UNIT 02 Accounting Standards (AS):

2.1 Meaning, Scope and Objectives of Accounting Standards

2.2 Advantages and Disadvantages of Accounting Standards
2.3 Formation of Accounting Standards Board and its Objectives and Functions
2.4 Procedure for Issuing Accounting Standards by the ICAI
2.5 AS-2: Valuation of Inventories
2.6 AS-5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies, and Ind AS-8: Accounting Policies, Changes in Accounting Estimate and Errors
2.7 Numerical Problems on AS-2 and AS-5.

Meaning, Scope and Objectives of Accounting Standards

Meaning
‘Accounting Standards are written, policy documents

issued by expert accounting body or by Government or other

regulatory authorities covering the aspects of recognition,

measurement, treatment, presentation and disclosure of accounting

transaction in the financial statement.’ The main purpose of

formulating accounting standard is to standardize the diverse

accounting policies with a view to eliminate to the extent possible

the incomparability of information provided in financial statements

and add reliability to such financial statements. Accounting

standards ensure the consistency and the comparability of the

financial statements reported by the different enterprises creating a

general sense of confidence that users have in the fairness and

reliability of the statements they rely.

Accounting Standards will not, however, apply to

enterprises only carrying on the activities which are not of

commercial, industrial or business nature, e.g., an activity of

pg. 1
collecting donations and giving them to flood affected people.

Exclusion of an enterprise from the applicability of the Accounting

Standards would be permissible only if no part of the activity of

such enterprise is commercial, industrial or business in nature.

Even if a very small proportion of the activities of an enterprise are

considered to be commercial, industrial or business in nature, the

Accounting Standards would apply to all its activities including

those which are not commercial, industrial or business in nature.

Purpose of AS : 

To promote the dissemination of timely and useful financial information to the users.

To reduce the accounting alternatives in the preparation of financial statements.

To ensure comparability of financial statements of different enterprises.

OBJECTIVES:

1. To standardise the diverse accounting policies.

2. To standardise the accounting practices.

3. To enhance the reliability of financial statements.

4. To eliminate non-comparability of financial statements

Scope of Accounting Standards

 Efforts will be made to issue Accounting Standards which are in conformity with the provisions of the
applicable laws, customs, usages and business environment in India. However, if a particular Accounting
Standard is found to be not in conformity with law, the provisions of the said law will prevail and the
financial statements should be prepared in conformity with such law.

 The Accounting Standards by their very nature cannot and do not override the local regulations which
govern the preparation and presentation of financial statements in the country. However, the ICAI will
determine the extent of disclosure to be made in financial statements and the auditor’s report thereon.
Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such
explanatory notes will be only in the nature of clarification and therefore need not be treated as
adverse comments on the related financial statements.

 The Accounting Standards are intended to apply only to items which are material. Any limitations with
regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to
time. The date from which a particular Standard will come into effect, as well as the class of entities to

pg. 2
 which it will apply, will also be specified by the ICAI. However, no standard will have retroactive
application, unless otherwise stated.

 The Institute will use its best endeavour to persuade the Government, appropriate authorities,
industrial and business community to adopt the Accounting Standards in order to achieve uniformity in
preparation and presentation of financial statements.

 In formulation of Accounting Standards, the emphasis would be on laying down accounting principles
and not detailed rules for application and implementation thereof.

 The Standards formulated by the ASB include paragraphs in bold italic type and plain type, which have
equal authority. Paragraphs in bold italic type indicate the main principles. An individual standard
should be read in the

Advantages and Disadvantages of Accounting Standards

ADVANTAGES:

1. It provides the accountancy profession with useful working rules.

2. It assists in improving quality of work performed by accountant.

3. It strengthens the accountant’s resistance against the pressure

from directors to use accounting policy which may be suspect in

that situation in which they perform their work.

4. It ensures the various users of financial statements to get

complete crystal information on more consistent basis from

period to period.

5. It helps the users to compare the financial statements of two or

more organizations engaged in same type of business

operation.

DISADVANTAGES:

1. Users are likely to think that said statements prepared using

accounting standard are foolproof.

2. They have been derived from social pressures which may

reduce freedom.

3. The working rules may be rigid or bureaucratic to some users of

pg. 3
financial statement.

4. The more standards there are, the more costly the financial

statements are to produce.

5. Difficulties in making

choice between different

treatments Alternative solutions to accounting problems have arguments.

 Therefore, the choice between different alternative accounting

treatments may become difficult.

6. Lack of flexibilities - There may be a trend towards rigidity and away from

flexibility in applying the accounting standards.

7. Restricted scope Accounting standards cannot override the statute.

 AS are to be framed within the ambit of prevailing statutes.

Formation of Accounting Standards Board and its Objectives and Functions

The Institute of Chartered Accountants of India (ICAI),

recognizing the need to harmonize the diverse accounting policies

and practices in use in India, constituted the Accounting Standards

Board (ASB) on 21st April, 1977.

COMPOSITION OF THE ACCOUNTING STANDARDS

BOARD (ASB)

The composition of the ASB is fairly broad-based and

ensures participation of all interest-groups in the standard-setting

process. Apart from the elected members of the Council of the ICAI

nominated on the ASB, the following are represented on the ASB:

1. Nominee of the Central Government representing the

Department of Company Affairs on the Council of the ICAI.

2. Nominee of the Central Government representing the Office of

the Comptroller and Auditor General of India on the Council of

pg. 4
the ICAI.

3. Nominee of the Central Government representing the Central

Board of Direct Taxes on the Council of the ICAI.

4. Representative of the Institute of Cost and Works Accountants

of India.

5. Representative of the Institute of Company Secretaries of

India.

6. Representatives of Industry Associations (1 from Associated

Chambers of Commerce and Industry (ASSOCHAM), 1 from

Confederation of Indian Industry (CII) and 1 from Federation of

Indian Chambers of Commerce and Industry (FICCI)

7. Representative of Reserve Bank of India

8. Representative of Securities and Exchange Board of India

9. Representative of Controller General of Accounts

10. Representative of Central Board of Excise and Customs

11. Representatives of Academic Institutions (1 from Universities

and 1 from Indian Institutes of Management)

12. Representative of Financial Institutions

13. Eminent professionals co-opted by the ICAI (they may be in

practice or in industry, government, education, etc.)

14. Chairman of the Research Committee and the Chairman of

the Expert Advisory Committee of the ICAI, if they are not

otherwise members of the Accounting Standards Board

15. Representative(s) of any other body, as considered

appropriate by the ICAI

OBJECTIVES OF THE ACCOUNTING STANDARDS

BOARD

pg. 5
The following are the objectives of the Accounting Standards

Board:

i. To conceive of and suggest areas in which Accounting

Standards need to be developed.

ii. To formulate Accounting Standards with a view to assist the

Council of the ICAI in evolving and establishing Accounting

Standards in India.

iii. To examine how far the relevant International Accounting

Standard/International Financial Reporting Standard can be

adapted while formulating the Accounting Standard and to

adapt the same.

To review, at regular intervals, the Accounting Standards from

the point of view of acceptance or changed conditions, and, if

necessary, revise the same.

v. To provide, from time to time, interpretations and guidance on

Accounting Standards.

vi. To send comments on various consultative papers such as

exposure drafts, discussion papers etc., issued by

International Accounting Standards Board and various other

International bodies such as Asian-Oceania Standard-Setters

Group (AOSSG).

vii. To carry out such other functions relating to Accounting

Standards.

FUNCTIONS OF THE ACCOUNTING STANDARDS BOARD

The main function of the ASB is to formulate Accounting

Standards so that such standards may be established by the ICAI

in India. While formulating the Accounting Standards, the ASB will

take into consideration the applicable laws, customs, usages and

pg. 6
business environment prevailing in India.

The ICAI, being a full-fledged member of the International

Federation of Accountants (IFAC), is expected, inter alia, to actively

promote the International Accounting Standards Board’s (IASB)

pronouncements in the country with a view to facilitate global

harmonization of accounting standards. Accordingly, while

formulating the Accounting Standards, the ASB will give due

consideration to International Accounting Standards (IASs) issued

by the International Accounting Standards Committee (predecessor

body to IASB) or International Financial Reporting Standards

(IFRSs) issued by the IASB, as the case may be, and try to

integrate them, to the extent possible, in the light of the conditions

and practices prevailing in India.

Procedure for Issuing Accounting Standards by the ICAI

The Accounting Standards are issued under the authority of

the Council of the ICAI. The ASB has also been entrusted with the

responsibility of propagating the Accounting Standards and of

persuading the concerned parties to adopt them in the preparation

and presentation of financial statements. The ASB will provide

interpretations and guidance on issues arising from Accounting

Standards. The ASB will also review the Accounting Standards at

periodical intervals and, if necessary, revise the same. The following procedure is adopted for formulating
Accounting

Standards:

1. The ASB determines the broad areas in which Accounting

Standards need to be formulated and the priority in regard to the

selection thereof.

2. In the preparation of Accounting Standards, the ASB will be

assisted by Study Groups constituted to consider specific

pg. 7
subjects. In the formation of Study Groups, provision will be

made for wide participation by the members of the Institute and

others.

3. The draft of the proposed standard will normally include the

following:

a) Objective of the Standard,

b) Scope of the Standard,

c) Definitions of the terms used in the Standard,

d) Recognition and measurement principles, wherever

applicable,

e) Presentation and disclosure requirements.

4. The ASB will consider the preliminary draft prepared by the

Study Group and if any revision of the draft is required on the

basis of deliberations, the ASB will make the same or refer the

same to the Study Group.

5. The ASB will circulate the draft of the Accounting Standard to

the Council members of the ICAI and the specified bodies for

their comments.

6. The ASB will hold a meeting with the representatives of

specified bodies to ascertain their views on the draft of the

proposed Accounting Standard. On the basis of comments

received and discussion with the representatives of specified

bodies, the ASB will finalize the Exposure Draft of the proposed

Accounting Standard.

7. The Exposure Draft of the proposed Standard will be issued for

comments by the members of the Institute and the public. The

Exposure Draft will specifically be sent to specified bodies (as

listed above), stock exchanges, and other interest groups, as

pg. 8
appropriate.

8. After taking into consideration the comments received, the draft

of the proposed Standard will be finalized by the ASB and

submitted to the Council of the ICAI.

The Council of the ICAI will consider the final draft of the

proposed Standard and if found necessary, modify the same in consultation with the ASB. The Accounting
Standard on the

relevant subject will then be issued by the ICAI.

COMPLIANCE WITH THE ACCOUNTING

STANDARDS

Accounting Standards are mandatory from the respective

dates mentioned in the standards. Hence, it is the duty of the

management to see that all the Accounting Standards are complied

with while preparing financial statement, in the case of any

deviation, necessary disclosure should be made in the audit report

so as to make the readers aware of the deviations.

The mandatory status of an Accounting Standard implies

that while discharging their attest functions, it will be the duty of the

members of the Institute

(a) To examine whether ‘Statements’ relating to accounting matters

are complied with in the presentation of financial statements

covered by their audit. In the event of any deviation from the

‘Statements’, it will be their duty to make adequate disclosures in

their audit reports so that the users of financial statements may be

aware of such deviations; and

(b) To ensure that the ‘Statements’ relating to auditing matters are

followed in the audit of financial information covered by their audit

reports. If for any reason a member has not been able to perform

an audit in accordance with such ‘Statements’, his report should

pg. 9
draw attention to the material departures there from.

LIST OF THE ACCOUNTING STANDARDS AS

ISSUED BY ICAI

The council of the Institute of the Chartered Accountants of

India has so far issued 32 Accounting Standards, However AS- 8

on Accounting for Research and Development (stands withdrawn

after introduction of AS-26), thus effectively there are 31

Accounting standards.

Accounting

Standard No.

Title of Accounting Standard

AS-1 Disclosure of Accounting Policies

AS-2 Valuation of Inventories

AS-3 Cash Flow Statements

AS-4 Contingencies and Events (Occurring after

the Balance Sheet Date)

AS-5 Net Profit or Loss for the Period, Prior

Period Items and Changes in Accounting

Policies

AS-6 Depreciation Accounting

AS-7 Construction Contracts

AS-8 Accounting for Research and Development

(standard withdrawn after introduction of

AS-26)

AS-9 Revenue Recognition

AS-10 Accounting for Fixed Assets

AS-11 The Effect of Changes in Foreign

pg. 10
Exchange Rates

AS-12 Accounting for Government Grants

AS-13 Accounting for Investments

AS-14 Accounting for Amalgamations

AS-15 Employee Benefits

AS-16 Borrowing Cost

AS-17 Segment Reporting

AS-18 Related Party Disclosures

AS-19 Leases

AS-20 Earnings per Share

AS-21 Consolidated Financial Statements

AS-22 Accounting for Taxes on Income

AS-23 Accounting for Investment in Associates in

Consolidated Financial Statements

AS-24 Discontinuing Operations

AS-25 Interim Financial Reporting

AS-26 Intangible Assets

AS-27 Financial Reporting of Interests in Joint

Venture

AS-28 Impairment of Assets

AS-29 Provisions, Contingent Liabilities and

Contingent Assets

AS-30 Financial Instruments: Recognition and

Measurement

AS 31 Financial Instruments: Presentation

AS 32 Financial Instruments: Disclosures

IFRS:-

pg. 11
The term ‘IFRS’ includes standards and interpretations approved by

IASB and the International Accounting Standards and

interpretations issued by the International Financial Reporting

Interpretations Committee.

International Accounting Standards Board (IASB) has issued the

following International Financial Reporting Standards (IFRS):-

AS-2: Valuation of Inventories

AS-5: Net Profit or Loss for the Period , Prior period items and changes in accounting policies
and Ind

AS 5 specifies the method of classification and disclosure for the following items:
a. Prior period items
b. Extraordinary items
c. Certain specific items w.r.t. profit and loss from ordinary activities
The standard also describes the treatment of changes in accounting estimates and disclosures
to be made on account of such changes. The standard doesn’t deal with tax implication on
account of such changes as mentioned above.
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 7. AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies

SHARE
AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
By Annapoorna
|
Updated on: Apr 21st, 2025
|
2 min read
AS 5 is prescribed to bring a uniformity in presentation among all enterprises.

Introduction
AS 5 specifies the method of classification and disclosure for the following items:
a. Prior period items
b. Extraordinary items
c. Certain specific items w.r.t. profit and loss from ordinary activities
The standard also describes the treatment of changes in accounting estimates and disclosures
to be made on account of such changes. The standard doesn’t deal with tax implication on
account of such changes as mentioned above.
Get Maximum Tax Refund
100% Accuracy, Zero Data Entry, No Notice Stress
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Application
Why apply – Applying this standard helps in comparison of financial statements among various
enterprises. Also, the financial statements of different enterprises can be compared over time
when the standard is applied properly.

pg. 13
Insight Into the Standard Guidelines
The standard particularly deals with following four specific items:
Net Profit or Loss for the Period
Two broad categories of net profit and loss for the period are Profit or loss from ordinary
activities and Profit or loss from extraordinary activities. Profit or loss from ordinary activities is
such which arise in the normal course of business. These activities are a part of business and
related activities. Examples: Profit/loss on sale of goods, services. The transactions and results
under this category are shown as usual items in the financial statements for the accounting
period. Profit or loss from extraordinary activities is such which do not arise under the normal
course of business. These activities do not occur regularly. Example: – Profit on sale of fixed
assets, Loss due to theft. The transactions and results under this category are to be disclosed
separately in financial statements. The disclosure should be in a manner which clearly shows
the effect on overall profits/losses due to these activities. The standard also specifies that if the
results of any activity are substantial on the overall performance of the enterprise, then it
should be disclosed separately in financial statements as a separate head. Example: – Fixed
assets disposal, Restructuring of activities, Settlement of litigations.
Prior Period Items
While preparing the financial statements, there are certain items which actually correspond to
prior accounting periods. The income or losses due to these items are a result of error or
omission in the financial statements of the prior period. By nature, these items are not
frequent and can be easily identified. The current period’s financial statements should clearly
show the effect of such prior period items.
Changes in Accounting Estimates
There are certain estimates which are used while preparing the financial statements for any
period. For example estimate on the useful life of a machinery, estimate on the realizable value
of an item in inventory. At times, these estimates are required to be revised due to any of the
following reasons (inclusive list):
i. Change in circumstances
ii. New information
iii. Subsequent developments
iv. Experience
pg. 14
The effect of such change in estimates is to be taken into account while preparing financial
statements. If the change in estimate affects ordinary activities, it is disclosed under ordinary
activities other under extraordinary activities.
Changes in Accounting Policies
Accounting policies are the accounting principles and method of applying those principles
while preparing the financial statements. A change in accounting policy should be undertaken
only in two cases:
i. If the change is required by law or accounting standard; or
ii. If the change helps in better presentation of financial statements
Any change in an accounting policy which has a substantial/material effect has to be disclosed
necessarily. The impact of such change should also be shown in financial statements. If the
impact can’t be assessed, this fact should also be disclosed.
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7. AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies

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AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
By Annapoorna
|
Updated on: Apr 21st, 2025
|
pg. 15
2 min read
AS 5 is prescribed to bring a uniformity in presentation among all enterprises.

Introduction
AS 5 specifies the method of classification and disclosure for the following items:
a. Prior period items
b. Extraordinary items
c. Certain specific items w.r.t. profit and loss from ordinary activities
The standard also describes the treatment of changes in accounting estimates and disclosures
to be made on account of such changes. The standard doesn’t deal with tax implication on
account of such changes as mentioned above.
Get Maximum Tax Refund
100% Accuracy, Zero Data Entry, No Notice Stress
File Now
Application
Why apply – Applying this standard helps in comparison of financial statements among various
enterprises. Also, the financial statements of different enterprises can be compared over time
when the standard is applied properly.
Insight Into the Standard Guidelines
The standard particularly deals with following four specific items:
Net Profit or Loss for the Period
Two broad categories of net profit and loss for the period are Profit or loss from ordinary
activities and Profit or loss from extraordinary activities. Profit or loss from ordinary activities is
such which arise in the normal course of business. These activities are a part of business and
related activities. Examples: Profit/loss on sale of goods, services. The transactions and results
under this category are shown as usual items in the financial statements for the accounting
period. Profit or loss from extraordinary activities is such which do not arise under the normal
course of business. These activities do not occur regularly. Example: – Profit on sale of fixed
assets, Loss due to theft. The transactions and results under this category are to be disclosed
pg. 16
separately in financial statements. The disclosure should be in a manner which clearly shows
the effect on overall profits/losses due to these activities. The standard also specifies that if the
results of any activity are substantial on the overall performance of the enterprise, then it
should be disclosed separately in financial statements as a separate head. Example: – Fixed
assets disposal, Restructuring of activities, Settlement of litigations.
Prior Period Items
While preparing the financial statements, there are certain items which actually correspond to
prior accounting periods. The income or losses due to these items are a result of error or
omission in the financial statements of the prior period. By nature, these items are not
frequent and can be easily identified. The current period’s financial statements should clearly
show the effect of such prior period items.
Changes in Accounting Estimates
There are certain estimates which are used while preparing the financial statements for any
period. For example estimate on the useful life of a machinery, estimate on the realizable value
of an item in inventory. At times, these estimates are required to be revised due to any of the
following reasons (inclusive list):
i. Change in circumstances
ii. New information
iii. Subsequent developments
iv. Experience
The effect of such change in estimates is to be taken into account while preparing financial
statements. If the change in estimate affects ordinary activities, it is disclosed under ordinary
activities other under extraordinary activities.
Changes in Accounting Policies
Accounting policies are the accounting principles and method of applying those principles
while preparing the financial statements. A change in accounting policy should be undertaken
only in two cases:
i. If the change is required by law or accounting standard; or
ii. If the change helps in better presentation of financial statements

pg. 17
Any change in an accounting policy which has a substantial/material effect has to be disclosed
necessarily. The impact of such change should also be shown in financial statements. If the
impact can’t be assessed, this fact should also be disclosed.
Illustration of AS 5
There was a theft of goods in the warehouse of ABC Pvt. Ltd. in the previous year (2016-17)
amounting to Rs. 50 Lakhs. The same was detected in the current year (2017-18) at the time of
physical verification of inventory. How do we account for this theft and its discovery in the
financial statements of 2017-18? The theft is not expected to take place on a frequent or
regular basis and is not in a normal course of business of ABC Pvt. Ltd. Thus, the same qualifies
to be an extraordinary item. Also, the theft took place in the financial year 2016-17 but was
discovered in 2017-18. This suggests that although the loss related to 2016-17, it was not
shown and the profit was overstated by such amount i.e. Rs. 50 Lakhs. While taking the effect
of such loss in the current year (2017-18), this is a prior period item. Thus, the disclosures for
the same should be given in the financial statements that due to a theft in 2016-17, goods
worth Rs. 50 Lakhs were lost and discovered only in the current year. The value of inventory
should be adjusted for such loss (both opening and closing inventory).
Comparison with Ind AS (IAS)
The following points are of importance in comparing AS 5 with Ind-AS 8:

Ind-AS (IAS) 8 AS 5

The prior period errors are to be rectified The prior period errors are to be rectified
retrospectively. prospectively.

Prior period items are not to be shown

Prior period items are to shown under
under separate heads.
separate heads.

The financial statements of previous The financial statements of previous period

period are to be adjusted to show the are not required to be adjusted to show the
effect of prior period items. effect of prior period items.

Case Study on Ind-AS 8 with regards to disclosure of prior period items

pg. 18
In September 2017, ABC Limited found that goods amounting to Rs. 42,000 which were
included in the inventory as on 31 Mar 2017, were actually sold before 31 March 2017. The
following figures for 2016-17 (reported) and 2017-18 (draft) are available.

Retained earnings on 1 Apr 2016 were Rs. 13,000. The cost of goods sold for 2017-18 includes
Rs. 42,000 errors in opening inventory. The income tax rate was 30% for 2016-17 and 2017-18.
No dividends have been declared or paid.
Required: Show the statement of profit or loss for 2017-18, with the 2016-17 comparative, and
retained earnings.

pg. 19
AS-8: Accounting Policies, Changes in Accounting Estimate and Errors

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. The Standard 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.

pg. 20
Disclosure requirements for accounting policies, except those for changes in accounting
policies, are set out in IAS 1 Presentation of Financial Statements.
Scope
This Standard shall be applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior period
errors.
The tax effects of corrections of prior period errors and of retrospective adjustments made to
apply changes in accounting policies are accounted for and disclosed in accordance with IAS 12
Income Taxes.
Definitions
The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial
statements.
Accounting estimates are monetary amounts in financial statements that are
subject to measurement uncertainty.
International Financial Reporting Standards (IFRSs) are Standards and
Interpretations issued by the International Accounting Standards Board
(IASB). They comprise:
(a) International Financial Reporting Standards;
(b) International Accounting Standards;
(c) IFRIC Interpretations; and
(d) SIC Interpretations.
Material is defined in paragraph 7 of IAS 1 and is used in this Standard with
the same meaning.
Prior period errors are omissions from, and misstatements in, the entity’s
financial statements for one or more prior periods arising from a failure to
pg. 21
use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were
authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.
Such errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts, and
fraud.
Retrospective application is applying a new accounting policy to transactions,
other events and conditions as if that policy had always been applied.
Retrospective restatement is correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a prior
period error had never occurred.
Impracticable Applying a requirement is impracticable when the entity
cannot apply it after making every reasonable effort to do so. For a
particular prior period, it is impracticable to apply a change in an
accounting policy retrospectively or to make a retrospective restatement to
correct an error if:
(a) the effects of the retrospective application or retrospective
restatement are not determinable;
(b) the retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in
that period; or
(c) the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to distinguish
pg. 22
objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the
date(s) as at which those amounts are to be recognised,
measured or disclosed; and
(ii) would have been available when the financial statements for
that prior period were authorised for issue from other
information.
Prospective application of a change in accounting policy and of recognising
the effect of a change in an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and conditions occurring
after the date as at which the policy is changed; and
(b) recognising the effect of the change in the accounting estimate in the current and future
periods affected by the change.
Accounting policies
Selection and application of accounting policies
When an IFRS specifically applies to a transaction, other event or
condition, the accounting policy or policies applied to that item shall be
determined by applying the IFRS.
IFRSs set out accounting policies that the IASB has concluded result in
financial statements containing relevant and reliable information about the
transactions, other events and conditions to which they apply. Those policies
need not be applied when the effect of applying them is immaterial. However,
it is inappropriate to make, or leave uncorrected, immaterial departures from
IFRSs to achieve a particular presentation of an entity’s financial position,
financial performance or cash flows.
IFRSs are accompanied by guidance to assist entities in applying their

pg. 23
requirements. All such guidance states whether it is an integral part of IFRSs.
Guidance that is an integral part of the IFRSs is mandatory. Guidance that is
not an integral part of the IFRSs does not contain requirements for financial
statements.
In the absence of an IFRS that specifically applies to a transaction, other
event or condition, management shall use its judgement in developing and
applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial
performance and cash flows of the entity;
reflect the economic substance of transactions, other events
and conditions, and not merely the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
In making the judgement described in paragraph 10, management shall
refer to, and consider the applicability of, the following sources in
descending order:
(a) the requirements in IFRSs dealing with similar and related issues;
and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the Conceptual Framework for Financial Reporting (Conceptual Framework).2
In making the judgement described in paragraph 10, 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 paragraph 11.

pg. 24
Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and
conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies
may be appropriate. If an IFRS requires or permits such categorisation, an appropriate accounting policy shall
be selected and applied consistently to each category.

Changes in accounting policies

An entity shall change an accounting policy only if the change:

(a) is required by an IFRS; or

(b) results in the financial statements providing reliable and more

relevant information about the effects of transactions, other events

or conditions on the entity’s financial position, financial

performance or cash flows.

Users of financial statements need to be able to compare the financial

statements of an entity over time to identify trends in its financial position,

financial performance and cash flows. Therefore, the same accounting policies

are applied within each period and from one period to the next unless a

change in accounting policy meets one of the criteria in paragraph 14.

The following are not changes in accounting policies:

(a) the application of an accounting policy for transactions, other

events or conditions that differ in substance from those previously

occurring; and

(b) the application of a new accounting policy for transactions, other

events or conditions that did not occur previously or were

immaterial.

The initial application of a policy to revalue assets in accordance with

IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets is a change in

an accounting policy to be dealt with as a revaluation in accordance with

IAS 16 or IAS 38, rather than in accordance with this Standard.

Applying changes in accounting policies

pg. 25
Subject to paragraph 23:

(a) an entity shall account for a change in accounting policy resulting

from the initial application of an IFRS in accordance with the

specific transitional provisions, if any, in that IFRS; and

(b) when an entity changes an accounting policy upon initial

application of an IFRS that does not include specific transitional

provisions applying to that change, or changes an accounting policy

voluntarily, it shall apply the change retrospectively.

For the purpose of this Standard, early application of an IFRS is not a

voluntary change in accounting policy.

In the absence of an IFRS that specifically applies to a transaction, other event

or condition, management may, in accordance with paragraph 12, apply an

accounting policy from the most recent pronouncements of other

standard-setting bodies that use a similar conceptual framework to develop

accounting standards. If, following an amendment of such a pronouncement,

the entity chooses to change an accounting policy, that change is accounted

for and disclosed as a voluntary change in accounting policy.

Retrospective application

Subject to paragraph 23, when a change in accounting policy is applied

retrospectively in accordance with paragraph 19(a) or (b), 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.

Limitations on retrospective application

When retrospective application is required by paragraph 19(a) or (b), a

change in accounting policy shall be applied retrospectively except to the

extent that it is impracticable to determine either the period-specific

pg. 26
effects or the cumulative effect of the change.

When it is impracticable to determine the period-specific effects of

changing an accounting policy on comparative information for one or

more prior periods presented, the entity shall apply the new accounting

policy to the carrying amounts of assets and liabilities as at the beginning

of the earliest period for which retrospective application is practicable,

which may be the current period, and shall make a corresponding

adjustment to the opening balance of each affected component of equity

for that period When it is impracticable to determine the cumulative effect, at the

beginning of the current period, of applying a new accounting policy to all

prior periods, the entity shall adjust the comparative information to apply

the new accounting policy prospectively from the earliest date practicable.

When an entity applies a new accounting policy retrospectively, it applies the

new accounting policy to comparative information for prior periods as far

back as is practicable. Retrospective application to a prior period is not

practicable unless it is practicable to determine the cumulative effect on the

amounts in both the opening and closing statements of financial position for

that period. The amount of the resulting adjustment relating to periods before

those presented in the financial statements is made to the opening balance of

each affected component of equity of the earliest prior period presented.

Usually the adjustment is made to retained earnings. However, the

adjustment may be made to another component of equity (for example, to

comply with an IFRS). Any other information about prior periods, such as

historical summaries of financial data, is also adjusted as far back as is

practicable.

When it is impracticable for an entity to apply a new accounting policy

retrospectively, because it cannot determine the cumulative effect of applying

the policy to all prior periods, the entity, in accordance with paragraph 25,

pg. 27
applies the new policy prospectively from the start of the earliest period

practicable. It therefore disregards the portion of the cumulative adjustment

to assets, liabilities and equity arising before that date. Changing an

accounting policy is permitted even if it is impracticable to apply the policy

prospectively for any prior period. Paragraphs 50–53 provide guidance on

when it is impracticable to apply a new accounting policy to one or more prior periods

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:

(a) the title of the IFRS;

(b) when applicable, that the change in accounting policy is made in

accordance with its transitional provisions;

(c) the nature of the change in accounting policy;

(d) when applicable, a description of the transitional provisions;

(e) when applicable, the transitional provisions that might have an

effect on future periods;

(f) for the current period and each prior period presented, to the

extent practicable, the amount of the adjustment:

(i) for each financial statement line item affected; and if IAS 33 Earnings per Share applies to the entity, for
basic and

diluted earnings per share;

(g) the amount of the adjustment relating to periods before those

presented, to the extent practicable; and

(h) if retrospective application required by paragraph 19(a) or (b) 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

pg. 28
accounting policy has been applied.

Financial statements of subsequent periods need not repeat these

disclosures.

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:

(a) the nature of the change in accounting policy;

(b) the reasons why applying the new accounting policy provides

reliable and more relevant information;

(c) for the current period and each prior period presented, to the

extent practicable, the amount of the adjustment for each financial statement line item affected; and

(ii) if IAS 33 applies to the entity, for basic and diluted earnings

per share;

(d) the amount of the adjustment relating to periods before those

presented, to the extent practicable; and

(e) 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.

Financial statements of subsequent periods need not repeat these

disclosures.

When an entity has not applied a new IFRS that has been issued but is not

yet effective, the entity shall disclose:

(a) this fact; and

(b) known or reasonably estimable information relevant to assessing

the possible impact that application of the new IFRS will have on

the entity’s financial statements in the period of initial application.

pg. 29
In complying with paragraph 30, an entity considers disclosing:

(a) the title of the new IFRS;

(b) the nature of the impending change or changes in accounting policy;

( c) the date by which application of the IFRS is required; (d) the date as at which it plans to apply the IFRS
initially; and (e) either: (i) a discussion of the impact that initial application of the IFRS is expected to have on
the entity’s financial statements; or (ii) if that impact is not known or reasonably estimable, a statement to that
effect.

Changes in accounting estimates

An entity may need to change an accounting estimate if changes occur in the

circumstances on which the accounting estimate was based or as a result of

new information, new developments or more experience. By its nature, a

change in an accounting estimate does not relate to prior periods and is not

the correction of an error.

The effects on an accounting estimate of a change in an input or a change in a

measurement technique are changes in accounting estimates unless they

result from the correction of prior period errors.

A change in the measurement basis applied is a change in an accounting

policy, and is not a change in an accounting estimate. When it is difficult to

distinguish a change in an accounting policy from a change in an accounting

estimate, the change is treated as a change in an accounting estimate.

Applying changes in accounting estimates

The effect of a change in an accounting estimate, other than a change to

which paragraph 37 applies, shall be recognised prospectively by including

it in profit or loss in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects

both.

To the extent that a change in an accounting estimate gives rise to changes

pg. 30
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.

Prospective recognition of the effect of a change in an accounting estimate

means that the change is applied to transactions, other events and conditions

from the date of that change. A change in an accounting estimate may affect

only the current period’s profit or loss, or the profit or loss of both the current

period and future periods. For example, a change in a loss allowance for

expected credit losses affects only the current period’s profit or loss and

therefore is recognised in the current period. However, a change in the

estimated useful life of, or the expected pattern of consumption of the future

economic benefits embodied in, a depreciable asset affects depreciation

expense for the current period and for each future period during the asset’s

remaining useful life. In both cases, the effect of the change relating to the

current period is recognised as income or expense in the current period. The

effect, if any, on future periods is recognised as income or expense in those

future periods.

Disclosure

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.

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

Errors

Errors can arise in respect of the recognition, measurement, presentation or

disclosure of elements of financial statements. Financial statements do not

comply with IFRSs if they contain either material errors or immaterial errors

pg. 31
made intentionally to achieve a particular presentation of an entity’s financial

position, financial performance or cash flows. Potential current period errors

discovered in that period are corrected before the financial statements are

authorised for issue. However, material errors are sometimes not discovered

until a subsequent period, and these prior period errors are corrected in the

comparative information presented in the financial statements for that

subsequent period (see paragraphs 42–47).

Subject to paragraph 43, an entity shall correct material prior period errors

retrospectively in the first set of financial statements authorised for issue

after their discovery by:

(a) restating the comparative amounts for the prior period(s) presented

in which the error occurred; or

(b) if the error occurred before the earliest prior period presented,

restating the opening balances of assets, liabilities and equity for

the earliest prior period presented.

Limitations on retrospective restatement

A prior period error shall be corrected by retrospective restatement except

to the extent that it is impracticable to determine either the period-specific

effects or the cumulative effect of the error.

When it is impracticable to determine the period-specific effects of an

error on comparative information for one or more prior periods presented,

the entity shall restate the opening balances of assets, liabilities and equity

for the earliest period for which retrospective restatement is practicable

(which may be the current period).

When it is impracticable to determine the cumulative effect, at the

beginning of the current period, of an error on all prior periods, the entity

shall restate the comparative information to correct the error

pg. 32
prospectively from the earliest date practicable.

The correction of a prior period error is excluded from profit or loss for the

period in which the error is discovered. Any information presented about

prior periods, including any historical summaries of financial data, is restated

as far back as is practicable.

When it is impracticable to determine the amount of an error (eg a mistake in

applying an accounting policy) for all prior periods, the entity, in accordance

with paragraph 45, restates the comparative information prospectively from

the earliest date practicable. It therefore disregards the portion of the cumulative restatement of assets,
liabilities and equity arising before that

date. Paragraphs 50–53 provide guidance on when it is impracticable to

correct an error for one or more prior periods.

Corrections of errors are distinguished from changes in accounting estimates.

Accounting estimates by their nature are approximations that may need

changing as additional information becomes known. For example, the gain or

loss recognised on the outcome of a contingency is not the correction of an

error.

Disclosure of prior period errors

In applying paragraph 42, an entity shall disclose the following:

(a) the nature of the prior period error;

(b) for each prior period presented, to the extent practicable, the

amount of the correction:

(i) for each financial statement line item affected; and

(ii) if IAS 33 applies to the entity, for basic and diluted earnings

per share;

(c) the amount of the correction at the beginning of the earliest prior

period presented; and

(d) if retrospective restatement is impracticable for a particular prior

pg. 33
period, the circumstances that led to the existence of that condition

and a description of how and from when the error has been

corrected.

Financial statements of subsequent periods need not repeat these

disclosures.

Impracticability in respect of retrospective application and retrospective restatement

In some circumstances, it is impracticable to adjust comparative information

for one or more prior periods to achieve comparability with the current

period. For example, data may not have been collected in the prior period(s) in

a way that allows either retrospective application of a new accounting policy

(including, for the purpose of paragraphs 51–53, its prospective application to

prior periods) or retrospective restatement to correct a prior period error, and

it may be impracticable to recreate the information.

It is frequently necessary to make estimates in applying an accounting policy

to elements of financial statements recognised or disclosed in respect of

transactions, other events or conditions. Estimation is inherently subjective,

and estimates may be developed after the reporting period. Developing

estimates is potentially more difficult when retrospectively applying an

accounting policy or making a retrospective restatement to correct a prior

period error, because of the longer period of time that might have passed

since the affected transaction, other event or condition occurred. However, the objective of estimates
related to prior periods remains the same as for

estimates made in the current period, namely, for the estimate to reflect the

circumstances that existed when the transaction, other event or condition

occurred.

Therefore, retrospectively applying a new accounting policy or correcting a

prior period error requires distinguishing information that

pg. 34
(a) provides evidence of circumstances that existed on the date(s) as at

which the transaction, other event or condition occurred, and

(b) would have been available when the financial statements for that prior

period were authorised for issue

from other information. For some types of estimates (eg a fair value

measurement that uses significant unobservable inputs), it is impracticable to

distinguish these types of information. When retrospective application or

retrospective restatement would require making a significant estimate for

which it is impossible to distinguish these two types of information, it is

impracticable to apply the new accounting policy or correct the prior period

error retrospectively.

Hindsight should not be used when applying a new accounting policy to, or correcting amounts for, a prior
period, either in making assumptions about what management’s intentions would have been in a prior
period or estimating the amounts recognised, measured or disclosed in a prior period. For example, when
an entity corrects a prior period error in calculating its liability for employees’ accumulated sick leave in
accordance with IAS 19 Employee Benefits, it disregards information about an unusually severe influenza
season during the next period that became available after the financial statements for the prior period were
authorised for issue. The fact that significant estimates are frequently required when amending comparative
information presented for prior periods does not prevent reliable adjustment or correction of the
comparative information.

pg. 35