Topic 9 Reporting financial performance IAS 8 Accounting policies, changes in accounting estimates and errors IAS 8 governs the following topics: Selection of account policies Changes in accounting policies Changes in accounting estimates Correction of prior period errors Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-1

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Selection of Accounting Policies When an IAS applies to a transaction, management should select an accounting policy that complies with the standard/interpretation, unless the effect of non-compliance would be immaterial. In the absence of a standard or interpretation that applies, management should select accounting policy in compliance with the principles of the Framework. Applicable concepts in the decision will be substance over form, freedom from bias, and prudence. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-2

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Changes in Accounting Policies Accounting policies are normally kept the same from period to ensure comparability of financial statements over time. IAS 8 allows accounting policies to be change only if: Required by statue or an accounting standard setting body; or The change will result in a more relevant and reliable presentation of events or transactions. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-3

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Changes in Accounting Policies A change in accounting policy occurs if there has been a change in : Recognition, eg: an expense is now recognized rather than an asset Presentation, eg: depreciation is now included in cost of sales rather than administrative expense Measurement, eg: stating assets at replacement cost rather than historical cost Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-4

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Changes in Accounting Policies The required treatment for dealing with changes policies is that: The change should be applied retrospectively With an adjustment to the opening balance of retained earnings in the statement of changes in equity. Comparative information should be restated unless it is impracticable to do so. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-5

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Changes in Accounting Policies The required treatment for dealing with changes policies is that: The change should be applied retrospectively With an adjustment to the opening balance of retained earnings in the statement of changes in equity. Comparative information should be restated unless it is impracticable to do so. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-6

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Changes in Accounting Policies When a change in accounting policy has a material effect on the current period or any prior period presented, or may have a material effect in subsequent periods, the following disclosure should be made: The reason for the change The amount of the adjustment recognized in the current period The amount of the adjustment included in each period to those included in the financial statement. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-7

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors An accounting estimate is a method adopted by an entity to arrive at estimated amounts for the financial statements. Examples of changes in accounting estimates The residual value of non-current assets The useful lives of non-current assets The depreciation methods Warranty provisions Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-8

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors The effects of any change in accounting estimate should be included in the income statement of the period of the change and, if subsequent periods are affected, in those subsequent periods. The effects of the change should be included in the same income statement classification as was used for the original estimate. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-9

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors When is the difference between a policy and an estimate A change of accounting policy had occurred where there has been a change to any one of the following: Measurement basis (eg. Cost model to revaluation model) Method of presentation (eg. dep.n suppose to COS, now change to admin cost, will affect gross profit margin) Recognition criteria Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-10

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors Conversely a change that does not affect any of the above is a change in estimation technique. eg. Depreciation straight line to reducing balance Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-11

Topic 2 IAS 8 Accounting policies, changes in accounting estimates and errors 3. Correction of prior period errors Prior period errors should be corrected retrospectively by adjustment against the of retained earning in the statement of change in equity. Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 5-12