Accounting Policies, Changes in Accounting Estimates and Errors

INTRODUCTION

The objectives of IAS 8 Accounting Policies, Changes in Estimate and Errors are:

  • Set out the criteria for choosing and changing accounting policies and
  • Accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of errors.

 DEFINITIONS

 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, liability, or an amount of the periodic consumption of an asset, that results from the assessment of 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.

Material Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the items, or a combination of both, could be the determining factor.

 Prior Period Errors are omissions from, and misstatements in, the entity’s financial statements for prior periods arising from a failure to use, or misuse,  reliable information that:

  • Was available when financial statements for those periods were authorised for issue; and
  • Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.  

ACCOUNTING POLICIES

If there is an accounting standard that applies to a transaction or event, the accounting policy to be applied in reporting that transaction or event shall be chosen by referring to the Accounting Standard. The entity does not have to apply the standard if the effect of applying the standard is immaterial

If there is no Accounting Standard relating to the transaction or event, management should use their judgement in developing and applying an accounting policy that results in information that is:

  •  Relevant to the users of the Financial Statements, and
  •  Reliable:
  • Faithful presentation of Financial position, financial performance and cash flow,
  • Reflect the substance of the transaction and not just the legal form,
  • Free from bias,
  • Prudent and
  • Complete.

The entity shall apply accounting standards consistently for similar transactions and events and over time, unless the standard specifically allows or requires categorisation of items for which different policies may be appropriate.

CHANGES IN ACCOUNTING POLICIES

An entity can only change an accounting policy if:

  • It is required by a standard, or
  • It provides more reliable and relevant information about the effects of the transactions, other events or conditions on the entity’s financial position, performance or cash flows.

Transactions that are different from those which have previously occurred and transactions that have not occurred before do not represent a change in an Accounting Policy.

 DISCLOSURE – CHANGES IN ACCOUNTING POLICY

Where an entity makes a voluntary change in an accounting policy which has an effect on the current period or prior periods, that would have an effect on that period but it is not possible to determine the amount of the adjustment, or might have an effect on future periods, the entity should disclose:

  • Nature of the change in accounting policy,
  • Reasons why the change will provide more reliable and relevant information,
  • Amount of the adjustment for current period and each prior period for each financial statement line item affected,
  • Amount of the adjustment relating to prior periods before those presented, if

practicable,

  • The circumstances that caused the existence of that condition and a description of how and from when the change in the accounting policy has been applied.

When the effect of the initial application of a standard has an impact on the current period or any prior period, but it is not practicable to estimate the amount of the adjustment, or it might have an effect on future periods, an entity shall disclose:

  • Title of the Standard,
  • Where relevant the change in the accounting policy is made in accordance with its transitional provisions,
  • Nature of the change in accounting Policy,
  • A description of the transitional provisions,
  • If applicable, the transitional provisions might have an effect on future periods,
  • For the current period and each prior period presented the amount of the adjustment for each line item in the financial statements,
  • Amount of the adjustment relating to periods before those presented to the extent that it is practicable. If retrospective application is not possible the circumstances that caused the existence of that condition and a description of how and from when the change in the accounting policy has been applied.

When an entity has not applied a standard that has been issued but is not yet effective, the entity shall disclose:

  • This fact and
  • Known or reasonably estimated information relevant to assessing the possible impact that application of the new standard will have on the entity’s financial statement in the period of initial application.

 CHANGES IN ACCOUNTING ESTIMATES

Some items cannot be measured with precision but can only be estimated. These estimates are based on the most recently available information. Examples of items that require estimation are Bad Debts and Useful lives of assets.

Use of estimates is common practice in Financial Statements they do not mean that the information is unreliable. How estimates are calculated may change over time due to a change in business practices, more experience in the area or the availability of additional information. A revision of an estimate is neither a change in an accounting estimate nor the correction of an error.

A change in a measurement basis being applied is a change in an accounting policy and not a change in an accounting estimate.

When a change in an accounting estimate gives rise to a change in assets, liabilities or equity it should be recognised by adjusting the carrying amount of the asset, liability or equity as appropriate.         

DISCLOSURE – CHANGES IN ACCOUNTING ESTIMATES

The entity shall disclose the nature and amount of the change in accounting estimate where it has an effect on the current period or future periods. The entity does not have to disclose the effect on future periods if it is impracticable to do so, but must disclose this fact. 

ERRORS

Errors can occur in the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements that contain errors do not comply with IFRSs, these errors can be either material or immaterial but made intentionally to present a particular aspect of the entity’s financial position or performance.

Errors in the current period should be corrected before the financial statements are authorised for issue. However, errors that are not discovered until a subsequent period are corrected in the comparative information presented in the financial statements for that subsequent period, for example, an error is discovered in the financial statements relating to the year-ended 30th September 2008 while finalising the accounts for the year-ended 30th September 2009, the comparative information presented in the “prior year comparatives” in the financial statements for the year-ended 30th September 2009 will be corrected.

A material prior period error shall be corrected in the first set of financial statements authorised for issue after the discovery of the error:

  • Restate the comparative amount for the prior period(s) presented in which the error occurred, or
  • If the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

  DISCLOSURE OF PRIOR PERIOD ERRORS

The entity has to make the following disclosure:

  • Nature of the error,
  • As far as practicable, the amount of the correction for each financial statement line item affected,
  • Amount of the correction at the beginning of the earliest prior period presented, and
  • If a retrospective restatement is not possible then the circumstances that led to the existence of the error and a description of how and from when the error has been corrected.

These disclosures do not need to be repeated in subsequent Financial Statements.

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