MFRS 108 –ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

FRAMEWORK

SCOPE MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors prescribes the rules for three specific areas. They are: Changes in accounting policies, Changes in accounting estimates, and Correction of material errors (of prior period).

ACCOUNTING POLICIES MFRS 108 defines accounting policies as ‘specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’. Where there is a specific standard or interpretation which is applicable to a transaction, event or condition, the accounting policy applied is to be determined by applying the requirements of that standard or interpretation. Consistency Accounting policies should be applied consistently for similar transaction, events and conditions. Principle of consistency is also applicable to categories if categorisation is permissible.

Absence of Standard or Interpretation Paragraph 11 of MFRS 108 Management of the entity is to use its judgement in developing and applying an accounting policy that results in information that is: relevant to the economic decision-making needs of users; and reliable, in that the financial statements: represent faithfully the financial position, financial performance and cash flows of the entity, reflects the economic substance of transactions, other events and conditions, are neutral (free from bias) are prudent, and are complete in all material respects.

In making the above judgement, management should consider the applicability of the following sources in descending order: - standards and interpretations dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. Management may also consider: the most recent pronouncement of other standard-setting bodies that use a similar conceptual framework other accounting literature, and industry practice Provided they are consistent with paragraph 11 of MFRS108.

CHANGES IN ACCOUNTING POLICIES a. Initial application of a standard or interpretation The change is required by a standard or an interpretation. b. Voluntary change The change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows. MFRS 108 applies to all changes in the accounting policies except the initial application of a policy to revalue assets in accordance with MFRS 116 and MFRS 138

NOT A CHANGE IN ACCOUNTING POLICIES The following events are not considered as changes in accounting policies: The application of accounting policies for transactions, other events or conditions that differ in substance from those previously occurring. The application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial

ACCOUNTING FOR CHANGES IN ACCOUNTING POLICIES Retrospective application The paramount rule is that the change in accounting policy is applied retrospectively. MFRS 108 defines retrospective application as ‘applying a new policy to transactions, other events and conditions as if the policy had always been applied.’

Retrospective Adjustment Adjust the opening balance of each affected component of equity for the earliest prior period presented, and The other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. When retrospective application of a change in accounting policy is not possible, the change in accounting policy can be applied prospectively. At times the retrospective application of a change in accounting policy may not be possible as it is impracticable to determine either: The period specific effects of the change, or The cumulative effect of the change.

CHANGE IN ACCOUNTING ESTIMATES Many items in the financial statements are estimated and revision of estimates is called changes in accounting estimates. Examples: Provision for bad debts, economic/useful life, inventory obsolescene and warranty obligations, change from indefinite to finite life. Change in measurement basis is not a change in accounting estimates, but a change in accounting policy It is not a correction of errors and does not affect prior period.

ACCOUNTING TREATMENT FOR CHANGES IN ACCOUNTING ESTIMATES The rule is to apply the change in accounting estimate prospectively by including in the profit or loss: the period of the change, if the change affects that period only (e.g. bad debts); or the period of the change and future periods, if the change affects both (e.g. economic life of an asset).

ERRORS Errors of prior periods may be discovered during the current period; these errors are called prior period errors. They may arise in respect of recognition, measurement, presentation or disclosure of the elements of the financial statements. MFRS 108 defines prior period errors as ‘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 authorised for issue; and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.’ Financial statements do not comply with MFRSs if they contain material errors or immaterial errors if they are made intentionally.

ACCOUNTING TREATMENT FOR PRIOR PERIOD ERRORS Material errors of prior periods are corrected retrospectively in the first set of financial statements authorised for issue after the discovery of the errors by: a. restating the comparative amounts for the period(s) presented in which the error occurred; or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

PROSPECTIVE APPLICATION A prior period error has to be corrected by retrospective restatement. There are exceptions to the application of retrospective application. They are when it is impracticable to determine: the period-specific effects, or the cumulative effect of the error.