Accounting policies, changes in accounting estimates and errors. The standard was extensively revised in Dec The new title reflects the fact that the material on determining net profit or loss for the period has been transferred to IAS 1. Mr. BarryA-level Accounting Year13 IAS 8

Mr. BarryA-level Accounting Year13

Definitions Accounting Policies : specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial info. Change in Accounting Estimate: an adjustment in the carrying amount of an asset, liability or the amount of the periodic consumption of an asset, that results from the assessment of the present status of & expected future benefits & obligations associated with assets and liabilities. Changes in accounting estimated results from new information or new developments and accordingly are not corrections in errors. Mr. BarryA-level Accounting Year13

Definitions Prior Period errors: are omissions from, and misstatements in, the entities financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: 1.Was available when fin stats for those periods were authorised for issue, and 2.Could reasonable be expected to have been obtained and taken into account in preparation and presentation of financial Mr. BarryA-level Accounting Year13

Errors include Mathematical mistakes, Mistakes in applying accounting policies Oversights, Misinterpretations of facts of fraud. Mr. BarryA-level Accounting Year13

Key Terms Retrospective application: applying new accounting policy to transactions, other events and conditions as if that policy had never been applied. Retrospective restatement: correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. Prospective application: change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are Mr. BarryA-level Accounting Year13

Key Terms (a)Applying the new accounting policy to transactions, other events and conditions occurring after the balance sheet date as at which the policy is changed, and: (b)Recognising the effect of the change in the accounting policy estimate in the current and future periods affected by the change. Impracticable: Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. It is impracticable to apply a change in accounting policy retrospectively or make a retrospective restatement to correct an error if one of the following apply Mr. BarryA-level Accounting Year13

Key Terms: the retrospective application or retrospective restatement (a)The effects of which are not determinable (b)requires assumptions about what management’s intent would have been in that period (c)Requires significant estimates of amounts and it is impossible to distinguish objectively about those estimates: (d)provides evidence of circumstances that existed on the date(s) at which those amounts are to be recognised, measured or disclosed; and would have been available when the fin. Stats for that prior period were authorised for issue, from other information. Mr. BarryA-level Accounting Year13

Accounting Policies Material on selection of appropriate accounting policies has been transferred from IAS 1 to IAS 8. Policies are determined by applying the relevant IAS. Where none exist, management should use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. Management should refer to: (a)The requirements and guidance in IRFSs dealing with similar and related issues (b)The definitions, recognition criteria and measurement concepts for assets, liabilities and expenses in the Framework. Mr. BarryA-level Accounting Year13

Accounting Policies Management may also consider : – recent pronouncements of other standard setting bodies that use a conceptual framework to develop standards, – other accounting literature and, – accepted industry practice, if there is no conflict with these sources. Must select and apply policies for similar transactions / events/ conditions, consistently for a period. IFRS specifically requires/permits categorisation of items for which different policies may be appropriate, then an appropriate policy must be selected and applied consistently to each category Mr. BarryA-level Accounting Year13

Selection: choice must (a)Relevant (b)Reliable (c)Faithful representation (d)Reflect economic substance of transaction (e)Neutral (f)Prudent (g)complete Mr. BarryA-level Accounting Year13

Changes in policies / estimates The same accounting policies are usually adopted from period to period to allow users to analyse trends over time in – Profit – Cash flows and – Financial position – Changes in accounting policy will therefore be rare and should only be made by one of three things Mr. BarryA-level Accounting Year13

Changes in policies / estimates Only by one of 3 things – Statue – Accounting standard setting body – Changes provides more appropriate presentation 2 events which do not constitute changes in accounting policy – Adopting a policy for a transaction / event not dealt with previously by the entity – Adopting a NEW policy for a transaction / event which has not occurred in the past or which is not material Revaluations covered under IAS 16 not IAS 8. Mr. BarryA-level Accounting Year13

Changes in policies / estimates Must be applied retrospectively = The new accounting policy is applied to transactions and events as if it had always been in use. At the earliest date such transactions or events occurred, the policy is applied from that date (unless impracticable to determine the cumulative amount of the charge). Adjustment made to opening retained earnings. Comparative information should be restated unless it is impracticable to do so All comparative information must be restated as if the new policy has always been in force with amounts relating to earlier periods reflected in adjustments to opening reserves. Mr. BarryA-level Accounting Year13

Changes in policies / estimates Restate comparatives (unless impracticable) Prospective application no longer allowed unless impracticable to determine cumulative effect. Certain disclosures required when: – Change in policy has effect on : current period or any prior period presented, or when It may have a material effect in subsequent period Mr. BarryA-level Accounting Year13

Changes in Accounting Estimates Arise because of uncertainties. They are judgements. It does not undermine their reliability such as: – A necessary bad debt provision – Useful lives of depreciated assets – Provision for obsolescence of inventory Rule: include in one of : – The period of the change, if the change affects that period only – The period of the change and future periods, if that change affects both. Mr. BarryA-level Accounting Year13

Changes in accounting estimates Examples: – Bad debts – Depreciation Include effect of change in P&L under same classification as was previously used (consistency) Materiality is also relevant – disclose if material on current and subsequent periods Mr. BarryA-level Accounting Year13

Errors relating to prior periods Errors discovered during a current period which relate to a prior period may arise through: a)Mathematical mistakes b)Mistakes in the application of accounting policies c)Misinterpretation of facts d)Oversights e)Fraud Mr. BarryA-level Accounting Year13

Errors relating to prior periods Most of the time these errors can be corrected through net profit or loss for the current period. Where they are material prior period errors, this is not appropriate. The standard considers 2 possible treatments: Prior period errors: correct retrospectively. There is no longer any alternative treatment allowed. This involves: a)Either restating the comparative amounts for the prior period(s) in which the error occurred. Mr. BarryA-level Accounting Year13

Errors relating to prior periods b) or, when the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for that period So that the financial statements are presented as if the error had never occurred. Only where it is impracticable to determine the cumulative effect of an error on prior periods can an entity correct an error prospectively, Mr. BarryA-level Accounting Year13

Summary Effect of change in accounting estimate be included in net profit / loss in: – Period of change, if change affects current period only – Period of change and future periods if change affects both. Prior period errors = correct retrospectively by: – Either restating the comparative amounts for the prior periods in which the error occured, or, – When the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the period – like error never occurred. Mr. BarryA-level Accounting Year13