in accounting estimate is
not directly defined by the standard IAS 8.
Change
in accounting estimate is an adjustment of the carrying amount
of an asset or liability, or related expense, resulting from reassessing the
expected future benefits and obligations associated with that asset or
liability.
Examples
1.
Bad debt provision
2.
Depreciation rates and useful lives of assets
3.
Provision for warranty repairs
How
to account for a change in accounting estimate?
Account
prospectively either
1.
In the current period
2.
In both current and future periods
DIFFERENCE
BETWEEN ACCOUNTING POLICY AND CHANGE IN ACCOUNTING ESTIMATES
|
ACCOUNTING
POLICY |
CHANGE
IN ACCOUNTING ESTIMATES |
|
Accounting: Retrospectively |
Accounting: Prospectively |
|
Definition: Principles,
bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements. |
Definition: Adjustment
in the Carrying amount based on selected basis or some pattern of future
consumption of the asset. |
PRIOR
- PERIOD ERRORS
Prior-period
errors are some omissions from or misstatements in the
financial statements as a result of ignoring or misusing available information.
How
to account for Prior - period errors?
QUESTION:
IS THE ERROR MATERIAL?
1.
If Error is material, we restate retrospectively.
2.
If Error is NOT material, we adjust it to the current reporting
period.
DISCLOSURES
RELATING TO CHANGES IN ACCOUNTING POLICIES
Disclosures
caused by a new standard or interpretation include:
1.
The title of the standard or interpretation causing the change.
2. The nature of the change in the accounting
policy.
3.
If retrospective application is impracticable, an explanation and description
of how the change in accounting policy was applied.
Disclosures
relating to voluntary changes in accounting policy include:
1. The nature of the change in accounting policy.
2.
The reasons why applying the new accounting policy provides reliable and more
relevant information.
3.
If retrospective application is impracticable, an explanation and description
of how the change in accounting policy was applied.
DISCLOSURES
RELATING TO CHANGES IN ACCOUNTING ESTIMATES
Disclose:
1. the nature and amount of changes in accounting
estimate that has an effect in the current period or is expected to have an
effect in future periods.
2.
if the amount of the effect in future periods is not disclosed because
estimating it is impracticable
DISCLOSURES
RELATING TO PRIOR PERIOD ERRORS
Disclosures relating to prior period errors
include:
1. the nature of the prior period errors.
2.
the amount of the correction at the beginning of the earliest prior period
presented.
3.
for each period presented, the amount of correction:
a. for each financial statement single line
item affected.
b. for basic and diluted earnings per
share.
4.
If retrospective restatement is impracticable, an explanation and description
of how the error has been corrected.