IAS 8 Best summary policies estimates and errors

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:

• If a standard or interpretation deals with a transaction, use that standard or interpretation
• If no standard or interpretation deals with a transaction, judgment should be applied. The following sources should be referred to, to make the judgement:
  • Requirements and guidance in other standards/interpretations dealing with similar issues
  • Definitions, recognition criteria in the framework
  • May use other GAAP that use a similar conceptual framework and/or may consult other industry practice / accounting literature that is not in conflict with standards / interpretations.

Criteria:

Develop and apply an accounting policy that results in information that is:

1. relevant to the economic decision-making needs of users; and
2. reliable, in that the financial statements:
   1. represent faithfully the financial position, financial performance and cash flows of the entity;
   2. reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
   3. are neutral, i.e. free from bias;
   4. are prudent; and IAS 8 Accounting errors

↓

Consistency of accounting policies:

Policies should be consistent for similar transactions, events or conditions.

IAS 8 Best summary policies estimates and errors

IAS 8 Best summary policies estimates and errors

IAS 8 Best summary policies estimates and errors

IAS 8 Best summary policies estimates and errors

Only change a policy if:

• Standard/interpretation requires it, or
• Change will provide more relevant and reliable information.

The following are not changes in accounting policies:

1. the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring; and
2. the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial.

↓

Principle

If change is due to new standard / interpretation, apply transitional provisions.

If no transitional provisions, apply retrospectively.

↓

If impractical to determine period-specific effects or cumulative effects of the change, then retrospectively apply to the earliest period that is practicable.

↓

Disclosure

• The title of the standard / interpretation that caused the change
• Nature of the change in policy
• Description of the transitional provisions
• For the current period and each prior period presented, the amount of the adjustment to:
• Each line item affected
• Earnings per share.
• Amount of the adjustment relating to prior periods not presented
• If retrospective application is impracticable, explain and describe how the change in policy was applied
• Subsequent periods need not repeat these disclosures.

2. Changes in accounting principles

Definition

A change in an accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with the asset or liability. IAS 8 Best summary policies estimates and errors

Principle

Recognise the change prospectively in profit or loss in:

• Period of change, if it only affects that period; or
• Period of change and future periods (if applicable).

Disclosure

• Nature and amount of change that has an effect in the current period (or expected to have in future)
• Fact that the effect of future periods is not disclosed because of impracticality

3. Errors

Definition

Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from failure to use/misuse of reliable information that:

• Was available when the financial statements for that period were issued IAS 8 Accounting errors
• Could have been reasonably expected to be taken into account in those financial statements. IAS 8 Accounting policies

Errors include:

• Mathematical mistakes IAS 8 Best summary policies estimates and errors
• Mistakes in applying accounting policies IAS 8 Best summary policies estimates and errors
• Oversights and misinterpretation of facts IAS 8 Best summary policies estimates and errors
• Fraud. IAS 8 Best summary policies estimates and errors

Principle

Correct all errors retrospectively

Restate the comparative amounts for prior periods in which error occurred or if the error occurred before that date – restate opening balance of assets, liabilities and equity for earliest period presented.

If impractical to determine period-specific effects of the error (or cumulative effects of the error), restate opening balances (restate comparative information) for earliest period practicable.

Disclosure

• Nature of the prior period error
• For each prior period presented, if practicable, disclose the correction to:
  • Each line item affected
  • Earnings per share (EPS).
• Amount of the correction at the beginning of earliest period presented
• If retrospective application is impracticable, explain and describe how the error was corrected
• Subsequent periods need not to repeat these disclosures.