Chapter 22 - Accounting Policies, Accounting Estimates & Errors Flashcards
How does IAS 8 define accounting policies?
IAS 8 defines accounting policies as “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements”.
Key: a change in accounting policy has occurred when there has been a change in the recognition or presentation or measurement of an item of the financial statements.
As time passes more information may become available so estimates are reviewed annually to ensure they are still appropriate.
What happens if a review finds that the estimate should be amended?
If the review finds that the estimate should be amended, then the change is made in the period that the new information became available and in future periods.
No change is made to the figures brought forward from previous reporting periods and comparative figures are not restated. This is known as applying the change in accounting estimate prospectively.
Explain the disclosure in relation to Changes in Accounting Estimates
When an entity changes its accounting estimates it must disclose the nature and amount of the change in the current period or expected in future periods.
If the entity cannot make an estimate of the effect on future periods, it must state that it cannot do so.
When is an accounting policy set?
An accounting policy is set when the particular transaction or event takes place for the first time and is then applied consistently to all subsequent transactions.
For example, when an entity purchases its first building it must decide whether to apply the cost model or the revaluation model. If the entity chooses the cost model, any other properties purchased will also use the cost model.
An entity can only change its accounting policies under what conditions?
- It is required by international financial reporting standards.
- the change is necessary to provide more relevant and reliable information.
How is a change in accounting policy applied?
A change in accounting policy must be applied retrospectively, that is, from the first day that the original accounting policy was applied.
This done by:
1 - Adjusting the opening balance of each affected component of equity for the earliest prior period presented.
2 - Adjusting comparative amounts for each prior period presented as if the accounting policy had always been applied.
IAS 8 allows for one exception to this rule, that is, when an entity changes from the cost model to the revaluation model under IAS 16 Property, Plant and Equipment, this initial change in fair value is treated as a revaluation and not a change in accounting policy.
How is the discovery of an error treated?
When an error is discovered, management must make the correction in the first set of financial statements prepared after the error is discovered. Depending on the nature and timing of the error, the figures brought forward may need to be amended.
If the amount of the error is not material, an adjustment is made in the current year’s statement of profit or loss and other comprehensive income (SPLOCI).
If the amount of the error is material, an adjustment is made in the current year’s SOCIE by restating the opening retained earnings figure.
