2 Policies, Estimates & Errors Accounting Policies: principles or conventions applied in statement preparation Estimate: Judgement applied in determining the carrying amount Error: omission or misstatement

3 Accounting policies Accounting policies: the specific principles, bases, conventions, rules and practices applied in financial statements (para 5) e.g. valuation of inventory at lower of cost or net realisable value is an accounting policy Accounting policies applied should be determined by the relevant Standards… (para 7) In the absence of a Standard management should use their judgement to develop and apply a policy that results in information that is both relevant and reliable for users (para 10)

4 Applying Policies Hierarchy of information sources when selecting/applying policies (para 11): 1. Standards and Interpretations 2. New Zealand Framework 3. Recent compatible pronouncements of other standard-setting bodies

5 Changing accounting policies Policies should be applied with consistency (para 13) and can be changed only: If required (by standard/interpretation); or to (voluntarily) provide reliable and more relevant information (para 14) If there are no transitional provisions upon application of a new requirements, changes are applied retrospectively – i.e.the new policy is applied as if it had always been in place (para 19(b))

6 Disclosures Initial application of a Standard or Interpretation requires disclosure in the year in which implemented of nature and amount of change plus transitional provisions (para 28) Voluntary changes require statement of reasons for changing (para 29) Where a new Standard has not yet been implemented, this needs to be stated and the estimated impacts disclosed (para 30)

7 Accounting Estimates A judgment applied in determining the carrying amount of an item in the financial statements e.g. estimating inventory obsolescence in line with policy on inventory valuation Other examples include estimating the allowance for bad debts or estimates of useful lives for non- current assets

8 Changing accounting estimates Accounting estimates are regularly changed as new information arises Changes in estimates require prospective application i.e. recognition in the period of change and any future periods affected (para 36) Example - the useful life of an asset is shortened due to technology changes. The depreciation already charged remains unchanged but the existing carrying amount is written off over its remaining shortened life If the change affects assets, liabilities or equity it is recognised by adjusting the carrying amount in the period of change (para 37)

9 Disclosures Must disclose the nature and amount of change in an accounting estimate for the current and future periods (para 39) If impracticable to determine the effect in future periods, then this must be disclosed (para 40)

10 Accounting errors These are usually omissions or misstatements that arise from mathematical errors, oversight, misinterpretation of facts or fraud – the Standard is concerned with prior period errors Discovered prior period errors must be corrected retrospectively by: Restating the comparative amount in the prior period; (para 42(a)) or If the errors occurred before the earliest prior period presented, restating the opening balances for the earliest prior period presented (para 42(b)).

11 Disclosures Must disclose: Nature of the prior period error The amount of the correction (as practicable) The amount of the correction at the beginning of the earliest prior period presented; And if retrospective restatement is impracticable, then why and a description of how the error has been corrected (para 49)