IAS 8
change in accounting estimate
A change in accounting estimate is 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
What do accounting policies impact
Accounting policies impact the recognition (Companies may have different capitalisation policies. Options in IFRSs), measurement (Current values vs historical values) and presentation of assets, liabilities, gains, losses and change in equity (recognition stage vs management choice)
Summary
Change in accounting estimates are applied prospectively. • Change in accounting policies are applied retrospectively • Changes in accounting policy are only made if:- it will result in the provision of more relevant and reliable information to the users of financial statements; and- change is required by IFRS. • Accounting for error depends on whether it is material or not.- material errors are corrected retrospectively; and- errors that are not material are corrected in the current year FS.
Examples of things that are not changes in accounting policy
Change in method of depreciation (see accounting estimate. The application of an accounting policy for transactions, events or conditions that differ in substance from those previously recorded. E.g. building now rented to 3rd party (Move form IAS 16 to IAS 40 not IAS 16
Accounting for changes in accounting policy
Changes in accounting policies are applied 'retrospectively', that is to past financial statements, when the original accounting policy was first applied. If it is not practicable to apply the effects of a change in policy in prior periods IAS 8 allows the change to be made from the earliest period for which retrospective application is practicable.
What is classification
Classification: current accounts payable have been classified as non current liabilities. - This might have occurred due to error or a deliberate attempt to improve the liquidity ratio - either way, the accounts payable and long-term debt must be re-stated.
Give two examples of events or elements which might induce a voluntary change in accounting policies?
Company A becomes a subsidiary of Company B, subsequently the accounting policies within Company A should be harmonised with the accounting policies of Company B. All changes between benchmark treatments and allowable treatments prescribed in IFRS e.g. switch from valuing certain PPE at historical cost to Fair Value.
What is cut off
Cut off; Double counting the sale of goods and included in inventory
Why are estimates made and what are they based on
Due to uncertainties inherent in business transaction and entity may not have complete information when it prepares its financial statements, therefore it has make estimates. These estimates are based on: • management's past experience; • judgement; and • economic environment in which the entity operates (the most up to date and reliable information).
Give an example of a change in accounting estimate which effects only the current period and one example which affects both the current period and subsequent periods.
E.g. that affects current period only:-Change in estimate of amount of bad debts• E.g. that affects current & future periods:-Change in estimate of UEL or expected pattern of consumption of future economic benefits of a non-current asset.
What is the objective of IAS 8
Ensure entities prepare & present financial statements on a consistent basis. To ensure that sufficient information is disclosed in the financial statements to enable users to understand the policies adopted and how they have been implemented. To enhance comparability of financial statement (FS) data over time within the same firm and between firms In order to improve comparability IAS 8 focuses on the criteria for selecting accounting policies, the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and the correction of errors.
What are estimates based on and how often should they be reviewed
Estimates are based on the information available at a point in time.• Estimates should be reviewed annually.
Define accounting policy under IAS 8
IAS 8 defines accounting policies as "the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements".
How is a change in accounting policy dealt with
If a new standard is issued the transitional provisions of that standard will be applied to any change of accounting policy . If a new standard does not have transitional provisions, the change is applied retrospectively. If the change is voluntary, the change is applied retrospectively.
When do accounting estimates have to be revised
If changes occur regarding the circumstances on which the estimate was based; As a result of new information, more experience or subsequent developments. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections for errors.
If the error is not material how should corrections be made
If the error is not material, adjustment is made in the current year's statement of profit or loss and other comprehensive income.
When is information material
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Materiality depends on the size and nature of an item.
Disclosure for Errors
Nature of the prior-period error. • For each prior period presented, where practicable, the amount of the correction for each financial statement line affected. • Amount of the correction at the beginning of the earliest prior period presented. • If retrospective application is not practicable for a particular prior period, then a description of how, and from when, the error correction has been applied.
What is ommission
Omission: Trade Payable invoices might have been concealed;
What are prior period errors
Prior period errors are omissions from and misstatements in the entity's financial statements for one or more periods arising from a failure to use, or misuse of, reliable information that: - Was available when financial statements for those periods were authorized for issue .- Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
Selection of accounting policies
Selection and application of accounting policies are to be selected in reference to: - Applicable accounting standards and interpretations - In absence of standards/interpretations, management are to exercise judgement in selecting accounting policies (qualitative characteristics ) .- Accounting policies should be selected and applied consistently to all subsequent transactions. (Refer to IAS 16 Can select the Cost Model OR the Revaluation Model, but must apply to all assets in the same class).
How must correction of material error be made
The correction of the (material) error must be accounted for in a retrospective way, in the first set of financial statements prepared after the error has been discovered by; - Restating the comparative amounts for the prior period(s) in which the error occurred. - Or, if the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for the earliest period presented.
impact of changing accounting estimates
The effect of a change in an accounting estimate is applied 'prospectively', that is the effect of the change is applied to current and future periods if it affects both. • There is no impact on the financial information presented in earlier reporting periods and comparative figures are not restated.
What is the exception to the retrospective rule
The initial application of a policy to revalue assets in accordance with IAS 16 or IAS 38 is a change in accounting policy to dealt with as a revaluation in accordance with IAS 16 or IAS 38.
Management has decided to include within Administration Expenses some overhead costs that has previously been shown within Cost of Sales. Is this a change in accounting policy?
This represents a change in Presentation. Because of the options allowed, management have changed where they present certain overhead costs in the FS thus this is a change in accounting policy as per IAS 8.
A company is considering revaluing some of its non-current assets from historical cost. Would this qualify as a change in accounting policy according to IAS 8?
This represents a change in one of the monetary attributes of an element of the FS and therefore is a change of Measurement basis i.e. from historical cost to fair value. According to IAS 8 this is a change in accounting policy.
What is included in disclosure of change in accounting policy
Title of the IFRS.• State if change is due to new or existing standard.• Nature of change in the accounting policy. Description of any transitional provisions in the accounting standard. Amount of adjustment and statement line affected. Amount of adjustments relating to previous period. If retrospective application is not practicable, then a description of how and when the change in accounting policy has been applied.
What is valuation
Trade receivables may have been overstated by failing to make adequate provision for bad debts; or- Expenses might have been incorrectly capitalised.
Examples of accounting estimates
Useful lives of items of property, plant and equipment.-Depreciation rates-Bad debts-Inventory Obsolescence
When is a change in accounting policy allowed
it will result in the information presented in the financial statements being more relevant and reliable; Or a change is required by an accounting standard
Disclosure for changes in accounting estimates
• The nature and amount that has an effect in the current period or is expected to have effect in future periods. • If not possible to estimate the effects on future periods then that fact must be disclosed.
