Chapter 4 (accounting policies, accounting estimates and errors)

Question 1

Give examples of accounting standards that permits NO choice for treatments in the standard

Answer 1

1. Inventories
2. Provisions, Contingent Liabilities and Contingent Assets
3. Intangible Assets

Some of an entity’s accounting policies will be dictated by an international standard which permits no choice of treatment. For instance:

1. Inventories requires that inventories are measured at the lower of cost and net realisable value
2. Provisions, Contingent Liabilities and Contingent Assets prevents entities from recognising contingent assets and liabilities
3. Intangible Assets prevents entities from recognising internally-generated goodwill in their financial statements

Question 2

When can a company choose to change an accounting policy?

Answer 2

IAS8 allows an entity to change one of its accounting policies only if the change:

1. Is required by an international standard or IFRIC Interpretation; or
2. Results in the financial statements providing reliable and more relevant information than would be the case if the accounting policy were not changed.

Question 3

How will the accounting be affected if the company needs to apply a change in accounting policy retrospectively?

Answer 3

Svar:

1. Comparative figures for the previous period (or previous periods if comparatives are provided for more than one period) must be adjusted and presented “as if the new accounting policy had always been applied
2. The opening balance of each affected component of equity (usually retained earnings) must be adjusted. This adjustment takes place in the statement of changes in equity.

An important exception to this requirement arises in the case of property, plant and equipment (IAS16) and intangible assets (IAS38) where an entity changes from the cost model to the revaluation model. In this case, the international standards require that the change is accounted for prospectively rather than retrospectively

Question 4

What information must a company present if the company voluntarily change an accounting policy?

Answer 4

The reason why the new policy will provide more RELIABLE and RELIANT information

IAS8 requires that the change should be accounted for retrospectively. This entails the following steps:

1. Comparative figures for the previous period (or previous periods if comparatives are provided for more than one period) must be adjusted and presented “as if the new accounting policy had always been applied”.
2. The opening balance of each affected component of equity (usually retained earnings) must be adjusted. This adjustment takes place in the statement of changes in equity

The main disclosures required for a voluntary change in accounting policy: The reasons which suggest that application of the new policy will provide RELIABLE and more RELEVANT information

Question 5

Changes in accounting estimates can only be accounted for prospectively. What does that mean?

Answer 5

“It will affect the current and future periods”

IAS8 requires an entity which changes an accounting estimate to account for the change prospectively, not retrospectively. This means that the effect of the change should be dealt with in the entity’s financial statements for the current period and (if applicable) future periods. But the standard does not require (or permit) the restatement of comparative figures for prior periods.