The 6 things to know for IAS 8

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.

1 Selection and application of accounting policies

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 and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8 7]

In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8 10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:

………..the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8 11]

Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in IAS 8 11. [IAS 8 12]

2 Consistency of accounting policies

An entity shall apply its accounting policy consistently for similar transactions, other events or conditions unless an IFRS states otherwise.

If an IFRS requires or permits such categorisation of terms, or which different policies may be appropriate, an appropriate accounting policy shall be selected and applied consistently to each category.  The 6 things to know for IAS 8

The following are not changes in accounting policies:The 6 things to know for IAS 8

  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.
Something else -   Notes to the financial statements

Changes in accounting policies only if:

  1. Required by IFRS; or The 6 things to know for IAS 8
  2. Results in the financial statements providing reliable and more relevant information.

 

The 6 things to know for IAS 8
The core of IAS 8

3 Accounting policy changes

If the change is resulting from a Standard; an entity shall apply transitional provisions and if no specific transitional provisions exist, an entity shall apply the change retrospectively.

When a change in accounting policy is applied retrospectively, the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.

IAS 8 refers to limitations on retrospective application when it proves impracticable. The 6 things to know for IAS 8

4 Accounting estimate changes

The change shall be recognised prospectively in profit and loss in the: The 6 things to know for IAS 8

  1. period of change, if the change affects that period only or; The 6 things to know for IAS 8
  2. period of change and future periods if the change affects both. The 6 things to know for IAS 8

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change. The 6 things to know for IAS 8

5 Correction of errors

An entity shall correct material prior period errors respectively in the first set of financial statements authorised for issue after their discovery by:

  1. restating the comparative amounts for prior period(s) in which error occurred, or The 6 things to know for IAS 8
  2. If the error occurred before that date – restating the opening balance of assets, liabilities and equity for earliest prior period presented.

IAS 8 refers to limitations on retrospective application when it proves impracticable.

6 Presentation and disclosureDisclosure impairment

– Accounting policy changes

When initial application of an IFRS has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:

  1. the title of the Standard; The 6 things to know for IAS 8
  2. when applicable, that the change in accounting policy is made in accordance with its transitional provisions;
  3. the nature of the change in accounting policy; The 6 things to know for IAS 8
  4. when applicable, a description of the transitional provisions; The 6 things to know for IAS 8
  5. when applicable, the transitional provisions that might have an effect on future periods;
  6. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
    1. (i) for each financial statement line item affected; The 6 things to know for IAS 8
    2. if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share; The 6 things to know for IAS 8
  7. the amount of the adjustment relating to periods before those presented, to the extent practicable; and
  8. if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.
Something else -   IAS 8 Best summary policies estimates and errors

When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:

  1. the nature of the change in accounting policy;Measurement of remaining coverage
  2. the reasons why applying the new accounting policy provides reliable and more relevant information;
  3. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
    1. for each financial statement line item affected; and
    2. if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share;
  4. the amount of the adjustment relating to periods before those presented, to the extent practicable; and
  5. if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

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

  1. this fact; and The 6 things to know for IAS 8 The 6 things to know for IAS 8 The 6 things to know for IAS 8
  2. known or reasonably estimable information relevant to assessing the possible impact that application of the new Standard will have on the entity’s financial statements in the period of initial application. The 6 things to know for IAS 8

– Accounting estimate changesChange in accounting estimate

An entity shall disclose the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect. The 6 things to know for IAS 8

If the amount of the effect in future periods is not disclosed because estimation of it is impracticable, an entity shall disclose that fact.

Something else -   Types of accounting errors

– Correction of errors

An entity shall disclose the following: The 6 things to know for IAS 8

  1. the nature of the prior period error; The 6 things to know for IAS 8
  2. for each prior period presented, to the extent practicable, the amount of the correction: The 6 things to know for IAS 8
  3. for each financial statement line item affected; and The 6 things to know for IAS 8
    1. if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share; The 6 things to know for IAS 8
    2. the amount of the correction at the beginning of the earliest prior period presented; and The 6 things to know for IAS 8
  4. 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 The 6 things to know for IAS 8

Applicable to all disclosures – financial statements of subsequent periods need not repeat these disclosures.

Here is a real life example from Xerox (US GAAP but not significantly different from IFRS)

The 6 things to know for IAS 8

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Something else -   Accounting policies

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