Key points from IAS 8

Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

How to select and apply accounting policies?

  • If there is a standard or interpretation which deal with the transaction, then use that standard or interpretation
  • If there is no standard or interpretation which deal with the transaction, the judgment should be applied. The following sources should be referred to, to make the judgment:



  1. Requirement and guidance in other standards/interpretations dealing with similar issues
  2. Definition and recognition criteria in the framework
  3. 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 or interpretations

Accounting policies should be applied consistently for similar transactions, events or conditions.

The accounting policies can only be changed if:

  • Standard or the interpretation require the change;
  • The change will provide more relevant and reliable information

As the general rule, changes in accounting policies must be applied retrospectively in the financial statement. Retrospective application means that an entity implements the change in accounting policy as though it had always been implemented. Consequently, entity adjust all comparative amount presented in the financial statement affected by the change in accounting policy for each prior period presented



The following are exemptions from retrospective application of accounting policy

  • If a change in accounting policy is required by a new standard or interpretation or a change to existing standard/interpretation and the transitional provisions of those standards or interpretation allow the prospective application of new accounting policy. Specific transitional guidance of standard or interpretation must be followed in such circumstances:
  • If the effects of retrospective application of the change in accounting policy is immaterial
  • If the application of the new accounting policy is in the respect of transactions, events, and circumstances that are substantially different from those that transpire in the past
  • If the retrospective application of a change in accounting policy is impracticable. Example of this is when the entity has not collected sufficient data to enable objective assessment of the effects of the change in accounting policy and it would be impracticable to reconstruct such data

If it is impractical to determine the period-specific effect or the cumulative effect of error, then retrospectively apply accounting policy to the earliest period that is practicable.

The following disclosure should be made with respect to the change in accounting policy.

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



CHANGE IN ACCOUNTING ESTIMATES

A change in accounting estimates is an adjustment of the carrying amount of an asset or liability, or related expenses, resulting from reassessing the expected future benefits and obligations associated with the asset and liability.
The change in accounting estimates is recognized prospectively in the financial statements in;

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

The following disclosure should be made regarding the change in accounting estimates.

  • Nature and amount of change that has an effect in the current period (or expected to have in the future)
  • Fact that the effect of future periods is not disclosed because of impracticability
  • Subsequent periods need not repeat these disclosures

ERRORS

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 financial statement for the period were issued
  • could have been reasonably expected to be taken into account in those financial statements

Error includes

  • Mathematical mistakes
  • Mistakes in applying accounting policies
  • Oversight and misinterpretation of facts
  • fraud

The errors in the financial statement are dealt with by

  • Correcting all errors retrospectively 
  • Restate the comparative amounts for the prior periods in which errors occurred or if the errors occurred before that date – restate the opening balance of assets, liabilities, and equity for the earliest period presented
  • Nature of prior period errors
  • For each prior period presented, if practicable, disclose the correction to
  1. Each line item affected
  2. Earnings per share (EPS)



If it is impractical to determine period-specific effects of the error (or the cumulative effects of the error), restate opening balances (restate comparative information) for the earliest period practicable
When dealing with financial statements the following should be disclosed in the financial statement

  • Amount of the correction at the beginning of the earliest period presented
  • If the retrospective application is impracticable, explain and describe how the error was corrected
  • Subsequent periods need not repeat these disclosures.

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