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IFRS 8– Accounting Polices, Changes in accounting estimates and Errors

Aim to enhance the relevance, reliability and comparability of financial statements

Standard applied when an organisation:

- Changes its accounting policies

- Changes its accounting estimates

- Corrects errors identified in previous financial periods

Changes in accounting policies

- A new IFRS makes the financial statements more reliable and more relevant

- Cannot change accounting policy if another IFRS does not lead to more relevant information

Objective Of IFRS 8

It prescribes the criteria for:

Selection of accounting policies;

Changes in accounting policies;

Accounting treatment;

Disclosure of changes in accounting policies;

Changes in accounting estimates;

Correction of errors;

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The achievement of the objective would result in Enhancement of:

Relevance and reliability of financial statements;

Comparability of financial statements with the financial statements of other entities and of prior periods of the same entity.

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Retrospective Application:

• Retrospective application is applying a new policy to transactions, other events & conditions as if that policy had always been applicable.

• Retrospective Restatement is the effect of Retrospective application on the Prior Periods presented along the current year’s Financial Statement.

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Prospective Application

Prospective Application means applying the changes on current and future periods only.In the past what’s done is done no such alteration is required in the books of the accounts.

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Impracticability of Application

Applying a requirement is impracticable when the entity cannot apply it after making every possible effort.

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What are Accounting Policies?

Basis; Rules; Conventions; Practices; Specific Principles;

That are applied in preparing and presenting financial Statements

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Reasons for Changes in Accounting Policies

Change in International Financial Reporting Standard Change in Local Legislation For More True & Fair View

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Accounting Treatment of Change in Accounting PolicyRetrospective

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When a change in accounting policy is applied retrospectively, the entity shall adjust the opening balances 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 it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.

Impracticable

DISCLOSURE REQUIREMENTS OF CHANGE IN ACCOUNTING POLICY

Nature of change Description of transitional provision if any For the current period and each prior period presented, to the

extent practicable, the amount of adjustment:

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What is a Change in Accounting Estimates?

Change in Accounting Estimates is an Adjustment in Carrying value of an Asset ; or a liability; Or the amount of Periodic consumption of an Asset as a

Result of Present Conditions and Circumstances

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What are the Reasons for Estimation?

When an item of financial statements cannot be measured precisely, it can only be estimated. This is because of: Uncertainties inherent in the business; Where judgments are involved;

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Where Estimation is Required?

Estimates may be required of Bad Debts Inventory obsolescence 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 etc.

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When Change in Accounting Estimate Becomes Necessary?

If changes occur in the circumstances on which the estimate was based As a result of a new information As a result of new development More Experience

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What is the Recognition Criteria of Change in Accounting Estimate? Adjusting the carrying amount of the related asset,

liability or equity item in the period of change recognizes a change in an accounting estimate

Example: Management estimated that provision for doubtful

debts up to 5 percent of the total population of trade debts. However, upon identifying the age of the trade debts, it revealed that bad debts are about 6.5 percent of total population of trade debts. Management immediately recognizes the increase in bad debts expense in the books of accounts.

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Accounting Treatment of Change in Accounting Estimates

IFRS 8 Requires Recognizing the effect of the change in the accounting estimate in the

Current and future periods affected by the change.

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Disclosures Required for Change in Accounting Estimates

If the effect of a change in estimate is immaterial (as is usually the case for changes in reserves and allowances), we do not disclose the alteration.

However, we disclose the change in estimate if the amount is material. Also, if the change affects several future periods, e.g., the effect on income from continuing operations and net income,

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What are Errors?

Errors are mistakes.

They can be Classified as shown.

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Errors

Prior Period

Current Period

Errors Related To Prior Reporting Periods

Errors Related To Current Reporting

Period

What are Prior Period Errors?

Failure to use or misuse of reliable information that was available when financial statements for those periods were authorized for issue.

Failure to use or misuse of reliable information that could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

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What Are Examples of Prior Period Errors?

Effect of mathematical mistakes Mistakes in applying accounting policies Oversight Misinterpretation of facts Fraud.

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Changes in accounting estimates resulting from new information or new developments are NOT corrections of errors

What is the Accounting Treatment for Rectification of 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; 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

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What are the Disclosure Requirements of IFRS 8

Nature of the prior period error To the extent practicable, the amount of the correction

for each financial statement line item affected; The amount of the correction at the beginning of the earliest prior period presented; and

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.

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IFRS 8– Limitations on retrospective restatement

A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error.

When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and net assets for the earliest period for which retrospective restatement is practicable (which may be the current period).

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IFRS 8 Disclosure of prior period errors

Disclosure of prior period errors

(a) the nature of the prior period error;

(b) for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected;

(c) the amount of the correction at the beginning of the earliest prior period presented; and

(d) 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.

Financial statements of subsequent periods need not repeat these disclosures.

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Tunshill ACCA December 2010

An accounting entity will chose accounting policies which best represent the economic reality of the organisation. These must be acceptable within the appropriate accounting standards

Furthermore their may also be industry norms, local legislation and other local customs

The benefits of compliance should be less than the cost

An accounting policy therefore will be the way (principle) transactions are accounted for, an accounting estimate will be an educated guess at some financial matter

Accounting policy may be that we recognise revenue when we receive the cash, accounting estimate is that motor vehicles will have a life of 5 years

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Bi Tunshill

This represents a change in an estimate. All plant should be assessed to see whether useful lives are appropriate

An analysis is prepared and usually agreed with the auditors Need to explain and justify the change The expectation is wrong, if they change the estimate then the

carrying amount will be written off over the remaining life There will therefore be no change

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Bii Tunshill

The change needs to be made for a practical reason ie better information. However comparability is a good reason

The company needs to show that the IT system can cope with the change

Account for change as if it had always been in force

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Bii Tunshill

Both opening and closing inventory will be on the AVCO basis so the profit will not increase by $2m

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Av FIFO

Op Inv 13.4 15

Cl Inv 18 20

Movement 4.6 5

Therefore profit will fall $400k