Accounting Policies

Chapter 2
Accounting Policies, Changes in Accounting Estimates and
Errors (IAS 8):
Is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment
and disclosure of changes in accounting policies, changes in
accounting estimates and corrections of errors.
The Standard is intended to enhance the relevance and
reliability of an entity’s financial statements, and the
comparability of those financial statements over time and with
the financial statements of other entities.
Accounting policies:
Are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting
financial statements.
A change in accounting estimate:
is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an
asset, that results from the assessment of the present status
of, and expected future benefits and obligations associated
with, assets and liabilities.
Changes in accounting estimates result from new information
or new developments and, accordingly, are not corrections of
errors.
Cont.
Retrospective application: is applying a new accounting
policy to transactions, other events and conditions as if that
policy had always been applied.
Prospective application: is applying a change in accounting
policy and of recognizing the effect of a change in an
accounting estimate, respectively.
Cont.
An entity shall select and apply its accounting policies
consistently for similar transactions, other events and
conditions, unless an IFRS specifically requires or permits
categorization of items for which different policies may be
appropriate.
If an IFRS requires or permits such categorization, an
appropriate accounting policy shall be selected and applied
consistently to each category.
An entity shall change an accounting policy only if the
change:
is required by an IFRS; or
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.
Users of financial statements need to be able to compare the
financial statements of an entity over time to identify trends in
its financial position, financial performance and cash flows.
Cont.
Users of financial statements need to be able to compare the
financial statements of an entity over time to identify trends
in its financial position, financial performance and cash flows.
Therefore, the same accounting policies are applied within
each period and from one period to the next unless a change
in accounting policy meets one of the criteria mentioned
earlier.
Cont.
an entity shall account for a change in accounting policy
resulting from the initial application of an IFRS in accordance
with the specific transitional provisions, if any, in that IFRS;
when an entity changes an accounting policy upon initial
application of an IFRS that does not include specific
transitional provisions applying to that change, or changes an
accounting policy voluntarily, it shall apply the change
retrospectively.
When initial application of an IFRS has an effect, an entity
shall disclose:
the title of the IFRS;
when applicable, that the change in accounting policy is made
in accordance with its transitional provisions;
the nature of the change in accounting policy;
when applicable, a description of the transitional provisions;
when applicable, the transitional provisions that might have
an effect on future periods;
Cont.
for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
the amount of the adjustment relating to periods before those
presented, to the extent practicable;
if retrospective application required is impracticable for a
particular prior period, or for periods before those presented,
the circumstances that led to the existence of that condition
and a description of how and from when the change in
accounting policy has been applied.
Estimation:
As a result of the 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.
Estimates may be required of:
bad debts;
inventory obsolescence;
the fair value of financial assets or financial liabilities;
the useful lives of, or expected pattern of consumption of the
future economic benefits embodied in, depreciable assets;
warranty obligations.
Disclosure:
An entity shall disclose the nature and amount of a change in
an accounting estimate that has an effect in the current
period or is expected to have an effect in future periods,
except for the disclosure of the effect on future periods when
it is impracticable to estimate that effect.
If the amount of the effect in future periods is not disclosed
because estimating it is impracticable, an entity shall disclose
that fact.
Errors:
An entity shall 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;
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.
Disclosure of prior period errors:
An entity shall disclose the following:
the nature of the prior period error;
the amount of the correction.
if retrospective restatement is impracticable for a particular
prior period, the circumstances that led to the existence of that
condition and a description of how and from when the error has
been corrected.