IAS 8

IAS 8                                                                                         IAS 8

Accounting Policies, Changes in

Accounting Estimates and Errors

International Accounting Standard 8 focuses on Accounting policies, Accounting Estimates, as well as Prior period errors.

The objective of this Standard (IAS 8) is to:

           A.      Accounting Policies

• Prescribe the criteria for Selecting Accounting policies:
• Prescribe the criteria for changing accounting policies ;
• Prescribe the criteria for Accounting for changes in accounting policies; and
• Prescribe disclosures of changes in accounting policies,

         B.       Accounting Estimates

• ·         Prescribe the criteria for Accounting for changes in accounting estimates and

         C.      Prior period errors

• ·         Prescribe the criteria for Accounting for corrections of errors. 

ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING POLICIES

Let me commence with the objectives under A above, i.e Accounting policies.

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. This therefore means, out of the various principles, bases, conventions, rules and practices, those specifically adopted by the entity are the entity’s accounting policies.

Selection and application of accounting policies

A)     WHERE A PARTICULAR STANDARD ADDRESSES THE TRANSACTION OR EVENT:

When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the IFRS.

B)      WHERE NO STANDARD APPLIES TO THE TRANSACTION OR EVENT

When this happen the management shall use its judgement in developing and applying an accounting policy that results in information that is:

(i) relevant, to the economic decision-making needs of users;  and

(ii) reliable,  in that the financial statements.

In applying the above judgment the entity shall refer to, and consider the applicability of the following sources in descending order:

1.  The requirements in IFRSs dealing with similar and related issues

2. Framework

      3.The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework.

Changes in accounting policies

Example of changes in accounting policy is a change from AVCO inventory cost method to FIFO inventory cost method.

WHEN SHOULD AN ENTITY CHANGE ITS ACCOUNTING  POLICY                                                                                                      

An entity shall change an accounting policy only if the change:

(a) is required by an IFRS; or

(b) 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.

Accounting Treatment:  RETROSPECTIVE APPLICATION unless impracticable, then apply PROSPECTIVELY from the earliest date practicable.

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. The practical impact of this is that the new policy should be effected not just in the period of change but from the period when the previous policy commenced, that is, corresponding amounts (or “comparatives”) presented in financial statements must be restated as if the new policy had always been applied.

In addition, to applying the change “retrospectively”, the new accounting policy, if it affects  transactions, other events and conditions occurring after the date as at which the policy is changed will be applied “prospectively”– Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed.

ACCOUNTING ESTIMATE

*Accounting estimate—An approximation of a monetary amount or quantitative figure in the absence of a precise means of measurement.

Judgements are made based on the most up to date information and the use of such estimates is a necessary part of the preparation of financial statements. It does not undermine their reliability. Here are some examples of accounting estimates.

(a) A necessary irrecoverable debt allowance.

(b) Useful lives of depreciable assets.

(c) Provision for obsolescence of inventory.

d) Residual value of an Asset.

e) Changes in depreciation method.

f) Warranty obligation

g) Change in the estimate of contract revenue or costs (IAS 11)

h) Change in the outcome of a contract (IAS 11)

ACCOUNTING TREATMENT: PROSPECTIVE APPLICATION

Prospective application of recognising the effect of a change in an accounting estimate is recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.

   

  PRIOR PERIOD ERRORS

Prior period errors are 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: 

(a) was available when financial statements for those periods were authorised for issue;  and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

EXAMPLES OF SUCH ERROR, Include the effect of:

 (a) Mathematical mistakes

(b) Mistakes in the application of accounting policies

(c) Misinterpretation of facts

(d) Oversights

(e) Fraud (For the purpose of this standard, this is also an example of error)

ACCOUNTING TREATMENT: RETROSPECTIVE RESTATEMENT unless impracticable, then correct prospectively.

Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. i.e. Correct  retrospectively. This involves:

(a) Either restating the comparative amounts for the prior period(s) in which the error occurred,

(b) Or, when the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for that period.

Correcting prospectively here means when it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable.