Lecture 2 - Accounting Policies, Estimates and Errors Flashcards
accounting policy (current) definition?
the specific bases, conventions, rules & practices applied by an entity in preparing FSs
specific principles / rules used in preparing FSs
accounting policy (new) definition?
the specific principles, measurement bases & practices applied by an entity in preparing FSs
specific principles / rules used in preparing FSs
examples of accounting policies?
inventory measured at lower of cost or NRV
items of PPE measured using cost or revaluation models
examples of an accounting policy that gives entity’s a choice of methodology?
inventory recognition methods, FIFO, LIFO, AVCO
should accounting policies be selected to comply with international standards?
yes
in the absence of IFRS, what is used?
management judgement
instances in which accounting policy changes?
- change is required by international standard
- change results in more reliable and relevant info
how do you disclose a change in accounting policy if change is caused by initial application of an international standard?
- include title of standard
- include description of transitional provisions in that standard
how do you disclose a change in accounting policy if change is voluntary?
- disclose reasons for making the change
how do you disclose a change in accounting policy for all changes?
- adjustments need to be made in the current and prior relevant periods
IAS8 = ?
- many items cannot be measured, only estimated
- judgements are made
- this doesn’t undermine the reliability of the info
when is a change in estimate necessary?
- if circumstances change
- if new information becomes available
example of a policy and it’s relevant estimate?
e.g., policy = to depreciate or to not depreciate
estimate = use of straight line or reducing balance method
how are changes in accounting estimates recognised?
prospectively
this means it applies to current and future periods only
comparative period information isn’t restated
how are changes in accounting policies recognised?
retrospectively
this means it applies to current and past periods only
comparative period information is restated
accounting error?
omissions or misstatements in recognising or presenting financial info
examples of accounting errors?
misclassifying an asset
misstating a figure in the FSs
types of accounting errors?
prior period errors
current period errors
define prior period errors
errors that relate to a previous financial reporting period but are discovered after the FSs have been issued
define current period errors
errors that are discovered and corrected within the same financial period in which they are incurred
are prior period errors handled prospectively or retrospectively?
retrospectively
corrections are made to the current and previous periods
are current period errors handled prospectively or retrospectively?
prospectively
corrections are made to the current period
material prior period errors should be corrected…
retrospectively
the material misstatement must be corrected in the previous FSs and disclosed as restatements in the comparative FSs
control account = ?
account that checks the arithmetical accuracy of a ledger
if errors are found before the FS are prepared, how is the suspense account handled?
the suspense account will be included in the B/S
where in the B/S it goes depends on whether it was debited or credited
accounting errors?
accounting policies?
accounting estimates?
errors = misstatements/omissions
policies = principles/rules
estimates = judgements
define comparative figures
figures given for previous years in the financial statements of an organisation for the purpose of comparison
when is a ‘restated’ disclosure required?
when changes are made retrospectively
this is so people viewing previous years’ FSs aren’t confused at the discrepancy
define the suspense account?
account to balance entries which we don’t know what to do with
