CHANGES IN ACCOUNTING ESTIMATES IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

What is IAS 8 meant for How to select Accounting policies How to change Accounting policies Accounting and disclosure aspects on (a) Change in Accounting policies (b) Change in Accounting estimates © Prior period errors But disclosure on Accounting policies is covered by IAS 1- Presentation of Financial Statements

How is an Accounting Policy IFRS compliant When the Accounting policy is in compliance of the IFRS, which is relevant to the transaction or event When no IFRS is applicable, the policy must adhere to the basic principles laid down in the “framework” and must result in reliable and relevant information for the economic use of users. When no IFRS is in place (a) Guidance issued by IFRS on similar or related transactions or (b) Standards issued by other standard setters, provided they are consistent with the IFRS frame work also can be used

Is departure from IFRS always a matter of noncompliance Only material items( in terms of volume or value) need to be IFRS compliant. Any departure, the effect of which ,would have influenced the decision making of the user of the financial statement is, material. Even non material departures if done only to achieve a particular result or presentation is not permissible

Can the policy be different for different types of transactions Basic principle is that uniform policy be consistently used for similar transactions , for eg- accounting of fixed assets, valuation of inventory etc.. Certain IFRSs allow different options in the measurement and recognition of specified transactions . In such cases adoption of different policies for different categories with in those similar transactions is ,allowed. For eg- land and buildings followed revaluation method and other assets followed historical cost

When can the accounting policy be changed When an IFRS requires a policy change or When the management feels that reliable and more relevant information would be presented with a changed Accounting policy

New kind of transactions X ltd , was using electricity generated from captive plant for its steel plant and was charging Rs 2.00 per unit as transfer pricing charge. No revenue was booked on account of power .Total cost of power generation was charged as cost of production . The company started selling power in the current year at Rs 3.00 per unit to SEB and started charging proportionate cost to Power division. Is this a change of policy No .The transaction of power sales in substance is different from earlier ones. So identification of associated costs and its accounting becomes a new event although these costs were being incurred even in past.

Accounting requirements on change in accounting policy If change is to comply with initial application of an IFRS, apply transition provisions in that IFRS If no transition provisions in IFRS or if change is voluntary, then retrospective application If retrospective application impracticable, effect the change from earliest possible date If that too is not practicable, then prospective application

How is retrospective application Retrospective application requires finding out period specific effect of change in each line item including components in equity Figures for all the years are reworked as if the changed policy was in place right from beginning and arrive at the changed opening balances in the comparatives. Minimum three balance sheets and two income statements are to be presented in the case of change as per IAS 1 Balance sheets for Current year , previous year and of earliest possible date on which change effected are to be presented.

Adoption of revaluation method A Ltd decided to change the accounting for fixed assets and intangible assets from carrying cost method to Revaluation method. How is IAS 8 applicable here. It is a change of accounting policy .Yet it has to be dealt under IAS 16 and IAS 38 as applicable for revaluation. Fair value on the date of revaluation less subsequent accumulated depreciation be presented in balance sheet. Revaluation surplus goes to OCI part. But revaluation loss charged to separate income statement Depreciation and remaining useful life be reassessed every year and change in depreciation is a change of estimate with in IAS8 , unlike in AS 5 .

Method of depreciation changed X Ltd decided on 1-1-09 to change the method of depreciation from “SLM” to “No of units produced” in the case of plant machinery as the management believes it as more representative of the economic affairs. Is this a change of accounting policy . How to account for it. Unlike in AS 6 and AS 5, change of method of depreciation is mere change of estimate as per IAS 16 and IAS 8. Therefore this is not a change of accounting policy. Therefore future depreciation only will under go changes

Accounting policy changed to comply with IFRS Presentation of employees retirement liabilities was changed to show present value of obligation and fair value of corresponding asset separately in liabilities and asset side respectively (as they were not plan assets), instead of netting them off. This change is in order to comply with IAS 19. But it is not for initial application and therefore transitory provisions are not applicable. Therefore the policy change is in order to rectify an incorrect policy followed thus far. There retrospective change is necessary here by restating the comparatives.

Voluntary change Policy on allocation of Staff costs amongst various profit centers and projects was changed to present more relevant and reliable financial information to users of financial statements. The change has significantly increased the operating profit of the current year . It is not practical to estimate the effect of the change in the earlier years, according to the management. IAS 8 requires the comparatives of the previous years be changed , after giving effect to the impact of the change , to each affected line item, right from the beginning. In the event of impracticability prospective application be made from the earliest possible date. Reasoning of impracticability be disclosed. The case in discussion is unlikely to have an impracticable situation for past data collection.

Earlier application of IFRS Before the effective date , an IFRS was applied . Transition provisions were not followed (that required adjustment to retained earnings for the past effect of difference in liabilities). It was considered as a voluntary change ,and stated the reason that it is not practical to find out the year wise impact of change in the prior period. Prospective application was made. This is not correct according to IAS 8 .Earlier application of IFRS is not voluntary application. Transition provisions in the IFRS is applicable

Policy change due to statutory needs An accounting policy was to be changed in order to comply with regulatory requirement. “Framework” prescribes that the statutory requirements shall not affect financial statements unless other users are benefited by such changes. It has to be assumed that all are benefited by the change. Unlike in AS 5, IAS 8 does not envisage a change in policy on account of statutory needs. Yet this has to be considered as a voluntary change, in view of the guidance in ‘Framework’

Disclosure if the change necessitated by IFRS Title of IFRS and transitional provisions Nature of change in Accounting policy Description of transitional provisions and effect if any on future results Quantitative details of changes in line items as a result of policy change including EPS impact Adjustment effect relating to prior period Retrospective application if impractical, those circumstances and description regarding the date from which change effected

Disclosure if the change is voluntary Nature of change in Accounting policy How does the change present reliable and more relevant information Quantitative details of changes in line items as a result of policy change including EPS impact for current period and each previous period presented Adjustment effect relating to periods prior to the one presented Retrospective application if impractical, those circumstances and description regarding the date from which change effected

Disclosure on IFRS not yet effective IFRS issued but not yet effective and not yet applied be disclosed with its title , nature, date of application, date of proposed implementation Likely impact when it would be implemented

How is a change in accounting policy different in IFRS regime AS 5 does not require restatement of comparatives Material impact if any and its adjustment be shown in the current year financials Disclosure requirements are detailed in IAS 8

Change of estimate It is the result of certain new information which was not considered when the estimates were made originally . Therefore they are not any errors A change on the basis of measurement is not any change of estimate it is a change in policy ( except in case of depreciation where IAS 16 considers it as an estimate change)

Change in estimate or change of policy Warrantee provisions used to be reckoned at 2% of the unexpired warrantees. In the event of high incidence of claims, it was revised to 3% from FY 2008 onwards. Change in measurement basis is a change in Accounting policy Here the warranty provisions used to be made on estimated basis and the revision was the result of new circumstances When there is difficulty to distinguish between change in policy and change in estimate , it is considered as change in estimate So it requires to be effected prospectively in the books

How to give effect to change in estimate Effect of change in assets, liabilities or equity to be made in the carrying amount of the respective items in the period of change Effect of revenue in the income statement of the period of change and if it affects the future , in all those future periods.

Disclosure on change in estimate Nature and quantitative effect of change in estimate in current period and for future If its impracticable to estimate future effect, disclosure to that effect

How is change in estimate different under IFRS No significant difference

Errors Errors can be in measurement , recognition, presentation or disclosure Material errors make financial statement non compliant with IFRS Non material errors intentionally made to achieve a particular presentation also is non compliant with IFRS

How are material prior period errors rectified Material prior period items be corrected by restating the financial statement of the year , in which the error occurred If the error pertains to other periods than the earliest period presented in the comparatives, change the opening balances of all line items affected by such errors.

What if retrospective restatement is impracticable If period specific effects of a past error cannot be determined, then opening balances of assets liabilities and equity for the earliest period possible, be restated If restatement of opening balances of current period is impracticable, restate the effect of rectification prospectively from earliest date possible

Should the rectification of error affect current year profit No. IAS 8 does not prescribe any adjustment in the current year profit for past period errors. Only restatement of comparatives is necessary However in AS 5 prior period items are taken to current year profit and loss account and separately shown. As per AS 5 appropriate disclosure is warranted.

Erroneous application of an accounting policy It was detected that an accounting policy was incorrectly applied for many years. Management finds it impracticable to find out the impact in opening balances .Management has decided to apply the change prospectively and disregard the cumulative effect in the assets, liabilities and equity till the date of change. IAS 8 allows such a step , provided the management discloses the circumstances and other details of the impracticability, that they encounter

Erroneous Inventory valuation X Ltd detected during inventory valuation as on 31-3-2009 that sales recognized in 2006-07 for which stocks amounted to Rs.10.00 L were appropriated but not delivered at the instruction of buyer was reckoned as part of inventory as on 31-3-07. Tax rate is 30% Rectification while presenting financials of 2008-09, requires restatement of financials of 2006-07 and 2007-08. 06-07 07-08 08-09 Inventory down Rs 10.00L Consequential effect in this yr No effect except carrying correct opening stock, reserves etc.. Carried to this year Tax liability down Rs 3.00 L Reserves down Rs 7.00 L

Estimate error or past period error A loss was provided against a contingent event which was found to be short materially in the subsequent period. This is more of an estimation error rather than an omission or oversight Therefore correction in the current period is possible

Disclosure on past errors Nature of prior period error Quantitative year wise break up of the error effect including that in EPS Amount of correction in the beginning of the earliest prior period Circumstances of impracticability if restatement not done

Provisions against receivables no longer required Reversal of provision is the result of change of estimate. Impact has to be in current year profit Whether it has to be an income or adjustment against current year provision in the balance sheet depends on management policy . Showing as many material items as separate line items in Income statement is allowed by IAS 1 Yet, more practical way is to set off against current year expenses

How is treatment of prior period error different under IFRS AS 5 prescribes adjustment in current year profits, but separately IAS 8 requires restatement of comparative data, and no adjustment to current year profit Disclosure requirements in IAS 8 detailed

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