IAS 8- Changes in Accounting Policies .
Tuesday 14th july
Oo ,Tuesday. At least it is better than Monday, 1day closer to the weekend. Thank God. Arrived at the office after 8 oclock I think 5 minutes or so. No one noticed sha. It is not like I clock in or something, because I don’t have a pass and my finger prints have not been taken yet. I was told that my computer would be arriving but the end of the week, so chilling things for me till then. I did petty cash vouchers this time around. After I settled down to read. So I learnt something on IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors).
Accounting policies are the specific principles, bases , conventions, rules and practices adopted by an entity in preparing and presenting financial statements. The ifrs standards consisting of the IAS, IFRS AND IFRS interpretations have a list of relevant policies for different accounting situations which are expected to be followed. When there is no applicable ifrs or interpretation, then the management is expected to use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable.
When applying judgement, management should put into consideration the following:
a) The requirements and guidance in Ifrs & Ifric’s dealing with similar and related issues.
b) The definitions, recognitions criteria and measurement concepts for assets, liabilities and expenses in the conceptual framework.
When a company has chosen its accounting policies, frequent and incessant changing of it would not be permitted. There must be consistency in applying the policies for similar transactions. A change in accounting policy is permitted by the Ifrs if
1) The change is required by an ifrs standard or
2) The change will give more meaning to the reliability and relevance and gives a more appropriate presentation of events or transactions in the financial statement of the entity.
Ias 8 highlights two types of events that do not constitute changes in accounting policies.
1) Adopting an accounting policy for a new type of transaction or event which is not dealt with previously by the entity.
2) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material
A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. Which means that at the earliest date such transaction or event occurred, the policy is applied from that date.
If a new ifrs is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new IFRS itself to be followed. In a situation where no transitional provision is given in the new ifrs standard, then we are to follow the general principles of IAS 8.
When a change in accounting policies have a significant effect on the current accounting period or any other prior period, then there are disclosures that the entity must disclose. They are:
- Reasons for the change
- Amount of the adjustment for the period presented
- Amount of the adjustment relating to the periods prior to those included in the comparative information.
- The fact that comperative information has been restored or that is impracticable to do so
Change in Accounting Estimates
Estimates are adjustments made in cases of uncertainties inherent with the firm. Judgments are made based on the most up to date information and the use of estimates are a necessary part of the preparation of the financial statements .
A change in accounting estimate is an adjustment of the carrying amount of an asset or 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. The effect of change in accounting estimates shall be recognized prospectively, and not retrospectively like the change in accounting policies. It is recognized prospectively, and not retrospectively like the change in accounting policies. It is recognized prospectively by including it in
a) The period of the change, if the change affects that period only, or
b) The period of the change and future periods, if the change affects both.
Prior Period Errors
Under IAS 8, prior period errors must be corrected retrospectively. Prior period errors are omissions from and misstatement s in the entity’s financial statements for one or more prior periods arising from a f ailure to use or misuse of reliable information that
a) Was available when financial statements for those periods were authorized for issue; and
b) Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
Errors relating to prior period may arise through Mathematical mistakes, mistakes in the application of accounting policies, misinterpretation of facts, oversights and fraud.
An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by:
a) Restating the comparative amounts for the prior period(s) presented in which the error occurred
b) 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.
Except to the extent that is impracticable to determine the cumulative effect of an error or prior periods can an entity correct an error prospectively.
The disclosure required in the case of correction of accounting errors are:
a) The nature of the prior period error
b) For each prior period, to the extent practicable, the amount of the correction;
i) For each financial statement line item affected
ii) If IAS33 applies for basic and diluted earnings per share .
c) The amount of the correction at the beginning of the earliest prior period presented
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
Abbas A Mirza., Graham Holt., Liesel Knorr., Wiley IFRS: Practical Implementation Guide and Workbook
Dieter Christian., Nobert Ludenbach., IFRS Essentials