Section 10 Accounting Polices, Estimates and Errors The IFRS for SMEs Section 10 Accounting Polices, Estimates and Errors By: Olonje 11/7/2018

Section 10 - Scope Section 10 Provides guidance for selecting and applying the accounting policies Specifies accounting for changes in accounting estimates corrections of errors in prior period financial statements By: Olonje 11/7/2018

Section 10 – accounting policies hierarchy Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. If IFRS for SMEs addresses an issue, must follow IFRS for SMEs If not; choose policy that results in most relevant and reliable information by; 1st try to analogise from requirements in other sections 2nd use concepts/pervasive principles in Section 2 may also (not required) look to full IFRSs By: Olonje 11/7/2018

Section 10-accounting policies hierarchy Example 1: A received a grant of Kshs. 500,000 from a non‑government development agency to set up farming operations in a specified rural area. IFRS for SMEs does not specify how to account for a grant from a non‑government agency. However, it specifies how to account for government grants (Section 24 Government Grants). By analogy, A should account for the grant received in accordance with Section 24. By: Olonje 11/7/2018

Section 10- Consistency of Accounting policies Select and apply its accounting policies consistently for similar transactions, other events and conditions Change accounting policy only if; is required by change to IFRS for SMEs (compulsory) results in reliable and more relevant information (voluntary) By: Olonje 11/7/2018

Section 10- Accounting policies Example 2: A measures invest’s in associates at fair value. Because it cannot determine the fair value of its investment in associate B, it measures it using the cost model. A’s accounting policy is acceptable. Section 14-Investment in Associates; requires A choose cost, equity method, or fair value. If choose fair value still use cost for investments if impracticable to measure fair value reliably without undue cost or effort (see paragraph 14.10). By: Olonje 11/7/2018

Section 10- Accounting policies Example 3: A’s accounting policy = account for investments in associates at fair value and jointly controlled entities at cost. None of A’s investments are traded in a public securities market. A’s accounting policies are acceptable. Its policy for associates need not be the same as its policy for jointly controlled entities. By: Olonje 11/7/2018

Section 10 – change in accounting policy Change accounting policy if if mandated, follow the transition guidance as mandated if voluntary, retrospective application impracticability exemption apply new accounting policy on the carrying value of assets or liabilities at the beginning of the earliest period Disclosures By: Olonje 11/7/2018

Section 10 – retrospective application Example 4: In 20X7 A voluntarily changed an accounting policy. The cumulative effect of the change is a decrease of Kshs. 100,000 in retained earnings at 1/1/20X7 (i.e. Kshs. 25,000 less profit for each of the past four years). The entity presents two years of comparative information. Presented as a restatement of: –retained earnings at 1/1/20X5—reduce by Kshs. 50,000 –profit 20X5 & 20X6—reduce by Kshs. 25,000 each By: Olonje 11/7/2018

Section 10 – impracticability exemption Example 5: Facts same as Example 4. Except, it is impracticable to determine the individual period effects of the change of policy. Presented as a restatement of: –retained earnings at 1/1/20X7—reduce by Kshs.100,000 (no adjustment to 20X5 & 20X6) –additional disclosures By: Olonje 11/7/2018

Section 10 – accounting estimate The use of reasonable estimates is an essential part of accounting. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. By: Olonje 11/7/2018

Section 10- Errors Prior period errors are omissions from, and misstatements in, financial statements for prior periods arising from a failure to use, or misuse of, reliable information that: was available when financial statements for those periods were authorised for issue, and could reasonably be expected to have been obtained and taken into account in the preparation & presentation of those financial statements. By: Olonje 11/7/2018

Section 10 – change in estimate Account for changes in accounting estimates prospectively Disclose nature of change and the effect of the change on assets, liabilities, income and expense for the current period if practicable, estimates of the effect of the change in one or more future periods By: Olonje 11/7/2018

Section 10 – correcting errors Correct prior period errors retrospectively (i.e. restate comparative figures) Disclose nature of the error financial effects (each line-item) an explanation if it is not practicable to determine the financial effects By: Olonje 11/7/2018

Section 10 – change in estimate Example 6: On 1/1/20X1 A buys yacht for Kshs. 1,000,000. Useful life = 30 years. Residual value = Kshs. 100,000. Straight‑line method of depreciation. At 31/12/20X9, as a result of research in 20X9, A reassessed the yacht as follows: useful life at 20 years from 1/1/20X1; residual value at nil; fair value at Kshs. 800,000; and straight-line depreciation as most appropriate method. By: Olonje 11/7/2018

Section 10 – change in estimate Example 6 continued: The reassessment of the yacht’s useful life and its residual value are changes in accounting estimates. The revised assessments are appropriately made on the basis of new information that arose from research performed in the current reporting period—20X9. By: Olonje 11/7/2018

Section 10 – prior period error Example 7: Same as Example 6, except, the research was publicly available in late 20X5. A believed the research to be valid but chose to ignore it until 20X9. A’s 20X5–20X8 financial statements include errors. The comparative figures in its 20X9 financial statements must be restated to correct the effects of the prior period errors [if material]. By: Olonje 11/7/2018