IAS 8
Accounting Policies, Changes
in Accounting Estimates and
Errors
01/21/22 IAS 8- Reporting and Disclosures- 1
Objective of IAS 8
This standard Prescribes the criteria
for:
Selection and application of accounting policies
Changes in accounting policies
Changes in accounting estimates
accounting treatment and disclosure of changes in
accounting policies;
accounting treatment and disclosure of changes
changes in accounting estimates; And
correction of prior period errors
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Objective of IAS 8 cont`d
The achievement of the
objective would result in:
Enhancement of:
Relevance and reliability of
financial statements;
Comparability of financial
statements with the financial
statements of other entities;
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MAIN DEFINITIONS
Accounting policy are specific principles, bases,
conventions, rules and practices applied by an entity
in preparing and presenting financial statements.
Change in accounting estimate is an adjustment of the
carrying amount of an asset or 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. Changes in accounting estimates result form
new information or new developments and, accordingly
are not corrections of errors.
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MAIN DEFINITIONS
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 use, or misuse of, reliable
information that:
(a) was available when the financial statements for
those periods were authorized 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.
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MAIN DEFINITIONS…. CONT’D
Errors may arise due to
Mathematical mistakes
Mistakes in applying accounting policies
Oversights
Misinterpretation of facts
Fraud?
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TREATMENT DEFINATIONS
Retrospective application is
applying a new accounting policy to
transactions, other events and
conditions,
as if that policy had always been
applied.
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Cont’d
Prospective application of a change in
accounting policy and of recognizing 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) Recognizing the effect of the change in the
accounting estimate in the current and future
periods affected by the change.
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Cont’d
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.
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Other definitions.
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 retrospectively
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
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Impracticable
c) The retrospective application or retrospective
restatement requires significant estimates of amounts and
it is impossible to distinguish 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
recognized, measured or disclosed; and
ii. Would have been available when the financial
statements for that prior period were authorized for
issue from other information.
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Accounting policies.
Selection and Application of Accounting
Policies
When specific IFRSs applies to a
transaction or event then,
the accounting policy or policies applied to
that item shall be determined by applying
the IFRS.
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In the absence of IFRS…
Sometimes the standards do not have
clear guidance.
management shall use its judgment in
developing and applying an accounting
policy that results in information which is:
(a)Relevant to the decision-making needs of
users; and
(b) Reliable, in that the financial statements
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How to make Judgment
In making judgment management should
consider the following sources:
(a) IFRS dealing with similar and related
issues;
(b) Framework to IFRSs
(c)Pronouncements of other standard setting
bodies and accepted as best practices.
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WHAT IS YOUR EXPERIENCE
WITH REGARD TO ACC
POLICIES?
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CONFUSED?
I guess you are still fine!
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CHANGES
IN ACCOUNTING POLICY
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Changes in accounting policies
An entity shall change an accounting
policy only if the change:
(a) Is required by an IFRS (setting body); or
(b) Results in the financial statements
providing reliable and more relevant
information;
about the effects of transactions; other
events and conditions
on the entity’s financial position,
financial performance or cash flows
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Not a Change in accounting
policies
The following are not changes in
accounting policies:
The application of an accounting policy
for transactions and events that differ
in substance from those previously
occurring; and
The application of a new accounting
policy for transactions and events that
did not occur previously or immaterial.
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Generally a change in
accounting policy occur
If there has been a change in-
recognition, e.g. expenses is now
recognized rather than asset.
Presentation, e.g. depreciation is now
included in cost of sales rather than
administrative expenses, or
measurement basis, stating assets at
replacement cost rather than historical
cost.
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Just a minute!
Which of the following are changes
in accounting policy?:
1. An entity has previously charged interest
incurred in connection with construction
of tangible NCA to the income statement
following the revision of IAS 23
(Borrowing costs) and as per
requirements of that standard, it now
capitalizes that interest.
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2. An entity previously depreciated
vehicles using the reducing balance
method at 40% p.a. It now uses
straight line method over a period
of five years.
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3.An entity has previously shown
certain overhead within cost of
sales. It now shows those
overheads within administrative
expenses.
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4. An entity has previously measured
inventory at weighted average cost
(WAM). It now measure inventory
using FIFO method.
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CAN YOU TRY?
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Accounting treatment of
changes in Acc. Policies
Changes an accounting policy
should be applied retrospectively
except to the extent that is
impracticable to determine
either period specific effects or
cumulative effect of change.
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Retrospective Application
Retrospective application has three steps:
a) Apply new policy in current periods
b) Apply new policy in comparative period as if in
comparative period the new policy was
applicable
c) For periods before the comparative period,
adjust the opening balance of each affected
component of equity for the earliest prior period
presented and other comparative amounts
disclosed, as if new policy had always been
applied.
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Limitations on
Retrospective Application
A change in accounting policy shall be
applied retrospectively except to the
extent that it is impracticable to
determine
either the period specific effects
or the cumulative effect of the change.
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What therefore?.....
When it is impracticable to determine the period
specific effects for one or more prior periods, then
The entity shall apply the new accounting policy as at
the beginning of earliest period for which retrospective
application is practicable (which may be 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, then
the entity shall apply the new accounting policy
prospectively.
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Disclosure requirements
for changes in accounting policy
in accordance with an IFRS
Title of the IFRS
If change made in accordance with transitional
provisions, the fact thereof
The nature and reason of the change in accounting
policy.
Amount of adjustment for all period presented for
each line item and EPS.
Amount of adjustment for period not presented,
unless impracticable
The circumstances due to which retrospective
application is impracticable
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Disclosure requirements
for changes in acc. Policy as a
result of a voluntary change
The nature and reason of the change in accounting
policy.
Reasons why new policy gives more relevant and
reliable information.
Amount of adjustment for all period presented for
each line item and EPS.
Amount of adjustment for period not presented,
unless impracticable
The circumstances due to which retrospective
application is impracticable
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Until when does disclosure
required?
Financial statements of
subsequent periods need not
repeat these disclosures.
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IFRS not yet Effective
Disclose
(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
Standard is required;
(d)The date as at which the entity plans to
apply the Standard initially.
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Example of a retrospective change in
accounting policy with complete disclosure
ABC Ltd is engaged in manufacturing of spare parts for
motor car assemblers. The audited financial statements for
the year ended December 31, 2014 disclosed that the profit
and retained earnings were TZS 21 million and TZS 89
million respectively. The draft financial statements for the
year show a profit of TZS 15 million. However, the following
adjustments are required to be made
Details FIFO (TZS) AVCO (TZS)
December 31, 2013 37,000,000 35,500,000
December 31, 2014 42,300,000 44,500,000
December 31, 2015 58,400,000 54,400,000
Required: Produce an extract showing the movement in
retained earnings, as would appear in the statement of
changes in equity for the year ended December 31, 2015
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WHAT ELSE?....
CHANGES IN ACCOUNTING
ESTIMATES
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Changes in Accounting
Estimates
As a result of the uncertainties inherent in
delivering services, conducting trading or
other activities,
many items in financial statements cannot
be measured with precision but can only
be estimated.
Estimation involves judgments based on
the latest available, reliable information.
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Changes in Accounting
Estimates Cont`d…
Change in accounting estimate is an
adjustment of the carrying amount of
an asset or 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.
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When change in accounting
estimate becomes necessary
If changes occur in the circumstances
on which the estimate was based; or
As a result of a new information; or
More experience
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Examples of accounting
estimates
Estimates may be required of:
Tax revenue due to government
Bad debts;
Inventory obsolescence;
Fair value of financial assets or financial
liabilities;
The useful lives of, or expected pattern of
consumption of the future economic benefits
embodied in, depreciable assets; and
Warranty obligation
Residual value of non current assets etc
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Changing Accounting
Estimates
Shall be recognized prospectively by
including it in profit or loss in:
(a)The period of the change, if the change
affects the period only; or
(b) The period of the change and future
periods, if the change affects
both.
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Accounting treatment of the
changes
recognized by adjusting the carrying
amount of the related asset, liability or
net assets/equity item in the period of
change.
For all other items the effect of a change
in accounting estimate, shall be
recognized prospectively.
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Accounting treatment of the
changes
Adjusting the carrying amount of the related
asset, liability or equity item in the period of
change recognizes a change in an accounting
estimate.
Example: Management estimates that provision
for doubtful debts is estimated up to 5 percent of
the total population of trade debts. However,
upon identifying the age of the trade debts, it
revealed that bad debts are about 6.5 percent.
Management immediately recognizes the
increase in bad debts expense in the books
of accounts.
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Example of a change in accounting
estimate
XYZ Textile Limited purchased a plant on January
01, 2011 for TZS 1,120,000,000. At this date the
useful of the asset was estimated at 10 years after
which it can be sold for TZS 120,000,000. However,
during 2013 XYZ estimates the remaining useful life
of this plant as 6 years and expects to fetch residual
value of TZS 170,000,000. XYZ uses straight line
method for depreciating such plants.
Required: Calculate the amount of depreciation from
year 2011 to 2018.
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Disclosure Requirements Of
Change In Accounting Estimate
Nature and amount of a change in an
accounting estimate for the current year
and future period if practicable;
If estimation is impracticable,
disclosure of this fact;
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ERRORS
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Errors
Errors can arise in respect of the
recognition, measurement, presentation or
disclosure of elements of financial
statements.
Financial statements do not comply with
IFRS if they contain either material errors or
immaterial errors made intentionally to
achieve a particular presentation of an
entity’s financial position, financial
performance or cash flows.
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Current Period Errors
Potential current period errors
discovered in that period are
corrected before the financial
statements are authorized for issue.
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Prior Period Errors
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 use, or misuse of,
reliable information that:
(a) was available when the financial statements for
those periods were authorized 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.
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Accounting treatment
an entity shall correct material prior period
errors retrospectively in the first set of
financial statements authorized for
issue after their discovery by:
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Accounting treatment
(a) Restate comparative amounts for each prior
period presented in which the error occurred;
(b) If the error occurred before the earliest prior
period presented restate the opening
balances of assets, liabilities and equity for
the earliest prior period presented; and
(c) Include any adjustment to opening equity as
the second line of the statement of changes
in equity.
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When impracticable….
If it impracticable to determine the period
specific effects or the cumulative effect of
the error,
the entity corrects the error from the
earliest period/date practicable
(and discloses that fact).
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Limitations of
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.
The correction of a prior period error is
excluded from income statement for the
period in which the error is discovered
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Limitation On Retrospective
Restatement ( what to do?)
Limitation on period specific effect
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).
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Limitation On Retrospective
Restatement
( what to do?) cont`d
Limitation on cumulative effect
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
prospectively form the earliest date
practicable.
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Example of an Error
During 2012, Beta Co discovered that some products that
had been sold during 2011, were incorrectly included in
inventory at 31 December 2011 at TZS 6,500,000. Beta’s
accounting records for 2012 show sales of TZS
104,000,000, cost of goods sold of TZS 86,500,000
(including TZS 6,500,000 for the error in opening
inventory), income taxes of TZS 5,250,000.
In 2011, Beta reported:
Sales 73,500,000
Cost of goods sold (53,500,000)
Profit before income tax 20,000,000
Income tax (6,000,000)
Profit 14,000,000
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Cont’d
Year 2011 reported retained earnings was TZS 20,000,000
and closing retained earnings was TZS 34,000,000. Beta’s
income tax rate was 30% for 2012 and 2011. It had no
other income or expenses. Beta had TZS 5,000,000 of
share capital throughout, and no other components of
equity except for retained earnings.
Required: Relevant extracts of financial statements.
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Answer
Extract from the notes
Some products that had been sold in 2011 were incorrectly
included in inventory at 31 December 2011 at TZS 6,500,000.
the financial statements of 2011 have been restated to correct
this error. The effect of the restatement on the financial
statement has been summarized below.
There is no effect in 2012.
Effect on 2011
Increase in cost of goods sold (6,500,000)
Decrease in income tax expenses 1,950,000
Decrease in profit (4,550,000)
Decrease in inventory (6,500,000)
Decrease in income tax payable 1,950,000)
Decrease in equity (4,550,000)
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Disclosure requirements
Prior Period Errors
The nature of the prior period error;
To the extent practicable, the amount of
the correction:
For each financial statement line item
affected; and
Revision in earnings per share (EPS)
The amount of the correction at the
beginning of the earliest prior period
presented; and
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Disclosure requirements
Prior Period Errors cont`d
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.
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Wait!
Should the disclosure continue?..
~NO~
Do not repeat such disclosures in
subsequent financial statements.
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EFFECTIVE DATE OF THE
STANDARD
This standard has been applicable
from annual periods beginning on
or after 1 January 2005.
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Still fine?
Any questions?
Any point worth sharing?
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Conclusion-
Accounting Policies, Accounting
Estimates, Errors;
can materially affect the true and fair
view of the entity’s financial position,
financial performance and cash flows.
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Conclusion-
Accountant should ensure that all
figures on the face of the Statement of
Financial Position as well as in the
Statement of Financial Performance
are supported by Accounting Policies.
This is also Auditors` point of interest.
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Case questions
Refer to training manual on IAS 8
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Conclussion-3
Thank you for listening
ASANTE SANA
CHEERS..
01/21/22 IAS 8- Reporting and Disclosures- 71
The End
IAS 8- Reporting and
01/21/22 Disclosures- 72
