IAS8

• IAS 8 objective


  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.
• IAS 8


  Accounting Policies, Changes in Accounting estimates and errors
• Accounting Policies


  specific principles, bases, conventions, rules, and practices applied by entity in preparing financial statements.
• Consistency of accounting policies


  Policies should be consistent for similar transactions, events, and conditions
• Principle

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

  If no transitional provisions, apply retrospectively.
• Selection and application of accounting policies:

  • • If a standard or interpretation deals with atransaction. use that standard or intercretation
  • IF no standard of 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

  • Definitions, recognition criteria in the framework
  • May use other GAAP that use a similar conceptual framework and/or may consult other industry practice or accounting literature that is not in conflict with standards
• Changes in Accounting policy

  Retrospective application
• Changes in accounting policies


  The new accounting policy is applied to transactions.
• Changes in accounting estimates

  Prospective application
• Changing in accounting estimates


  The effect is recognized in the current and future periods affected by the change.
• Prior period error


  retrospective restatement
• Prior period error


  recognition, measurement, and disclosure of amounts of elements of financial statements are corrected as if a prior period error had never occured.
• Accounting policies examples

  Inventory costing (FIFO)

  Accounting for PPE (cost or revaluation model)
• Selection and application of accounting policies

  Hierarchy of guidance

  1. Specific standards
  2. Judgement; a. similar matters, b. conceptual framework, c. other standard-setting bodies, d. other accounting literature
• Consistency of accounting policies exempt/ unless, a standard specifically requires or permits categorization of items
• Changes in Accounting Policies

  permitted to change only if:

  • Required by standard
  • results in fs providing reliable and more relevant information
• changes in accounting policies do not include applying to a kind of transaction that DID NOT OCCUR OR IMMATERIAL.
• Application of Change in accounting policy

  Mandatory> with transitional provisions > Follow transitio prov
• Application of Changes in accounting policy

  no trans provisions/ voluntary > Retrospective application
• This is change in accounting policy.

  Retained earnings 250k

  Inventory, Beg. 250k

  
• Accounting estimates


  monetary amounts in financial statements that are subject to measurement UNCERTAINTY.

  Examples:

  1. Bad debts
  2. Inventory obsolescene
  3. Fair values of Financial Assets/ Liabilties
  4. Useful Lives of and depreciation patterns of fixed assets
  5. Warranty obligations
• The effect of a change in accounting estimate shall be recognized prospectively by including it in profit or loss in:

  • The period of the change- change affects that period only
  • Period of change and future periods- affects both
• This is a change of accounting estimate

  1. No entry needed since this is prospective application.

  2. Depreciation Expense. 560k

  Accumulated Depreciation 560K

  3. 1,120,000

  
• Prior Period Errors


  Omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from a FAILURE TO USE, OR MISUSE of, reliable information
• Prior period errors result from:

  1. Mathematical Mistakes
  2. Mistakes in applying accounting policies
  3. Misinterpretations of facts/ fraud
• Statement of Financial position errors


  errors that affect the statement of financial position or real accounts only.

  entry is simply to reclassify the account balances.
• Income Statement errors

  1. Errors that affect the income statement or nominal accounts only.
  2. improper classification of revenue/ expense
  3. no effect on SFS and net income
  4. Reclassifying entry is necessary ONLY IF the error is discovered in the same year committed.
• Errors that affect BS and IS accounts

  result in a misstatement of net income

  classified counterbalancing errors and non-counterbalancing errors.
• Counter balancing errors

  • Errors if not detected are automatically offset or corrected over two periods.
  • Restatement is necessary even if a correcting journal entry is not required.
  • Net income of two successive periods are misstated.
• Counterbalancing errors include the misstatements of the following:

  1. Inventories
  2. Prepaid expenses
  3. Deferred income
  4. accrued expense
  5. accrued income
• Books are open

  1. if the error counterbalanced, entry is to correct the current period and adjust the beg balance of RE.
  2. If the error is not yet counterbalanced, entry is necessary to adjust the beg bal of re and correct the current period.
• Books are closed

  1. If error is counterbalanced, No entry is necessary.
  2. If error is not yet counterbalanced, an entry is necessary to adjust the present bal of RE.
• Non counterbalancing errors


  errors which take longer than two periods to correct.

  carried over to the subsequent accounting period
• Error Analysis and Correction

  1. Analyze
  2. determine
  3. evaluate
  4. prepare
• Errors


  -entity must correct all material prior period errors retrospectively in the first set of financial statements

  -restating the comparative amounts for the prior periods
• If it is impracticable to determine the period specific effects of an error, the entity must restate the opening balances of ALE for the earliest period for which retrospective restatement is practicable.
• if it is impracticable to determine the cumulative effect, entity must restate the comparative info to correct the error prospectively
• A change in accounting policy that an IFRS requires is an INVOLUNTARY change in accounting policy.
• Voluntary change in accounting policy


  change is because the management assess that the financial statements would be more relevant to the users.