Knowledge base on financial reporting
Last update
IAS 8 Best summary policies estimates and errors comprises a high level summary of the three items in this standard:
1. Accounting policies | ||
Definition: Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. | ||
↓ | ↓ | |
Selection and application of accounting policies:
| ||
Last update
The 6 things to know for IAS 8 – The objective of 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.
IAS 8 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.
When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation … Read more
Last update
Change in accounting principles – There is an underlying presumption that an accounting principle, once adopted, should not be changed for similar events and transactions. A change in principle may be 
caused by new events, changing conditions, or additional information or experience.
There are two circumstances when a company is required to change an accounting policy. These are:
IAS 8 19 (b) requires retrospective application (i.e., the application of a different accounting method to previous years as if that … Read more
Last update
Change in accounting estimate – 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 correction of errors.
Therefore no retrospective restatement of financial statements is needed. The adjustment is recorded in profit or loss in the period it was re-estimated/re-calculated/re-validated.
| Changes in accounting policies | Correction of errors | Changes in estimates |
Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required in … Read more
Last update
Adjustment of an error in previously issued financial statements is not an accounting change. Such errors include mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time financial statements were prepared.
– IN SHORT – Adjustments of accounting errors.
Last update
Types of accounting errors come in the form of different kinds of errors. Some errors are discovered in the period in which they are made and are easily adjusted. Others may not be discovered currently and are incorrectly reflected in the financial statements until discovered. Some errors are never discovered; however, the effects of these errors may be counterbalanced in subsequent periods, and after this takes place, account balances are again accurately stated. Errors may be classified as follows:
Last update
Required Disclosure for error restatements – If an error (either accidental or intentional in nature) is subsequently discovered that affected a prior period, the nature of the error, its effect on previously issued financial statements, and the effect of its adjustment on current period’s net income and EPS should be disclosed in the period in which the error is adjusted. In addition, any comparative financial statements provided must be adjusted. Required Disclosure for error restatements
In accounting for events after the reporting period errors easily occur because adjusting events are not properly recognised or the difference between adjusting events and non-adjusting events is not correctly made. Adjusting events are those providing evidence of conditions existing at the … Read more
Last update
Examples of adjustments of errors – When errors affecting income are discovered, careful analysis is necessary to determine the required action to correct the account balances. As indicated, most errors will be caught and adjusted prior to closing the books. The few material errors not detected until subsequent periods and those that have not already been counterbalanced must be treated as prior-period adjustments. See also ‘Types of errors‘.
The following sections describe and illustrate the procedures to be applied when error adjustments require prior-period adjustments. It is assumed that each of the errors is material. Errors that are discovered usually affect the income tax liability for a prior period. Amended tax returns are usually prepared … Read more
Last update
Change in accounting policy – Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized over proved developed reserves. License acquisition, common facilities and future decommissioning costs are amortized over total proved reserves. The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.
This clearly shows all the estimates involved in setting up a depreciation policy. Not only in a complex environment as the oil and gas industry but also in a manufacturing business consisting of … Read more
Last update
It is impracticable to apply a requirement if the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’ is a high hurdle. What constitutes undue cost or effort is a matter of judgement.
In short:
IFRS definition IAS 8: 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: