IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

The objective of this Standard 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.

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:

  • If the change is required by a Standard or an Interpretation; or
  • If the change results in the financial statements providing more reliable and relevant information about the effects of transactions (or other events).

IAS 8 19 (b) requires retrospective application (i.e., the application of a different accounting method to previous years as if that new method had always been used) to prior years’ financial statements of Read more

Change in accounting estimate

Change in accounting estimates (IAS 8 32 – 39) is an accounting rule which is easily explained in a few captions of bullet points, as follows.

Basics:

  • Use of estimates is an integral process of the accounting process.
  • Use of estimates is in line with matching concept and conservatism concept
  • Use of estimate is needed due to the inherent uncertainties in business activities
  • There is a need to revise the estimate due to changes in circumstances on which the estimate was based or as a result of new information, more experience or subsequent developments.

Examples of changes in accounting estimates include:

  • Changes in the estimate of the collectibility of trade debtors;
  • Changes in the estimate of useful lives or depreciation
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An error in previously issued financial statements

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.

  1. If detected in period error occurred correct accounts through normal accounting cycle adjustments.
  2. If detected in a subsequent period, adjust for effect of material errors by making prior-period adjustments directly to retained earnings balance for the years affected by those errors. lf the error relates to a year that is not presented in the financial statements, the retained earnings balance for the earliest year presented is adjusted. Also correct each item
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Types of accounting errors

There are a number 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:

  1. Errors discovered currently in the course of normal accounting procedures. Examples of this type of error are clerical errors, such as an addition error, posting to the wrong account) misstating an account, or omitting an account from the trial balance. These types of errors
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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.

An example of the disclosure provided when an error adjustment is made through a prior-period adjustment is given in Exhibit 6; the error adjustment (intentional errors in this instance) was made in 2000 by Xerox. Xerox provides extensive disclosure as to the effect of the errors on the income statement and the balance sheet for each Read more

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 either to claim a refund or to pay any Read more

Change in accounting policy?

Tangible assets

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.Read more