5.2 Accounting policies

Question 1

How are accounting policies defined in IAS8?

Answer 1

“The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.”

Question 2

What are the two major concerns around the application of accounting policies?

Answer 2

1 Selection and application of policies

2 Consistency

Question 3

Why should a reporting entity apply accounting policies consistently across accounting periods?

Answer 3

To ensure comparability.

Question 4

Under what circumstances should an entity change its accounting policy?

Answer 4

Only where a change is required under IFRS, or where the change will result in more reliable and relevant information in the financial statements.

Question 5

Changes in accounting policy must be applied retrospectively. What does this mean?

Answer 5

In the financial statements, the new policy should be applied to previous periods as though the policy had always been in place.

Question 6

Following the end of an accounting period in which a change in accounting policy was made, what disclosures must be made

Answer 6

• the accounting standard responsible for the change
• the nature of the change in policy
• transitional provisions
• the amount of adjustment to each line item affected and the earnings per share
• the amount of the adjustment relating to prior periods
  an explanation of how the change in policy was applied.

Question 7

Firms are required to disclose any changes in accounting estimates (rather than policy). The disclosure requirements around this are less onerous. What are they?

Answer 7

Details of the nature and amount of change caused by the change in estimate.

Question 8

What it a prior period error as defined by IAS8?

Answer 8

An omission from, or misstatement in the entity’s financial statements for one or more prior periods.

Question 9

When is an omission or misstatement considered material?

Answer 9

When it influences the economic decisions of users taken on the basis of the financial statements.

Question 10

How should a material error be corrected (in the first set of statements following its discovery)?

Answer 10

• restatement the comparative amounts for the prior period presented; or
• if the error occurred before the earliest prior period presented, the opening balance of assets, liabilities and equities for the earliest period should be corrected.