IAS 8

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

 

Overview: IAS 8 prescribes the criteria for selecting and changing accounting policies. It also deals with the accounting and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors.

 

ACCOUNTING POLICIES

Definition:

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements

Selection and application of accounting policies:

• If a standard or interpretation deals with a transaction, use that standard or interpretation
• If no standard or interpretation deals with a transaction, judgment should be applied. The following sources should be referred to, to make the judgement:

- Requirements and guidance in other standards/interpretations dealing with similar issues

- Definitions, recognition criteria in the framework

- May use other GAAP that use a similar conceptual framework and/or may consult other industry practice / accounting literature that is not in conflict with standards / interpretations

 

Consistency of accounting policies:

Policies should be consistent for similar transactions, events or conditions

Only change a policy if:

• Standard/interpretation requires it, or
• Change will provide more relevant and reliable information.

 

Principle

If change is due to new standard / interpretation, apply transitional provisions.

If no transitional provisions, apply retrospectively.

 

If impractical to determine period-specific effects or cumulative effects of the error, then retrospectively apply to the earliest period that is practicable

Disclosure

• The title of the standard / interpretation that caused the change
• Nature of the change in policy
• Description of the transitional provisions
• For the current period and each prior period presented, the amount of the adjustment to:

- Each line item affected

- Earnings per share.

• Amount of the adjustment relating to prior periods not presented
• If retrospective application is impracticable, explain and describe how the change in policy was applied
• Subsequent periods need not repeat these disclosures.

 

CHANGES IN ACCOUNTING ESTIMATES

Definition

A change in an 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 the asset or liability.

 

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).

 

Disclosure

• Nature and amount of change that has an effect in the current period (or expected to have in future)
• Fact that the effect of future periods is not disclosed because of impracticality
• Subsequent periods need not repeat these disclosures.

 

 

ERRORS

Definition

Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from failure to use/misuse of reliable information that:

• Was available when the financial statements for that period were issued
• Could have been reasonably expected to be taken into account in those financial statements.

 

Errors include:

• Mathematical mistakes
• Mistakes in applying accounting policies
• Oversights and misinterpretation of facts
• Fraud.

 

Principle

• Correct all errors retrospectively
• Restate the comparative amounts for prior periods in which error occurred or if the error occurred before that date – restate opening balance of assets, liabilities and equity for earliest period presented.

If impractical to determine period-specific effects of the error (or cumulative effects of the error), restate opening balances (restate comparative information) for earliest period practicable

 

Disclosure

• Nature of the prior period error
• For each prior period presented, if practicable, disclose the correction to:

- Each line item affected

- Earnings per share (EPS).

• Amount of the correction at the beginning of earliest period presented
• If retrospective application is impracticable, explain and describe how the error was corrected
• Subsequent periods need not to repeat these disclosures.