Accounting Policies based on IFRS Flashcards
How are changes in new accounting policy, the correction of material prior year errors and changes in accounting estimates applied in the financial statements in order to comply with IAS 8?
Application of new accounting policy or the correction for a material prior period error requires retrospective application. It requires the restatement of the comparative financial statements for each prior accounting period that is being presented to account for the new accounting policy and/or the material error. The details of the changes must be disclosed in the notes to the financial statements for completeness.
- An example of a change in accounting policy would be a change in the depreciation method from straight line to reducing balance
- Examples of a material prior period error include a material over/understatement of sales or inventory or other expenses due to mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts and fraud.
IAS 8 only allows for the prospective application of both a change in accounting policy and material prior period errors if it is impracticable to perform the retrospective adjustment. A material change in an accounting estimate requires the prospective application. The change would also be disclosed in the notes to the financial statements. Examples of changes in accounting estimates include a change in the estimated lifespan of a fixed asset or a change in the estimate used in the calculation of the provision of doubtful debtors.
What are the criteria set out by IAS 2 for the recognition of the cost of an item of property, plant and equipment as an asset?
The cost of an item of property, plant and equipment should be recognised as an asset only if:
- it is probably that future economic benefits associated with the item will flow to the entity
- the cost of the item can be measured reliably
Items such as spare parts, standby equipment and servicing equipment are also accounted for under IAS 16 when they meet the definition of property, plant and equipment. Otherwise, they are recognised as inventories. Costs of ongoing servicing of assets are not added to the carrying amount but are recorded as an expense as they are inccured.
If the government introduced tax changes after a company’s financial statements were authorised for issue, increasing tax liability, how will this be reported in the books?
The changes occurred after the date when the statements were authorised for issue. Therefore, this will be treated as outside of the scope of IAS 10. It would have been treated as a non-adjusting event if it had occurred after the reporting date but before the date of authorisation of the financial statements, as the tax change arose after the reporting period.
