Accounting Policies

Question 1

Introduction

The selection and application of accounting policies is obviously crucial in the preparation of financial statements. As a general premise, the whole purpose of accounting standards is to specify required accounting policies, presentation and disclosure.

However, judgement will always remain; many standards may allow choices to accommodate different views, and no body of accounting literature could hope to prescribe precise treatments for all possible situations.

Answer 1

The selection and application of accounting policies is obviously crucial in the preparation of financial statements. As a general premise, the whole purpose of accounting standards is to specify required accounting policies, presentation and disclosure.

However, judgement will always remain; many standards may allow choices to accommodate different views, and no body of accounting literature could hope to prescribe precise treatments for all possible situations.

Question 2

General principles

IAS 1 deals with some general principles relating to accounting policies, with IAS 8 discussing the detail of selection and application of individual accounting policies and their disclosure.

The general principles discussed by IAS 1 can be described as follows:
• fair presentation and compliance with accounting standards;
• going concern;
• the accrual basis of accounting;
• consistency;
• materiality and aggregation;
• offsetting; 
• profit or loss for the period.

Answer 2

IAS 1 deals with some general principles relating to accounting policies, with IAS 8 discussing the detail of selection and application of individual accounting policies and their disclosure.

The general principles discussed by IAS 1 can be described as follows:
• fair presentation and compliance with accounting standards;
• going concern;
• the accrual basis of accounting;
• consistency;
• materiality and aggregation;
• offsetting; 
• profit or loss for the period.

Question 3

General principles - Fair presentation 1

Consistent with its objective and statement of the purpose of financial statements, IAS 1 requires that financial statements present fairly the financial position,
financial performance and cash flows of an entity.

Fair presentation for these purposes requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework

Answer 3

Consistent with its objective and statement of the purpose of financial statements, IAS 1 requires that financial statements present fairly the financial position,
financial performance and cash flows of an entity.

Fair presentation for these purposes requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework

Question 4

General principles - Fair presentation 2

A fair presentation requires an entity to:

(a) select and apply accounting policies in accordance with IAS 8, which also sets out a hierarchy of authoritative guidance that should be considered in the absence of an IFRS that specifically applies to an item
(b) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
(c) provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

Answer 4

A fair presentation requires an entity to:

(a) select and apply accounting policies in accordance with IAS 8, which also sets out a hierarchy of authoritative guidance that should be considered in the absence of an IFRS that specifically applies to an item
(b) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
(c) provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

Question 5

General principles - Going concern 1

When preparing financial statements, IAS 1 requires management to make an assessment of an entity’s ability to continue as a going concern. This term is not defined, but its meaning is implicit in the requirement of the standard that financial statements should be prepared on a going concern basis unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so.

The standard goes on to require that when management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties should be disclosed.

Answer 5

When preparing financial statements, IAS 1 requires management to make an assessment of an entity’s ability to continue as a going concern. This term is not defined, but its meaning is implicit in the requirement of the standard that financial statements should be prepared on a going concern basis unless management either intends to liquidate the entity or to
cease trading, or has no realistic alternative but to do so.

The standard goes on to require that when management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties should be disclosed.

Question 6

General principles - Going concern 2

When financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.

Answer 6

When financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.

Question 7

General principles - Going concern 3

In assessing whether the going concern assumption is appropriate, the standard requires that all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period should be taken into account. The degree of consideration required will depend on the facts in each case.

Answer 7

In assessing whether the going concern assumption is appropriate, the standard requires that all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period should be taken into account. The degree of consideration required will depend on the facts in each case.

Question 8

General principles - Going concern 4

When an entity has a history of profitable operations and ready access to financial resources, a
conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules
and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Answer 8

When an entity has a history of profitable operations and ready access to financial resources, a
conclusion that the going concern basis of accounting is appropriate may be reached without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules
and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

Question 9

General principles - Going concern 5

There is no guidance in the standard concerning what impact there should be on the financial statements if it is determined that the going concern basis is not appropriate. Accordingly, entities will need to consider carefully their individual circumstances to arrive at an appropriate basis.

Answer 9

There is no guidance in the standard concerning what impact there should be on the financial statements if it is determined that the going concern basis is not appropriate. Accordingly, entities will need to consider carefully their individual circumstances to arrive at an appropriate basis.

Question 10

General principles - The accrual basis of accounting 1

IAS 1 requires that financial statements be prepared, except for cash flow information, using the accrual basis of accounting. No definition of this is given by the standard, but an explanation is presented that ‘When the accrual basis of accounting is used, items are recognised as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Conceptual Framework.’

Answer 10

IAS 1 requires that financial statements be prepared, except for cash flow information, using the accrual basis of accounting. No definition of this is given by the standard, but an explanation is presented that ‘When the accrual basis of accounting is used, items are recognised as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Conceptual Framework.’

Question 11

General principles - The accrual basis of accounting 2

The Conceptual Framework explains the accruals basis as follows :

‘Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting
entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.’

Answer 11

The Conceptual Framework explains the accruals basis as follows :

‘Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting
entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.’

Question 12

General principles - Consistency 1

One of the objectives of both IAS 1 and IAS 8 is to ensure the comparability of financial statements with those of previous periods. To this end, each standard addresses the principle of consistency.

Answer 12

One of the objectives of both IAS 1 and IAS 8 is to ensure the comparability of financial statements with those of previous periods. To this end, each standard addresses the principle of consistency.

Question 13

General principles - Consistency 2

IAS 1 requires that the ‘presentation and classification’ of items in the financial statements be retained from one period to the next unless:

(a) it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8 or
(b) an IFRS requires a change in presentation.

Answer 13

IAS 1 requires that the ‘presentation and classification’ of items in the financial statements be retained from one period to the next unless:

(a) it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8 or
(b) an IFRS requires a change in presentation.

Question 14

General principles - Consistency 3

The standard goes on to amplify this by explaining that a significant acquisition or disposal, or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently.
An entity should change the presentation of its financial statements only if the changed presentation provides information that is reliable and is more relevant to users of the financial statements and the revised structure is likely to continue, so that comparability is not impaired. When making such changes in presentation, an entity will need to reclassify its comparative information

Answer 14

The standard goes on to amplify this by explaining that a significant acquisition or disposal, or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently.
An entity should change the presentation of its financial statements only if the changed presentation provides information that is reliable and is more relevant to users of the financial statements and the revised structure is likely to continue, so that comparability is not impaired. When making such changes in presentation, an entity will need to reclassify its comparative information

Question 15

General principles - Consistency 4

IAS 8 addresses consistency of accounting policies and observes that 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. For this
reason, the same accounting policies need to be applied within each period and from one period to the next unless a change in accounting policy meets certain criteria. Accordingly, the standard requires that accounting policies be selected and applied 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 should be selected and applied consistently to each category.

Answer 15

IAS 8 addresses consistency of accounting policies and observes that 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. For this
reason, the same accounting policies need to be applied within each period and from one period to the next unless a change in accounting policy meets certain criteria. Accordingly, the standard requires that accounting policies be selected and applied 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 should be selected and applied consistently to each category.

Question 16

General principles - Materiality and aggregation 1

Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed
and classified data, which form line items in the financial statements, or in the notes. The extent of aggregation versus detailed analysis is clearly a judgemental one, with either extreme eroding the usefulness of the information.

Answer 16

Financial statements result from processing large numbers of transactions or other events that are aggregated into classes according to their nature or function. The final stage in the process of aggregation and classification is the presentation of condensed
and classified data, which form line items in the financial statements, or in the notes. The extent of aggregation versus detailed analysis is clearly a judgemental one, with either extreme eroding the usefulness of the information.

Question 17

General principles - Materiality and aggregation 2

IAS 1 resolves this issue with the concept of materiality, by requiring:

• each material class of similar items to be presented separately in the financial statements; and

• items of a dissimilar nature or function to be presented separately unless they are
immaterial.

Answer 17

IAS 1 resolves this issue with the concept of materiality, by requiring:

• each material class of similar items to be presented separately in the financial statements; and

• items of a dissimilar nature or function to be presented separately unless they are
immaterial.

Question 18

General principles - Materiality and aggregation 3

The standard also states when applying IAS 1 and other IFRSs an entity should decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes.

In particular, the understandability of financial statements should not be reduced by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

Answer 18

The standard also states when applying IAS 1 and other IFRSs an entity should decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes.

In particular, the understandability of financial statements should not be reduced by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

Question 19

General principles - Materiality and aggregation 4

Materiality is defined by both IAS 1 and IAS 8 as follows.

‘Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.’

Board is in the process of changing this definition to align with the new Conceptual Framework (refer latest definition materiality)

Answer 19

Materiality is defined by both IAS 1 and IAS 8 as follows.

‘Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.’

Board is in the process of changing this definition to align with the new Conceptual Framework (refer latest definition materiality)

Question 20

General principles - Materiality and aggregation 5

At a general level, applying the concept of materiality means that a specific disclosure required by an IFRS to be given in the financial statements (including the notes) need not be provided if the information resulting from that disclosure is not material.

This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. On the other hand, the provision of additional disclosures should be considered when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

Answer 20

At a general level, applying the concept of materiality means that a specific disclosure required by an IFRS to be given in the financial statements (including the notes) need not be provided if the information resulting from that disclosure is not material.

This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. On the other hand, the provision of additional disclosures should be considered when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

Question 21

General principles - Materiality and aggregation 6

IAS 1 and IAS 8 go on to observe that assessing whether an omission or misstatement could influence economic decisions of users, and so be material, requires consideration of the characteristics of those users.

For these purposes, users are assumed to have a
reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Therefore, the
assessment of materiality needs to take into account how users with such attributes could reasonably be expected to be influenced in making economic decisions.

Answer 21

IAS 1 and IAS 8 go on to observe that assessing whether an omission or misstatement could influence economic decisions of users, and so be material, requires consideration of the characteristics of those users.

For these purposes, users are assumed to have a
reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Therefore, the
assessment of materiality needs to take into account how users with such attributes could reasonably be expected to be influenced in making economic decisions.

Question 22

General principles - Materiality and aggregation 7

Regarding the presentation of financial statements, IAS 1 requires that if a line item is not individually material, it should be aggregated with other items either on the face of those statements or in the notes.

The standard also states that an item that is not sufficiently material to justify separate presentation on the face of those statements may nevertheless be sufficiently material for it to be presented separately in the notes.

Answer 22

Regarding the presentation of financial statements, IAS 1 requires that if a line item is not individually material, it should be aggregated with other items either on the face of those statements or in the notes.

The standard also states that an item that is not sufficiently material to justify separate presentation on the face of those statements may nevertheless be sufficiently material for it to be presented separately in the notes.

Question 23

General principles - Offset 1

IAS 1 considers it important that assets and liabilities, and income and expenses, are reported separately.

This is because offsetting in the statement of profit or loss or statement of comprehensive income or the statement of financial position, except when
offsetting reflects the substance of the transaction or other event, detracts (reduce) from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows.

Answer 23

IAS 1 considers it important that assets and liabilities, and income and expenses, are reported separately.

This is because offsetting in the statement of profit or loss or statement of comprehensive income or the statement of financial position, except when
offsetting reflects the substance of the transaction or other event, detracts (reduce) from the ability of users both to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows.

Question 24

General principles - Offset 2

It clarifies, though, that measuring assets net of valuation allowances – for example, obsolescence allowances on inventories and doubtful debts allowances on receivables – is not offsetting.

Answer 24

It clarifies, though, that measuring assets net of valuation allowances – for example, obsolescence allowances on inventories and doubtful debts allowances on receivables – is not offsetting.

Question 25

General principles - Offset 3

Accordingly, IAS 1 requires that assets and liabilities, and income and expenses, should not be offset unless required or permitted by an IFRS.

Answer 25

Accordingly, IAS 1 requires that assets and liabilities, and income and expenses, should not be offset unless required or permitted by an IFRS.

Question 26

General principles - Offset 4a

Just what constitutes offsetting, particularly given the rider noted above of ‘reflecting the substance of the transaction’, is not always obvious. IAS 1 expands on its meaning as follows. It notes that:

(a) IFRS 15 – Revenue from Contracts with Customers – defines revenue from contracts with customers and requires it to be measured at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services, taking into account the amount of any trade discounts and volume rebates allowed by the entity – in other words a notional ‘gross’ revenue and a discount should not be shown separately, but should be ‘offset’.

Answer 26

Just what constitutes offsetting, particularly given the rider noted above of ‘reflecting the substance of the transaction’, is not always obvious. IAS 1 expands on its meaning as follows. It notes that:

(a) IFRS 15 – Revenue from Contracts with Customers – defines revenue from contracts with customers and requires it to be measured at the amount of consideration to which the entity expects to be entitled in exchange for transferring promised goods or services, taking into account the amount of any trade discounts and volume rebates allowed by the entity – in other words a notional ‘gross’ revenue and a discount should not be shown separately, but should be ‘offset’.

Question 27

General principles - Offset 4b

(b) entities can undertake, in the course of their ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. The results of such transactions should be presented, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. For example:
(i) gains and losses on the disposal of non-current assets, including investments and operating assets, should be reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses; and
(ii) expenditure related to a provision that is recognised in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) may be netted against the related reimbursement;

Answer 27

(b) entities can undertake, in the course of their ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. The results of such transactions should be presented, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. For example:
(i) gains and losses on the disposal of non-current assets, including investments and operating assets, should be reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses; and
(ii) expenditure related to a provision that is recognised in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) may be netted against the related reimbursement;

Question 28

General principles - Offset 4c

(c) gains and losses arising from a group of similar transactions should be reported on a net basis, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. However, such gains and losses should be reported separately if they are material.

Answer 28

(c) gains and losses arising from a group of similar transactions should be reported on a net basis, for example, foreign exchange gains and losses or gains and losses arising on financial instruments held for trading. However, such gains and losses should be reported separately if they are material.

Question 29

General principles - Profit or loss for the period 1

The final provision of IAS 1 which we term a general principle is a very important one. It is that, unless an IFRS requires or permits otherwise, all items of income and expense recognised in a period should be included in profit or loss. [IAS 1.88].

This is the case whether one combined statement of comprehensive income is presented or whether a separate statement of profit or loss is presented

Answer 29

The final provision of IAS 1 which we term a general principle is a very important one. It is that, unless an IFRS requires or permits otherwise, all items of income and expense recognised in a period should be included in profit or loss. [IAS 1.88].

This is the case whether one combined statement of comprehensive income is presented or whether a separate statement of profit or loss is presented

Question 30

General principles - Profit or loss for the period 2

Income and expense are not defined by the standard IAS 1 IAS 8, but they are defined by the Conceptual Framework as follows:

(a) income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims; and
(b) expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

Answer 30

Income and expense are not defined by the standard IAS 1 IAS 8, but they are defined by the Conceptual Framework as follows:

(a) income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims; and
(b) expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.

Question 31

General principles - Profit or loss for the period 3

These definitions clearly suggest to us that the terms do not have what many would consider their natural meaning, as they encompass all gains and losses (for example, capital appreciation in a non-current asset like property). There is a somewhat awkward compromise with various gains and losses either required or permitted to bypass profit or loss and be reported instead in ‘other comprehensive income’. Importantly, profit and loss, and other comprehensive income may each be reported as a separate statement.

Answer 31

These definitions clearly suggest to us that the terms do not have what many would consider their natural meaning, as they encompass all gains and losses (for example, capital appreciation in a non-current asset like property). There is a somewhat awkward compromise with various gains and losses either required or permitted to bypass profit or loss and be reported instead in ‘other comprehensive income’. Importantly, profit and loss, and other comprehensive income may each be reported as a separate statement.

Question 32

General principles - Profit or loss for the period 4a

IAS 1 notes that some IFRSs specify circumstances when an entity recognises particular items outside profit or loss, including the effect of changes in accounting policies and error corrections. Other IFRSs deal with items that may meet the Framework’s definitions of income or expense but are usually excluded from profit or loss.

Answer 32

IAS 1 notes that some IFRSs specify circumstances when an entity recognises particular items outside profit or loss, including the effect of changes in accounting policies and error corrections. Other IFRSs deal with items that may meet the Framework’s definitions of income or expense but are usually excluded from profit or loss.

Question 33

General principles - Profit or loss for the period 4b

Examples include:
(a) changes in revaluation surplus relating to property, plant and equipment and intangible assets;

(b) remeasurements on defined benefit plans in accordance with IAS 19;
(c) gains and losses arising from translating the financial statements of a foreign operation;
(d) gains and losses from investments in equity instruments designated at fair value through other comprehensive income;
(e) gains and losses on financial assets measured at fair value through other comprehensive income;

Answer 33

Examples include:
(a) changes in revaluation surplus relating to property, plant and equipment and intangible assets;

(b) remeasurements on defined benefit plans in accordance with IAS 19;
(c) gains and losses arising from translating the financial statements of a foreign operation;
(d) gains and losses from investments in equity instruments designated at fair value through other comprehensive income;
(e) gains and losses on financial assets measured at fair value through other comprehensive income;

Question 34

General principles - Profit or loss for the period 4c

Examples include:
(f) the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income;

(g) for particular liabilities designated as at fair value through profit and loss, fair value changes attributable to changes in the liability’s credit risk;

Answer 34

Examples include:
(f) the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income;

(g) for particular liabilities designated as at fair value through profit and loss, fair value changes attributable to changes in the liability’s credit risk;

Question 35

General principles - Profit or loss for the period 4d

Examples include:
(h) changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging
instrument only the changes in the intrinsic value;

(i) changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contract and designating as the hedging instrument only the changes in the spot element, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument;

Answer 35

Examples include:
(h) changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging
instrument only the changes in the intrinsic value;

(i) changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contract and designating as the hedging instrument only the changes in the spot element, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument;

Question 36

Practice Statement 2 – Making Materiality Judgements 2

Statement 2 addresses three main areas:

• the general characteristics of materiality;
• a four-step process that may be applied in making materiality judgements when preparing financial statements (the ‘materiality process’); and
• guidance on how to make materiality judgements in relation to the following:
  • prior period information,
  • errors,
  • information about covenants; and
  • interim reporting.

Answer 36

Statement 2 addresses three main areas:

• the general characteristics of materiality;
• a four-step process that may be applied in making materiality judgements when preparing financial statements (the ‘materiality process’); and
• guidance on how to make materiality judgements in relation to the following:
  • prior period information,
  • errors,
  • information about covenants; and
  • interim reporting.

Question 37

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality 1

Definition of material :

‘Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor’

Answer 37

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality

Definition of material :

‘Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor’

Question 38

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality 2

Materiality judgements are pervasive :

Materiality judgements are pervasive to the preparation of financial statements. Entities make materiality judgements in decisions about recognition and measurement as well as presentation and disclosure. Requirements in IFRS only need to be applied
if their effect is material to the complete set of financial statements. However, it is inappropriate to make, or leave uncorrected, immaterial departures from IFRS to
achieve a particular presentation.

The Practice Statement reiterates that an entity does not need to provide a disclosure specified by IFRS if
the information resulting from that disclosure is not material, even if IFRS contains a list of specific disclosure requirements or describes them as minimum requirements.

Answer 38

Materiality judgements are pervasive :

Materiality judgements are pervasive to the preparation of financial statements. Entities make materiality judgements in decisions about recognition and measurement as well as presentation and disclosure. Requirements in IFRS only need to be applied
if their effect is material to the complete set of financial statements. However, it is inappropriate to make, or leave uncorrected, immaterial departures from IFRS to
achieve a particular presentation.

The Practice Statement reiterates that an entity does not need to provide a disclosure specified by IFRS if
the information resulting from that disclosure is not material, even if IFRS contains a list of specific disclosure requirements or describes them as minimum requirements.

Question 39

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality 3

Judgement :

Materiality judgements require consideration of both the entity’s circumstances (and how they have changed compared to prior periods) and how the information responds to the information needs of its primary users.

Answer 39

Judgement :

Materiality judgements require consideration of both the entity’s circumstances (and how they have changed compared to prior periods) and how the information responds to the information needs of its primary users.

Question 40

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality 4

Primary users and their information needs :

When making materiality judgements, an entity needs to take into account how information could reasonably be expected to influence the primary users of its financial statements and what decisions they make on the basis of the financial statements. Primary users are existing and potential investors, existing and potential lenders and existing and potential other creditors. They are expected to have a reasonable knowledge of business and economic activities and to review and analyse the information included in the financial statements diligently. Since financial statements cannot provide all the information that primary users need, entities aim to meet the common information needs of their primary users and not, therefore, needs that are unique to particular users or to niche groups.

Answer 40

Practice Statement 2 – Making Materiality Judgements

Primary users and their information needs :

When making materiality judgements, an entity needs to take into account how information could reasonably be expected to influence the primary users of its financial statements and what decisions they make on the basis of the financial statements. Primary users are existing and potential investors, existing and potential lenders and existing and potential other creditors. They are expected to have a reasonable knowledge of business and economic activities and to review and analyse the information included in the financial statements diligently. Since financial statements cannot provide all the information that primary users need, entities aim to meet the common information needs of their primary users and not, therefore, needs that are unique to particular users or to niche groups.

Question 41

Practice Statement 2 – Making Materiality Judgements : General characteristics of materiality 5

Impact of publicly-available information :

Financial statements must be capable of standing-alone. Therefore, entities make the materiality assessment regardless of whether information is publicly available from another source.

Answer 41

Impact of publicly-available information :

Financial statements must be capable of standing-alone. Therefore, entities make the materiality assessment regardless of whether information is publicly available from another source.

Question 42

Practice Statement 2 – Making Materiality Judgements 1

The Practice Statement sets out a four-step process to help preparers making materiality judgements. This process describes how an entity may assess whether information is material for the purposes of recognition, measurement, presentation and disclosure.

Answer 42

The Practice Statement sets out a four-step process to help preparers making materiality judgements. This process describes how an entity may assess whether information is material for the purposes of recognition, measurement, presentation and disclosure.

Question 43

Practice Statement 2 – Making Materiality Judgements 2

The materiality process considers potential omissions and misstatements as well as unnecessary inclusion of immaterial information. In all cases, an entity focuses on how the information could reasonably be expected to influence the decisions of users of financial statements.

Answer 43

The materiality process considers potential omissions and misstatements as well as unnecessary inclusion of immaterial information. In all cases, an entity focuses on how the information could reasonably be expected to influence the decisions of users of financial statements.

Question 44

Practice Statement 2 – Making Materiality Judgements 3a

Step 1 – Identify

Identify information about transactions, other events and conditions that has the potential to be material considering the requirements of IFRS and the entity’s knowledge of its primary users’ common information needs.

Answer 44

Step 1 – Identify

Identify information about transactions, other events and conditions that has the potential to be material considering the requirements of IFRS and the entity’s knowledge of its primary users’ common information needs.

Question 45

Practice Statement 2 – Making Materiality Judgements 3b

Step 2 – Assess

Determine whether the information identified in Step 1 is material considering quantitative (size of the impact of the information against measures of the financial
statements) and qualitative (characteristics of the information making it more likely to influence decisions of the primary users) factors in the context of the financial statements as a whole.

Answer 45

Step 2 – Assess

Determine whether the information identified in Step 1 is material considering quantitative (size of the impact of the information against measures of the financial
statements) and qualitative (characteristics of the information making it more likely to influence decisions of the primary users) factors in the context of the financial statements as a whole.

Question 46

Practice Statement 2 – Making Materiality Judgements 3c

Step 3 – Organise

Organise material information within the draft financial statements in a way that communicates the information clearly and concisely (for example, by emphasising material matters, tailoring (adapt) information to the entity’s own circumstances, highlighting relationships between different pieces of information).

Answer 46

Step 3 – Organise

Organise material information within the draft financial statements in a way that communicates the information clearly and concisely (for example, by emphasising material matters, tailoring (adapt) information to the entity’s own circumstances, highlighting relationships between different pieces of information).

Question 47

Practice Statement 2 – Making Materiality Judgements 3d

Step 4 – Review

Review the draft financial statements to determine whether all material information has been identified and consider the information provided from a wider perspective and in aggregate, on the basis of the complete set of financial statements.

Answer 47

Step 4 – Review

Review the draft financial statements to determine whether all material information has been identified and consider the information provided from a wider perspective and in aggregate, on the basis of the complete set of financial statements.

Question 48

Practice Statement 2 – Making Materiality Judgements : Specific topics 1a

The Practice Statement provides guidance on how to make materiality judgements in the following specific circumstances:

• Prior period information

Entities are required to provide prior period information if it is relevant to understand the current period financial statements, regardless of whether it was included in the prior period financial statements.

This might lead an entity to include prior period information that was not previously provided (if necessary to understand the current period financial statements) or to summarise prior period information, retaining only the information necessary to understand the current period financial statement

Answer 48

The Practice Statement provides guidance on how to make materiality judgements in the following specific circumstances:

• Prior period information

Entities are required to provide prior period information if it is relevant to understand the current period financial statements, regardless of whether it was included in the prior period financial statements.

This might lead an entity to include prior period information that was not previously provided (if necessary to understand the current period financial statements) or to summarise prior period information, retaining only the information necessary to understand the current period financial statement

Question 49

Practice Statement 2 – Making Materiality Judgements : Specific topics 1b

• Errors

An entity assesses the materiality of an error (omissions or misstatements or both) on an individual and collective basis and corrects all material errors, as well as any immaterial financial reporting errors made intentionally to achieve a particular presentation of its financial statements. When assessing whether cumulative errors (that is, errors that have accumulated over several periods) have become material an entity considers whether its circumstances have changed or further accumulation of a current period error has occurred. Cumulative errors must be corrected if they have become material to the current period financial statements

Answer 49

• Errors

An entity assesses the materiality of an error (omissions or misstatements or both) on an individual and collective basis and corrects all material errors, as well as any immaterial financial reporting errors made intentionally to achieve a particular presentation of its financial statements. When assessing whether cumulative errors (that is, errors that have accumulated over several periods) have become material an entity considers whether its circumstances have changed or further accumulation of a current period error has occurred. Cumulative errors must be corrected if they have become material to the current period financial statements

Question 50

Practice Statement 2 – Making Materiality Judgements : Specific topics 1c

• Loan covenants

When assessing whether information about a covenant in a loan agreement is material, an entity considers the impact of a potential covenant breach on the financial statements and the likelihood of the covenant breach occurring.

Answer 50

• Loan covenants

When assessing whether information about a covenant in a loan agreement is material, an entity considers the impact of a potential covenant breach on the financial statements and the likelihood of the covenant breach occurring.

Question 51

Practice Statement 2 – Making Materiality Judgements : Specific topics 1d

• Materiality judgements for interim reporting

An entity considers the same materiality factors for the interim report as in its annual assessment. However, it takes into consideration that the time period and the
purpose of interim financial statements (that is, to provide an update on the latest complete set of annual financial statements) differ from those of the annual financial statements.

Answer 51

• Materiality judgements for interim reporting

An entity considers the same materiality factors for the interim report as in its annual assessment. However, it takes into consideration that the time period and the
purpose of interim financial statements (that is, to provide an update on the latest complete set of annual financial statements) differ from those of the annual financial statements.

Question 52

The distinction between accounting policies and accounting estimates 1

IAS 8 defines accounting policies as ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.’ [IAS 8.5].

In particular, IAS 8 considers a change in ‘measurement basis’ to be a change in accounting policy (rather than a change in estimate)

Answer 52

IAS 8 defines accounting policies as ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.’ [IAS 8.5].

In particular, IAS 8 considers a change in ‘measurement basis’ to be a change in accounting policy (rather than a change in estimate)

Question 53

The distinction between accounting policies and accounting estimates 2

Although not a defined term, IAS 1 (when requiring disclosure of them) gives examples of measurement bases as follows:

• historical cost;
• current cost;
• net realisable value;
• fair value; and
• recoverable amount

Answer 53

Although not a defined term, IAS 1 (when requiring disclosure of them) gives examples of measurement bases as follows:

• historical cost;
• current cost;
• net realisable value;
• fair value; and
• recoverable amount

Question 54

The distinction between accounting policies and accounting estimates 3

‘Accounting estimates’ is not a term defined directly by the standards. However, it is indirectly defined by the definition in IAS 8 of a change in an accounting estimate as follows.

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. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. [IAS 8.5].

Answer 54

‘Accounting estimates’ is not a term defined directly by the standards. However, it is indirectly defined by the definition in IAS 8 of a change in an accounting estimate as follows.

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. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. [IAS 8.5].

Question 55

The distinction between accounting policies and accounting estimates 4

Examples given by the IASB of change in accounting estimates are estimates of bad debts and the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset.

Answer 55

Examples given by the IASB of change in accounting estimates are estimates of bad debts and the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset.

Question 56

The distinction between accounting policies and accounting estimates 5

The standard also notes that corrections of errors should be distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision 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.

Answer 56

The standard also notes that corrections of errors should be distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision 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.

Question 57

The distinction between accounting policies and accounting estimates 6

The distinction between an accounting policy and an accounting estimate is particularly important because a very different treatment is required when there are changes in accounting policies or accounting estimates.

When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, IAS 8 requires the change to be treated as a change in an accounting estimate.

Answer 57

The distinction between an accounting policy and an accounting estimate is particularly important because a very different treatment is required when there are changes in accounting policies or accounting estimates.

When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, IAS 8 requires the change to be treated as a change in an accounting estimate.

Question 58

The selection and application of accounting policies 1

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.

Answer 58

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.

Question 59

The selection and application of accounting policies 2

To this end, IAS 8’s starting point is that when an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item should be determined by applying the IFRS and considering any relevant implementation guidance issued by the IASB for the IFRS.

Answer 59

To this end, IAS 8’s starting point is that when an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item should be determined by applying the IFRS and considering any relevant implementation guidance issued by the IASB for the IFRS.

Question 60

The selection and application of accounting policies 3

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 IFRS to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows

Answer 60

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 IFRS to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows

Question 61

The selection and application of accounting policies 4

There will be circumstances where a particular event, transaction or other condition is not specifically addressed by IFRS. When this is the case, IAS 8 sets out a hierarchy of guidance to be considered in the selection of an accounting policy.

Answer 61

There will be circumstances where a particular event, transaction or other condition is not specifically addressed by IFRS. When this is the case, IAS 8 sets out a hierarchy of guidance to be considered in the selection of an accounting policy.

Question 62

The selection and application of accounting policies 6

A neutral depiction is one without bias in the selection or presentation of financialvinformation. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users. That is not to imply that neutral information has no purpose or no influence on behaviour.

Relevant financial information is, by definition, capable of making a difference in users’ decisions.

Answer 62

A neutral depiction is one without bias in the selection or presentation of financialvinformation. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users. That is not to imply that neutral information has no purpose or no influence on behaviour.

Relevant financial information is, by definition, capable of making a difference in users’ decisions.

Question 63

The selection and application of accounting policies 7

The Conceptual Framework has a discussion of the word ‘prudence’, the exercise of which is considered by the Board to support neutrality. The IASB considers prudence to be the exercise of caution when making judgements under conditions of uncertainty.

This is said to mean that:
• assets and income are not overstated and liabilities and expenses are not understated; but also that
• the exercise of prudence does not allow for the understatement of assets or income or the overstatement of liabilities or expenses. Such misstatements can lead to the overstatement or understatement of income or expenses in future periods.

Answer 63

The Conceptual Framework has a discussion of the word ‘prudence’, the exercise of which is considered by the Board to support neutrality. The IASB considers prudence to be the exercise of caution when making judgements under conditions of uncertainty.

This is said to mean that:
• assets and income are not overstated and liabilities and expenses are not understated; but also that
• the exercise of prudence does not allow for the understatement of assets or income or the overstatement of liabilities or expenses. Such misstatements can lead to the overstatement or understatement of income or expenses in future periods.

Question 64

The selection and application of accounting policies 8

The standard gives guidance regarding the primary requirement for exercising judgement in developing and applying an accounting policy.

In making its judgement, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in IFRSs dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework

Answer 64

The standard gives guidance regarding the primary requirement for exercising judgement in developing and applying an accounting policy.

In making its judgement, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements and guidance in IFRSs dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework

Question 65

Changes in accounting estimates 1

The making of estimates is a fundamental feature of financial reporting reflecting the uncertainties inherent in business activities. IAS 8 notes that the use of reasonable estimates is an essential part of the preparation of financial statements and it does not undermine their reliability.

Answer 65

The making of estimates is a fundamental feature of financial reporting reflecting the uncertainties inherent in business activities. IAS 8 notes that the use of reasonable estimates is an essential part of the preparation of financial statements and it does not undermine their reliability.

Question 66

Changes in accounting estimates 2

Examples of estimates given by the standard are:

• bad debts;
• inventory obsolescence;
• the 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 obligations.

Answer 66

Examples of estimates given by the standard are:

• bad debts;
• inventory obsolescence;
• the 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 obligations.

Question 67

Changes in accounting estimates 3

Estimates will need revision as changes occur in the circumstances on which they are based or as a result of new information or more experience. The standard observes that, by its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. [IAS 8.34].

Accordingly, IAS 8 requires that changes in estimate be accounted for prospectively; defined as recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.

Answer 67

Estimates will need revision as changes occur in the circumstances on which they are based or as a result of new information or more experience. The standard observes that, by its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. [IAS 8.34].

Accordingly, IAS 8 requires that changes in estimate be
accounted for prospectively; defined as recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.

Question 68

Changes in accounting estimates 4

The standard goes on to explain that this will mean (as appropriate):

• adjusting the carrying amount of an asset, liability or item of equity in the statement of financial position in the period of change; and
• recognising the change by including it in profit and loss in:
  • the period of change, if it affects that period only (for example, a change in estimate of bad debts); or
  • the period of change and future periods, if it affects both (for example, a change in estimated useful life of a depreciable asset or the expected pattern of consumption of the economic benefits embodied in it).

Answer 68

The standard goes on to explain that this will mean (as appropriate):

• adjusting the carrying amount of an asset, liability or item of equity in the statement of financial position in the period of change; and
• recognising the change by including it in profit and loss in:
  • the period of change, if it affects that period only (for example, a change in estimate of bad debts); or
  • the period of change and future periods, if it affects both (for example, a change in estimated useful life of a depreciable asset or the expected pattern of consumption of the economic benefits embodied in it).

Question 69

Changes in accounting policies 1

Consistency of accounting policies and presentation is a basic principle in both IAS 1 and IAS 8. Accordingly, IAS 8 only permits a change in accounting policies 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.

Answer 69

Consistency of accounting policies and presentation is a basic principle in both IAS 1 and IAS 8. Accordingly, IAS 8 only permits a change in accounting policies 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.

Question 70

Changes in accounting policies 2

IAS 8 addresses changes of accounting policy arising from three sources:

(a) the initial application (including early application) of an IFRS containing specific transitional provisions;
(b) the initial application of an IFRS which does not contain specific transitional provisions; and
(c) voluntary changes in accounting policy.

Answer 70

IAS 8 addresses changes of accounting policy arising from three sources:

(a) the initial application (including early application) of an IFRS containing specific transitional provisions;
(b) the initial application of an IFRS which does not contain specific transitional provisions; and
(c) voluntary changes in accounting policy.

Question 71

Changes in accounting policies 3

Policy changes under (a) should be accounted for in accordance with the specific transitional provisions of that IFRS.

Answer 71

Policy changes under (a) should be accounted for in accordance with the specific transitional provisions of that IFRS.

Question 72

Changes in accounting policies 4

A change of accounting policy under (b) or (c) should be applied retrospectively, that is applied to transactions, other events and conditions as if it had always been applied. [IAS 8.5, 19-20].

The standard goes on to explain that retrospective application requires adjustment of 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. [IAS 8.22].

Answer 72

A change of accounting policy under (b) or (c) should be applied retrospectively, that is applied to transactions, other events and conditions as if it had always been applied. [IAS 8.5, 19-20].

The standard goes on to explain that retrospective application requires adjustment of 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. [IAS 8.22].

Question 73

Changes in accounting policies 5

The standard observes that the amount of the resulting adjustment relating to periods before those presented in the financial statements (which is made to the opening balance of each affected component of equity of the earliest prior period presented) will usually
be made to retained earnings.

However, it goes on to note that the adjustment may be made to another component of equity (for example, to comply with an IFRS). IAS 8 also makes clear that any other information about prior periods, such as historical summaries of financial data, should be also adjusted.

Answer 73

The standard observes that the amount of the resulting adjustment relating to periods before those presented in the financial statements (which is made to the opening balance of each affected component of equity of the earliest prior period presented) will usually
be made to retained earnings.

However, it goes on to note that the adjustment may be made to another component of equity (for example, to comply with an IFRS). IAS 8 also makes clear that any other information about prior periods, such as historical summaries of financial data, should be also adjusted.

Question 74

Changes in accounting policies 6

Frequently it will be straightforward to apply a change in accounting policy retrospectively. However, the standard accepts that sometimes it may be impractical to do so.

Accordingly, retrospective application of a change in accounting policy is not required to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change. [IAS 8.23].

Answer 74

Frequently it will be straightforward to apply a change in accounting policy retrospectively. However, the standard accepts that sometimes it may be impractical to do so.

Accordingly, retrospective application of a change in accounting policy is not required to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change. [IAS 8.23].

Question 75

Changes in accounting policies 7

The standard clarifies that the following are not changes in accounting policy:

• the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring; and
• the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial.

Answer 75

The standard clarifies that the following are not changes in accounting policy:

• the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring; and
• the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial.

Question 76

Changes in accounting policies 8

More importantly, the standard requires that a change to a policy of revaluing intangible assets or property plant and equipment in accordance with IAS 38 and IAS 16 respectively is not to be accounted for under IAS 8 as a change in accounting policy. Rather, such a change should be dealt with as a revaluation in accordance with the relevant standards [IAS 8.17-18].

What this means is that it is not permissible to restate prior periods for the carrying value and depreciation charge of the assets concerned. Aside of this particular exception, the standard makes clear that a change in measurement basis is a change in an accounting policy, and not a change in an accounting estimate. However, when it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the standard requires it to be treated as achange in an accounting estimate.

Answer 76

More importantly, the standard requires that a change to a policy of revaluing intangible assets or property plant and equipment in accordance with IAS 38 and IAS 16 respectively is not to be accounted for under IAS 8 as a change in accounting policy. Rather, such a change should be dealt with as a revaluation in accordance with the relevant standards [IAS 8.17-18].

What this means is that it is not permissible to restate prior periods for the carrying value and depreciation charge of the assets concerned. Aside of this particular exception, the standard makes clear that a change in measurement basis is a change in an accounting policy, and not a change in an accounting estimate. However, when it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the standard requires it to be treated as achange in an accounting estimate.

Question 77

Correction of errors 1

IAS 8 defines prior period errors as omissions from, and misstatements in, an entity’s financial statements for one or more prior periods (including the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of
facts, and fraud) arising from a failure to 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.

Answer 77

IAS 8 defines prior period errors as omissions from, and misstatements in, an entity’s financial statements for one or more prior periods (including the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of
facts, and fraud) arising from a failure to 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.

Question 78

Correction of errors 2

Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. IAS 8 states that financial statements do not comply with IFRS if they contain errors that are:

(a) material; or
(b) immaterial but are made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

Answer 78

Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. IAS 8 states that financial statements do not comply with IFRS if they contain errors that are:

(a) material; or
(b) immaterial but are made intentionally to achieve a particular presentation of an entity’s financial position, financial performance or cash flows.

Question 79

Correction of errors 3

The concept in (b) is a little curious. As discussed above, an error is material if it could influence the economic decisions of users taken on the basis of the financial statements. We find it difficult to imagine a scenario where an entity would deliberately seek to misstate its financial statements to achieve a particular presentation of its financial position, performance or cash flows but only in such a way that did not influence the decisions of users.

Answer 79

The concept in (b) is a little curious. As discussed above, an error is material if it could influence the economic decisions of users taken on the basis of the financial statements. We find it difficult to imagine a scenario where an entity would deliberately seek to misstate its financial statements to achieve a particular presentation of its financial position, performance or cash flows but only in such a way that did not influence the decisions of users.

Question 80

Correction of errors 4

In any event, and perhaps somewhat unnecessarily, IAS 8 notes that potential current period errors detected before the financial statements are authorised for issue should be corrected in those financial statements. This requirement is phrased so as to apply to all potential errors, not just material ones. [IAS 8.41].

The standard notes that corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision 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.

Answer 80

In any event, and perhaps somewhat unnecessarily, IAS 8 notes that potential current period errors detected before the financial statements are authorised for issue should be corrected in those financial statements. This requirement is phrased so as to apply to all potential errors, not just material ones. [IAS 8.41].

The standard notes that corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision 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.

Question 81

Correction of errors 5

When it is discovered that material prior period errors have occurred, IAS 8 requires that they be corrected in the first set of financial statements prepared after their
discovery. [IAS 8.42].

The correction should be excluded from profit or loss for the period in which the error is discovered. Rather, any information presented about prior periods (including any historical summaries of financial data) should be restated as far back as practicable.

Answer 81

When it is discovered that material prior period errors have occurred, IAS 8 requires that they be corrected in the first set of financial statements prepared after their
discovery. [IAS 8.42].

The correction should be excluded from profit or loss for the period in which the error is discovered. Rather, any information presented about prior periods (including any historical summaries of financial data) should be restated as far back as practicable.

Question 82

Correction of errors 5

When it is discovered that material prior period errors have occurred, IAS 8 requires that they be corrected in the first set of financial statements prepared after their
discovery. [IAS 8.42].

The correction should be excluded from profit or loss for the period in which the error is discovered. Rather, any information presented about prior periods (including any historical summaries of financial data) should be restated as far back as practicable.

Answer 82

When it is discovered that material prior period errors have occurred, IAS 8 requires that they be corrected in the first set of financial statements prepared after their
discovery. [IAS 8.42].

The correction should be excluded from profit or loss for the period in which the error is discovered. Rather, any information presented about prior periods (including any historical summaries of financial data) should be restated as far back as practicable.

Question 83

Correction of errors 6

This should be done 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.

Answer 83

This should be done 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.

Question 84

Impracticability of restatement 1

IAS 8 does not require the restatement of prior periods
following a change in accounting policy or the correction of material errors if such a restatement is impracticable.

The standard devotes a considerable amount of guidance to discussing what ‘impracticable’ means for these purposes.

Answer 84

IAS 8 does not require the restatement of prior periods
following a change in accounting policy or the correction of material errors if such a restatement is impracticable.

The standard devotes a considerable amount of guidance to discussing what ‘impracticable’ means for these purposes.

Question 85

Impracticability of restatement 2

The standard states that applying a requirement is impracticable when an entity cannot apply it after making every reasonable effort to do so. It goes on to note that, 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 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 [IAS 8.5].

Answer 85

The standard states that applying a requirement is impracticable when an entity cannot apply it after making every reasonable effort to do so. It goes on to note that, 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 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 [IAS 8.5].

Question 86

Impracticability of restatement 3

An example of a scenario covered by (a) above given by the standard is that in some circumstances it may impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period because data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (or its prospective application to prior periods)
or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

Answer 86

An example of a scenario covered by (a) above given by the standard is that in some circumstances it may impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period because data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (or its prospective application to prior periods)
or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

Question 87

Impracticability of restatement 3

An example of a scenario covered by (a) above given by the standard is that in some circumstances it may impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period because data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (or its prospective application to prior periods) or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

Answer 87

An example of a scenario covered by (a) above given by the standard is that in some circumstances it may impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period because data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy (or its prospective application to prior periods) or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

Question 88

Impracticability of restatement : Impracticability of restatement for a change in accounting policy 1

When retrospective application of a change in accounting policy is required, the change in policy should 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.
[IAS 8.23].

When an entity applies a new accounting policy retrospectively, the standard requires it to be applied to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable for these purposes unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statement of financial position for that period.

Answer 88

When retrospective application of a change in accounting policy is required, the change in policy should 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.
[IAS 8.23].

When an entity applies a new accounting policy retrospectively, the standard requires it to be applied to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable for these purposes unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statement of financial position for that period.

Question 89

Impracticability of restatement : Impracticability of restatement for a change in accounting policy 2

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 new accounting policy should be applied to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable; and
• a corresponding adjustment to the opening balance of each affected component of equity for that period should be made.

The standard notes that this may be the current period. [IAS 8.24].

Answer 89

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 new accounting policy should be applied to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable; and
• a corresponding adjustment to the opening balance of each affected component of equity for that period should be made.

The standard notes that this may be the current period. [IAS 8.24].

Question 90

Impracticability of restatement : Impracticability of restatement for a change in accounting policy 3

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 standard requires an adjustment to the comparative information to apply the new accounting policy prospectively from the earliest date practicable.
[IAS 8.25].

Answer 90

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 standard requires an adjustment to the comparative information to apply the new accounting policy prospectively from the earliest date practicable.
[IAS 8.25].

Question 91

Impracticability of restatement : Impracticability of restatement for a change in accounting policy 4

Prospective application is defined by the standard as applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed. [IAS 8.5].

This means that the portion of the cumulative adjustment to assets, liabilities and equity arising before that date is disregarded. Changing an accounting policy is permitted by IAS 8 even if it is impracticable to apply the policy prospectively for any prior period.

Answer 91

Prospective application is defined by the standard as applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed. [IAS 8.5].

This means that the portion of the cumulative adjustment to assets, liabilities and equity arising before that date is disregarded. Changing an accounting policy is permitted by IAS 8 even if it is impracticable to apply the policy prospectively for any prior period.

Question 92

Impracticability of restatement : Impracticability of restatement for a material error 1

IAS 8 requires that a prior period error should 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.

Answer 92

IAS 8 requires that a prior period error should 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.

Question 93

Impracticability of restatement : Impracticability of restatement for a material error 2

When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the opening balances of assets, liabilities and equity should be restated for the earliest period for which retrospective
restatement is practicable (which the standard notes may be the current period).

Answer 93

When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the opening balances of assets, liabilities and equity should be restated for the earliest period for which retrospective
restatement is practicable (which the standard notes may be the current period).

Question 94

Impracticability of restatement : Impracticability of restatement for a material error 3

When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the comparative information should be restated to correct the error prospectively from the earliest date practicable.

The standard explains that this will mean disregarding the portion of the cumulative restatement of assets, liabilities and equity arising before that date.

Answer 94

When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the comparative information should be restated to correct the error prospectively from the earliest date practicable.

The standard explains that this will mean disregarding the portion of the cumulative restatement of assets, liabilities and equity arising before that date.

Question 95

LIST OF EXAMPLES

- Refer OneNote

Answer 95

LIST OF EXAMPLES