CH 2. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Question 1

What are Accounting Policies?

How are they selected?

What should be done in the absence of specific IFRS?

Answer 1

Accounting policies: The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

How are they selected?

• IAS 8 requires that an entity selects its policies by applying the relevant IFRS.
• Some standards permit a choice of policies (eg cost and revaluation models).

In the absence of a relevant standard?

management develop an accounting policy using its judgement, so that result of the information presented is relevant and reliable faithful representation to the economic decision-making needs of users.

Judgement should be made considered in the following order:

• (a) IFRSs dealing with similar and related issues;
• (b) The Conceptual Framework definitions of elements of the financial statements and recognition criteria;
• *Provided they do not conflict with the sources above, management may also
  consider: **
• (c) The most recent pronouncements of other national GAAPs based on a similar conceptual framework
• (d) other accepted industry practice

Question 2

When is a change in accounting policies permitted?

and how is it treated?

Answer 2

A change in accounting policy is only permitted if the change (IAS 8: para. 14):

• Is required by an IFRS; or

• Results in financial statements providing reliable and more relevant information.

The accounting treatment for a change in accounting policy is:

• The new policy applies RETROSPECTIVELY unless there’s a transitional provision of IFRS that specifies otherwise.
• Actions to take:
  
  • Adjust opening balance of each affected component of equity
  • Restate comparatives

Question 3

How are changes in accounting estimates treated?

Answer 3

Often measurements are based on an estimated outcome e.g no share options that will vest in the future or the outcome litigating the case.

CHANGES IN ACCOUNTING ESTIMATES should be treated by:

• Applying the change PROSPECTIVELY
• Actions to take:
  
  • ​Adjust measurements in the accounting period.

Question 4

What is a prior period error?

How do they occur?

How are they treated?

Answer 4

What and How

Prior period errors:

Omissions and misstatements in the financial statements arising from a failure to use, or misuse, reliable information that:

(a) Was available when the financial statements 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

They may arise from :

(a) Mathematical mistakes
(b) Mistakes in applying accounting policies
(e) Oversights
(d) Misinterpretation of facts
(e) Fraud

Treated:

Entity corrects material errors retrospectively in the first set of financial statements authorised for issue after their discovery by:

• (a) Restating comparative amounts for prior periods presented in which the error occurred;
• (b) (If the error occurred before the previous year presented) restating the opening balances of assets, liabilities and equity, for the earliest prior period presented;
  
  • and
• (c) Including any adjustment to opening equity as the second line of the statement of changes in equity.

Question 5

What are the 5 issues to address on the first time adoption of international financial reporting standards?

Answer 5

1 The date of transition to IFRS Standards.
2 Which IFRS Standards should be adopted.
3 How gains or losses arising from adopting IFRS should be accounted for.
4 The explanations and disclosures to be made in the year of transition.
5 The exemptions available.

Question 6

Which date should be used as the date of transition?

Answer 6

Date of Transition:-

“beginning of the earliest period for which an entity presents full comparative information under IFRS Standards in its first financial statements produced using IFRS Standards”

SIMPLY PUT - IFRS standards should be applied from the financial year before the entity decides to adopt IFRS.

Question 7

When adopting IFRS for the first time, Which IFRS Standards should be adopted?

Answer 7

• The entity should use the same accounting policies for all the periods presented.
• These policies should be based solely on IFRS Standards in force at the reporting date.
• An entity may apply a Standard not yet mandatory if that standard permits early application.
• IFRS 1 states that the opening IFRS statement of financial position must:

– recognise all assets and liabilities required by IFRS Standards
– do not recognise assets and liabilities not permitted by IFRS Standards
– reclassify all assets, liabilities and equity in accordance with IFRS Standards
– measure all assets and liabilities in accordance with IFRS Standards.

• An entity’s estimates at the date of transition to IFRS Standards should be consistent with estimates made for the same date in accordance with previous GAAP unless evidence exists that those estimates were wrong.

Question 8

How do you Report any gains and losses on the transition to IFRS?

Answer 8

• *Reporting gains and losses**
• *Any gains or losses arising on the adoption of IFRS Standards**

- should be recognised directly in retained earnings.

- They are not recognised in profit or loss.

Question 9

What Explanations and disclosures are required on the first time adoption?

Answer 9

• - Entities must explain how the transition affects their reported financial performance, financial position and cash flows.
• - Previous year errors identified. Should be corrected and must be disclosed separately.
• - When preparing IFRS statements for the first time,
  
  • the fair value of the property, plant and equipment, intangible assets and investment properties can be used as the ‘deemed cost’.
  • If they do so, the entity must disclose the aggregate of those fair values and the adjustment made to their carrying amounts under the previous GAAP.

Question 10

What Exemptions are allowed on the first-time adoption of IFRS?

Answer 10

IFRS 1 grants limited exemptions in situations where the cost of compliance would outweigh the benefits to the user.

For example:

• Previous business combinations do not have to be restated.
• An entity can choose to deem past translation gains and losses on an overseas subsidiary to be nil.
• An entity need not restate the borrowing cost component that was capitalised under previous GAAP at the date of transition.