Other Standards: 1 IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors
Other Standards: 1 IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors
Other Standards: 1 IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors
Introduction
IAS 8 governs the following topics:
• selection of accounting policies
• changes in accounting policies
• changes in accounting estimates
• correction of prior period errors.
Accounting policies
Accounting policies are the principles, bases, conventions, rules and
practices applied by an entity which specify how the effects of
transactions and other events are reflected in the financial statements.
IAS 8 requires an entity to select and apply appropriate accounting
policies complying with International Financial Reporting Standards
(IFRSs) and Interpretations to ensure that the financial statements
provide information that is:
• relevant to the decisionmaking needs of users
• reliable in that they:
– represent faithfully the results and financial position of the entity
– reflect the economic substance of events and transactions and
not merely the legal form
– are neutral, i.e. free from bias
– are prudent
– are complete in all material respects.
The general rule is that accounting policies are normally kept the same
from period to period to ensure comparability of financial statements
over time.
IAS 8 requires accounting policies to be changed only if the change:
• is required by IFRSs or
• will result in a reliable and more relevant presentation of events or
transactions.
A change in accounting policy occurs if there has been a change in:
• recognition, e.g. an expense is now recognised rather than an asset
• presentation, e.g. depreciation is now included in cost of sales
rather than administrative expenses, or
• measurement basis, e.g. stating assets at replacement cost rather
than historical cost.
Accounting for a change in accounting policy
The required accounting treatment is that:
• the change should be applied retrospectively, with an adjustment to
the opening balance of retained earnings in the statement of
changes in equity
• comparative information should be restated unless it is
impracticable to do so
• if the adjustment to opening retained earnings cannot be reasonably
determined, the change should be adjusted prospectively, i.e.
included in the current period’s statement of profit or loss.
Accounting estimates
An accounting estimate is a method adopted by an entity to arrive at
estimated amounts for the financial statements.
Most figures in the financial statements require some estimation:
• the exercise of judgement based on the latest information available
at the time
• at a later date, estimates may have to be revised as a result of the
availability of new information, more experience or subsequent
developments.
Changes in accounting estimates
The requirements of IAS 8 are:
• The effects of a change in accounting estimate should be included
in the statement of profit or loss in the period of the change and, if
subsequent periods are affected, in those subsequent periods.
• The effects of the change should be included in the same income or
expense classification as was used for the original estimate.
• If the effect of the change is material, its nature and amount must be
disclosed.
Examples of changes in accounting estimates are changes in:
• the useful lives of noncurrent assets
• the residual values of noncurrent assets
• the method of depreciating noncurrent assets
• warranty provisions, based upon more uptodate information about
claims frequency.
If a noncurrent asset has a depreciable amount of $5,000 to be written
off over five years, different depreciation methods such as straight line,
reducing balance, sum of the digits, etc. all represent different estimation
techniques.
The choice of method of depreciation would be the estimation technique
whereas the policy of writing off the cost of noncurrent assets over their
useful lives would be the accounting policy.
Estimation techniques therefore implement the measurement aspects of
accounting policies.
(1) An entity has previously charged interest incurred in connection with
the construction of tangible noncurrent assets to the statement of
profit or loss. Following the revision of IAS 23, and in accordance
with the revised requirements of that standard, it now capitalises this
interest.
(2) An entity has previously depreciated vehicles using the reducing
balance method at 40% pa. It now uses the straightline method
over a period of five years.
(3) An entity has previously shown certain overheads within cost of
sales. It now shows those overheads within administrative
expenses.
(4) An entity has previously measured inventory at weighted average
cost. It now measures inventory using the first in first out (FIFO)
method.
Solution
For each of the items, ask whether this involves a change to:
• recognition
• presentation
• measurement basis.
If the answer to any of these is yes, the change is a change in accounting
policy.
(1) This is a change in recognition and presentation. Therefore this is a
change in accounting policy.
(2) The answer to all three questions is no. This is only a change in
estimation technique.
(3) This is a change in presentation and therefore a change in
accounting policy.
(4) This is a change in measurement basis and therefore a change in
accounting policy.
• was available when the financial statements for those periods were
authorised for issue and
• could reasonably be expected to have been taken into account in
preparing those financial statements.
Such errors include mathematical mistakes, mistakes in applying
accounting policies, oversights and fraud.
Current period errors that are discovered in that period should be
corrected before the financial statements are authorised for issue.
Prior period errors are dealt with by:
• restating the opening balance of assets, liabilities and equity as if
the error had never occurred, and presenting the necessary
adjustment to the opening balance of retained earnings in the
statement of changes in equity
• restating the comparative figures presented, as if the error had
never occurred
• disclosing within the accounts a statement of financial position at the
beginning of the earliest comparative period. In effect this means
that three statements of financial position will be presented within a
set of financial statements:
– at the end of the current year
– at the end of the previous year
– at the beginning of the previous year.
During 20X1 a company discovered that certain items had been
included in inventory at 31 December 20X0 at a value of $2.5 million but
they had in fact been sold before the year end.
The original figures reported for the year ending 31 December 20X0
and the figures for the current year 20X1 are given below:
20X1 20X0
$000 $000
Sales 52,100 48,300
Cost of sales (33,500) (30,200)
––––––– –––––––
Gross profit 18,600 18,100
Tax (4,600) (4,300)
––––––– –––––––
Net profit 14,000 13,800
The cost of goods sold in 20X1 includes the $2.5 million error in opening
inventory. The retained earnings at 1 January 20X0 were $11.2 million.
(Assume that the adjustment will have no effect on the tax charge.)
Show the 20X1 statement of profit or loss with comparative figures and
the retained earnings for each year. Disclosure of other comprehensive
income is not required.
Solution
Retained earnings
20X1 20X0
Opening retained earnings $000 $000
As previously reported
$(11,200 + 13,800) 25,000 11,200
Prior period adjustment (2,500) –
–––––– ––––––
As restated 22,500 11,200
Net profit for the year 16,500 11,300
–––––– ––––––
Closing retained earnings 39,000 22,500
–––––– ––––––