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Chapter 4

Chapter 4 covers accounting policies according to IAS 8 and IFRS 1, including definitions, selection, changes, and disclosures related to accounting policies and estimates. It explains how entities should account for changes in accounting policies and prior period errors, emphasizing the need for consistency and reliability in financial statements. The chapter also addresses the impracticability of retrospective application and the first-time adoption of IFRS.

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13 views11 pages

Chapter 4

Chapter 4 covers accounting policies according to IAS 8 and IFRS 1, including definitions, selection, changes, and disclosures related to accounting policies and estimates. It explains how entities should account for changes in accounting policies and prior period errors, emphasizing the need for consistency and reliability in financial statements. The chapter also addresses the impracticability of retrospective application and the first-time adoption of IFRS.

Uploaded by

elio achkar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 4: Accounting policies

(IAS 8 and IFRS 1)


Objectives
When you have completed this chapter, you should be able to:
 Define the term ‘accounting policy’ and explain how an entity should select its
accounting policies.
 Explain the circumstances in which an entity may change an accounting policy.
 Account for a change in an accounting policy and list the disclosures which should be
made when an accounting policy is changed.
 Explain what is meant by an ‘accounting estimate’ and account for a change in an
accounting estimate.
 Define the term ‘prior period error’.
 Account for the correction of a prior period error and list the disclosures which should be
made when a prior period error is corrected.

Contents
 Definition of accounting policies.
 Selection and application of accounting policies.
 Changes in accounting estimates.
 Prior period errors.
 Impracticability of retrospective application or restatement.
 First-time adoption of IFRS (IFRS 1).

Definition of accounting policies


• ‘Specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.’ (IAS 8)
• Use of the word ‘policy’ suggests that the entity has made a choice between alternative
accounting treatments.
• Some of an entity’s accounting policies will be dictated by international standards which
permit no choice of treatment. For instance:
• IAS 2 requires that inventories are measured at the lower of the cost and
NRV.
• IAS 38 prohibits entities from recognizing internally generated goodwill
in their financial statements.
• IAS 37 prohibits entities from recognizing contingent assets and liabilities.
• But certain standards do permit a choice. For instance, IAS 16 and IAS 38 allow items of
PPE or intangible assets, respectively, to be measured using the cost or revaluation
models.

Selection and application of accounting policies


• If an international standard specifically applies to the item under consideration, the
accounting policy which is applied to that item should be determined by applying the
relevant standard.
• If there is no international standard which specifically applies to the item, management
should use its judgement in selecting an accounting policy that results in information

which is relevant and reliable. Having selected an accounting policy in relation to an


item, that policy should be applied consistently to all similar items.
• IAS 8 allows an entity to change one of its accounting policies only if the change:
• is required by an international standard or interpretation; or
• results in the financial statements providing reliable and more relevant
information than would be the case if the accounting policy were not
changed.
Example 4.1
Application of a change in accounting policy retrospectively.

1. During 2010, entity A changed its accounting policy for training costs in order to
comply with IAS 38. Previously, entity A had capitalized certain training costs.
Under IAS 38, it cannot capitalize training costs and, according to the transitional
provisions of the standard, it must apply the change in accounting policy
retrospectively.

2. During the year ended 30 June 2009, entity A had capitalized training costs of
€18,000. In periods before 2009, it had capitalized training costs of €36,000. In
2010, it incurred training costs of €13,500.

3. Entity A’s statement of comprehensive income for 2009 reported profit of


€147,000 net of income taxes of €63,000. Its statement of comprehensive income
for 2010 reported income of €168,000 after income taxes of €72,000. The training
costs of €13,500 were expensed in 2010.

4. Entity A’s retained earnings were €1.8m at July 2009 and €1,947,000 at 30 June
2009. It had €300,000 in share capital throughout 2009 and 2010, representing
100,000 ordinary shares, and there were no other reserves.

5. Entity A’s tax rate was 30% for both 2009 and 2010. The end of its accounting
period is 30 June.
Correction:

Comprehensive Income

Changes in Equity
Changes in accounting estimates
As a result of uncertainties inherent in business activities, many items in financial statements
cannot be measured with precision but can only be estimated. Estimation involves judgements
based on the latest available reliable information. For example, estimates may be required of:
a) bad debts;
b) inventory obsolescence;
c) fair values of financial assets or financial liabilities;
d) useful lives of, depreciable assets; and
e) warranty obligations.
Example 4.2
Accounting for a change in an accounting estimate and the relevant disclosure

Entity B has always depreciated its factory plant and equipment assuming a useful life of
15 years. In 2010, entity B’s directors determined that, due to technological
developments in its industry, the factory plant and equipment should be depreciated over
a shorter period: 10 years. The end of entity B’s accounting period is 30 September.

Correction :
Prior period errors
• Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements. Financial statements do not comply with IFRS if they
contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity’s financial position, financial performance or cash
flows.
• Potential current period errors discovered in that period are corrected before financial
statements are authorized for issue.
• As material errors are sometimes not discovered until a subsequent period, these prior
period errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
An entity should correct material prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery by:
• restating the comparative amounts for the prior 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 (IAS 8 para 42).
Example 4.3
Correction:

Impracticability of retrospective application or restatement


Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an
accounting policy retrospectively or to make a retrospective restatement to correct an error if:
• the effects of retrospective application or retrospective restatement are not
determinable;
• the retrospective application or retrospective restatement requires assumptions
about what management’s intent would have been in that
period; or
• the retrospective application or retrospective restatement requires significant
estimates of amounts and it is impossible to distinguish objectively information
about those estimates that:
• provides evidence of circumstances that existed on the date(s) as at
which those amounts are to be recognized, measured or disclosed;
and
• would have been available when the financial statements for that
prior period were authorized for issue from other information.

First-time adoption of IFRS (IFRS 1)


Example 4.4

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