Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors CA PARAS JAIN parasjain2807@gmail.com +91 9819815706 Slide 1 of 18

Changes in Accounting Policies Changes in Accounting Estimates Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors Accounting Policies Changes in Accounting Policies Scope Accounting Estimates Changes in Accounting Estimates Prior Period Errors Slide 2 of 18

Accounting Policies Accounting policies are the specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements. Principles are the guidelines which must be followed when reporting financial transactions. Bases are the methods in which accounting principles may be applied to financial transactions. Eg. Method used to depreciate assets. Conventions consists of practices that arise from the practical application of accounting principles and is designed to help accountants overcome practical problems that arise while reporting financial transactions. Rules are the golden rules of debit and credit of accounting. Practices are the ways by which its accounting policies are implemented and adhered to on a routine basis. Slide 3 of 18

Accounting Policies When an Ind AS specifically applies to a transaction, the accounting policy applied to that transaction shall be determined by applying the respective Ind AS, else management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making the judgement, management shall refer to: the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework; Ind AS on similar and related issues; Other financial reporting standards like IFRS, US GAAP. Eg.- Accounting of spare parts, stand-by equipment and service equipment, Accounting of De-merger. Accounting policies should be applied consistently. Slide 4 of 18

Change in Accounting Policies An Accounting policy can be changed only if the change : is required by an Ind AS (Mandatory change); or results in providing reliable and more relevant information about the transaction on the entity’s financial statement (Voluntary change). Accounting treatment of Changes in accounting policy: If transitional provisions are mentioned in the respective Ind AS, then apply those provisions, else apply the change retrospectively unless impracticable. Retrospective means adjust the opening balance of each affected component of equity for the earliest prior period presented and the comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Slide 5 of 18

Inventory as per old Accounting Policy Eg. of change in accounting policy Inventory as per old Accounting Policy Inventories are valued at Cost.  Item Qty Cost   Value A 10 120 1200 B 20 225 4500 C 30 200 6000 11700 Inventory as per new Accounting Policy Inventories are valued at lower of Cost and Net Realizable Value (NRV). NRV Lower 125 220 4400 150 10100 Slide 6 of 18

Changes in Accounting Estimates Accounting estimates are the estimations used by management to recognize amounts in the financial statements where precise values cannot be determined. A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset (depreciation), that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and accordingly are not corrections of errors. Slide 7 of 18

Changes in Accounting Estimates Accounting treatment of Changes in accounting estimate: The effects of change in accounting estimate is applied prospectively i.e. from the date of the change in estimate by including it in profit or loss in: The period of the change, if the change affects that period only; or The period of the change and future periods, if the change affects both. If change in accounting estimate relates to items of asset, liability or equity, it shall be recognised by adjusting the carrying amount of the related item of asset, liability or equity in the period of the change. Eg:- Change in amount of bad debts or change in the useful life of depreciable assets. Slide 8 of 18

Accounting Policies Versus Accounting Estimates  Particulars Accounting Policies Accounting Estimates   What it is? Principles, bases, conventions, rules and practices. Amount / Patterns Examples: Change from historical cost to realisable value. Change in the useful life of depreciable asset. Accounting treatment when there is a change in Retrospectively Prospectively A change in the measurement basis applied is a change in an accounting policy, not a change in an accounting estimate. When it is difficult to distinguish between change in accounting policy and accounting estimate, the change is treated as a change in accounting estimate. Slide 9 of 18

Prior Period Errors Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: was available when financial statement for those periods were approved for issue, and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statement. Such errors include - the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Eg:- Forget to include borrowing cost in the cost of machinery. Slide 10 of 18

Accounting treatment of Prior period errors: The entity must correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by restating: the comparative amounts for the prior period presented in which the error occurred; or the opening balance of assets, liabilities and equity for the earliest period presented, if the error occurred before the earliest prior period presented unless impracticable. Immaterial prior period error can be corrected in the financial statement of the period in which it is discovered. Slide 11 of 18

Particulars Change in Accounting estimates Prior Period Errors CHANGE IN Accounting ESTIMATEs Versus PRIOR PERIOD ERRORS Particulars Change in Accounting estimates Prior Period Errors   When there is Result from new information or new developments. Result from failure to use or misuse of available information. Examples: Change in the useful life of depreciable asset. Forget to include borrowing cost in the cost of machiney. Accounting treatment when there is Prospectively Retrospectively Slide 12 of 18

Summary Accounting Policy Accounting Estimate Prior Period Error Retrospectively Retrospectively Accounting Estimate Prospectively Q. Does restatement of prior period figures amounts to voluntary revision of financial statements? A. No, as entity is restating prior period figures in the current period financial statement so it does not amounts to voluntary revision of financial statements. Slide 13 of 18

Comparision Slide 14 of 18 Sr. No. Particulars Ind AS / IFRS AS ICDS 1 Accounting Policy - Definition Wider and includes bases, conventions, rules and practices. Restricted to accounting principles and methods to apply accounting principles. Same as AS 2 Accounting Policy - Selection When an Ind AS / IFRS specifically applies to a transaction, the accounting policy applied to that transaction shall be determined by applying the respective Ind AS / IFRS, else management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. The major considerations governing the selection and application of accounting policies are:- a. Prudence b. Substance over Form c. Materiality Accounting policies should be selected after taking into account the following factors: a. Substance over Form b. Marked to market loss or an expected loss shall not be recognised. 3 Change in Accounting Policy - Criteria An Accounting policy can be changed only if the change : a) is required by an Ind AS / IFRS; or b) results in providing reliable and more relevant information about the transaction on the entity’s financial statement. An Accounting policy can be changed only if the change : a) is required by an AS; or b) is required by statute; or c) results in more appropriate presentation of the entity’s financial statement. An accounting policy shall not be changed without reasonable cause. Slide 14 of 18

Comparision Sr. No. Particulars Ind AS / IFRS AS ICDS 4 Change in Accounting Policy - Accounting treatment in absence of Transitional Provisions Rectrospectively unless impracticable. Does not specify. 5 Change in Accounting Estimate - Definition Very clear definition. Not in such clear terms. Not covered by ICDS. 6 Prior period errors - Definition Very clear and wide definition. 7 Prior period errors include frauds Specifically mentioned. Not specifically mentioned. 8 Prior period errors - Accounting treatment Retrospectively unless impracticable. Prospectively. 9 Prior period errors – Seperately reported in current year Profit and Loss Seperate disclosure not required. Seperate disclosure required. Slide 15 of 18

Presentation of Financial Statement Design of Building Ì Presentation of Financial Statement Design of Building   Accounting policies Foundation of Building Framework Boundary of Building Respective standards Floors of Building Principles of respective standards Flats at respective floor of Building Building will be strong when its foundation is strong. Similarly Financial statement will be strong when its accounting policies are strong. Here, Financial Statement will be strong means that Financial Statement comprises of Accounting Policies which are transparent, crystal clear and help users in making economic decisions. Slide 16 of 18

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Thank You Slide 18 of 18