Accounting Policies, Changes in

Accounting Estimates & Errors – IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

Introduction

IFRS
IAS 8 Accounting
g Policies, Changes
g in Accounting
g Estimates and Errors

Indian GAAP
AS 5 Net
N t Profit
P fit or Loss
L f the
for th Period,
P i d Prior
P i Period
P i d Items
It and
d Changes
Ch i Accounting
in A ti
Policies

Institute has classified IAS 8 under category IV - the adoption of which would require
changes in laws/regulations because compliance with such IFRSs is not possible
until the regulations/laws are amended.

Slide 2
Accounting Policies, Changes in Accounting Estimates and Errors

Objective and Scope

• Prescribes criteria for selecting and applying accounting policies

• Deals with accounting
g treatment and disclosure requirements
q of changes
g in
accounting policies, accounting estimates and correction of prior period errors

• Qualitative characteristics of Financial Statements

• Relevant
• Reliable
• Understandable
• Comparable

• Where
Wh an accounting
ti standard
t d d permits
it an entity
tit tto adopt
d t one off two
t alternative
lt ti
accounting treatments, it is important that the entity clearly indicates the alternative
that has been adopted and it should be applied consistently

Slide 3
 IAS 8 – Changes

¾ Accounting
Changes & Errors

Accounting
Errors
Changes

¾ Changes in ¾ - Balance Sheet Errors

Accounting
Accounting ¾ - Income Statement Errors
Policy
Estimates ¾ - Cash Flow Errors
Accounting Policies, Changes in Accounting Estimates & Errors

Selection of Accounting Policy - Hierarchy

• Prescribed Standard or Interpretation – IFRS, IAS, IFRIC, SIC

• Anyy relevant Implementation

p Guidance issued byy the IASB for the Standard or
Interpretation – (technically not a part of the standards)

• Guidance for similar or related issue

• Framework of IFRS

• Most recent pronouncements of other standard-setting bodies

• Oth accounting
Other ti literature
lit t and
d accepted
t d industry
i d t practices
ti

• Onus on management - select policy to make financials relevant & reliable

Slide 5
Selecting accounting policies
Accounting policies
are the specific
I. IFRS standards and interpretations principles, bases,
conventions, rules
and ppractices applied
pp
II. Apply management judgement by an entity in
preparing and
presenting financial
a) Similar areas covered by IFRS statements.
Media Company
b) The Framework -Intangible v/s inventory
Common
-How control !
to amortise
transaction
III. Other standard setters or
accepted industry practices
Accounting
g Policy
y
An entity shall disclose in the summary of significant
accounting policies:
(a) the measurement basis (or bases) used in preparing the
financial statements, and
(b) the other accounting policies used that are relevant to an
understanding of the financial statements.
• particular accounting policies is especially useful
f to users when
those policies are selected from alternatives allowed in IFRSs.
• nature of its operations and the policies that the users of its
financial statements would expect to be disclosed for that type of
entity.
Is this accounting policy acceptable?

Operating lease rentals are recognised in the income

statement as incurred

Operating lease rentals are recognised in the income

statement on a straight-line basis over the lease term.
Is this accounting policy acceptable?
Receivables are stated net of a provision for bad
debts.

Trade receivables are recognised initially at fair value

and subsequently measured at amortised cost using
the effective interest method,, less provision
p for
impairment.
Presentation of Financial statements

Notes to financial statements

Key judgments
An entity shall disclose,
disclose in the summary of significant accounting policies or other
notes, the judgment that management has made in the process of applying the
entity’s accounting policies and that have the most significant effect on the
amounts recognised
g in the financial statements.”

Estimation uncertainty

“An entity shall disclose information about the assumptions it makes about the future,
and other sources of estimation uncertainty at the end of the reporting period,
that have a significant risk of resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
year In respect of those
assets and liabilities, the notes shall include details of:
(a) their nature, and
(b) their carrying amounts as at the end of the reporting period. ”

Slide 10
Accounting Policies, Changes in Accounting Estimates & Errors

What’s the big change?

Accounting policies change: retrospective application

A
Accounting
ti estimate
ti t change:
h P
Prospective
ti application
li ti

• Change in depreciation method = prospective

Correction of errors: retrospective application

Management
g cannot assert compliance
p with IFRS if financial statements does
not comply with all prescribed accounting standards

Slide 11
Accounting Policies, Changes in Accounting Estimates and Errors

Change in Accounting
Acco nting Polic
Policy

- Change in method of amortizing actuarial gains and losses

- Change in method of presenting the statement of cash flows (i.e., direct vs. indirect)

Following are not changes in accounting policies:

9 Accounting policy for transactions that differ in substance from those previously
occurring; and
9 Application of a new accounting policy for transactions that did not occur previously
or were immaterial.

Retrospective application to all prior periods unless impracticable

Slide 12
Accounting Policies, Changes in Accounting Estimates and Errors

Correction of Error in previously Issued Financial Statements

Errors discovered subsequent to issuance of financial statement reported as a prior-

period adjustment
p j byy restating
gppreviously
y issued financial statements.

Example
• Corrections of mistakes in the application of IFRS
• Corrections of mathematical mistakes
• Oversight or misuse of facts that existed at the time the financial statements were
prepared.
prepared

Slide 13
Accounting Policies, Changes in Accounting Estimates and Errors

Correction of Error in previously Issued Financial Statements

Restatement of Prior Period

• Cumulative effect of the error on Prior periods,

periods if material

• An offsetting adjustment, if any, to the opening balance of retained earnings

• Financial statements for each individual prior period presented shall be adjusted to
reflect correction of the period-specific effects of the error.

• Effect presented in line items affected and EPS

Slide 14
Accounting Policies, Changes in Accounting Estimates and Errors

Retrospective Application Vs. Restatement

Common confusion:
Retrospective application = Restatement

Retrospective application is applying a new accounting policy to transactions, other

events and conditions as if that policy had always been applied.

Retrospective restatement is correcting the recognition, measurement and

disclosure of amounts of elements of financial statements as if a prior period error
had never occurred.

Slide 15
Example: Change in policy or estimate?

Would the following be a change in accounting policy or

change in accounting estimate?

- Change in depreciation method Estimate

- Change
Ch iin b
basis
i off overhead
h d
absorption for inventory Estimate
- Changing from writing off
actuarial gains / losses to
Corridor approach Policy
Case Study: Lets put this into practice!

Drafting of
Accounting Policy
Case study

The Company
Th C wantst your help
h l in
i d
drafting
fti an accounting
ti policy
li
for property, plant and equipments (PPE). The Company has
informed yyou that:
- They have used fair value as deemed cost exemption as on the
date of transition to IFRS for some of plant and machinery.
- Rest all the assets are measures in accordance with IFRS
- Subsequently all the assets are depreciated over their useful
life. The depreciation is computed after considering the residual
value.
Y have
You h 10 minutes
i t to t draft
d ft accounting
ti policy.
li
Accounting Policies, Changes in Accounting Estimates & Errors

GAAP Differences
Nature of IFRS Indian GAAP
Difference
Changes
g in Changes
g in accounting gppolicy
y are accounted for The cumulative amount of the changeg is
accounting policy retrospectively. Comparative information is restated, recognised and disclosed in the income
and the amount of the adjustment relating to prior statement in the period of the change. Transition
periods is adjusted against the opening balance of provisions of certain new standards require
retained earnings of the earliest year presented. adjustment of the cumulative amount of the
change to opening retained earnings (reserves).
Changes in Changes in accounting estimates are accounted for Similar to IFRS.
accounting in the income statement when identified. However, the impact of change in depreciation
estimates method is determined by retrospectively
computing depreciation under the new method,
and is recorded in the period of change whereas
on revision of asset life, the unamortised
depreciable amount is charged over the revised
remaining asset life.
Non-compliance IAS 8 specifically provides that financial statements No such specific requirement under AS 5.
with standard do not comply with IFRSs if they contain either
material errors or immaterial errors made
intentionally to achieve a particular presentation of
an entity’s financial position, financial performance
or cash flows.

Slide 19
Accounting Policies, Changes in Accounting Estimates & Errors

GAAP Differences
Nature of IFRS Indian GAAP
Difference
Treatment of Prior IAS 8 requires
q that except
p when it is impractical
p to AS 5 requires
q p
prior p
period items to be included in
period items do so, an entity shall correct material prior period the determination of net profit or loss for the
errors retrospectively in the first set of financial current period.
statements authorised for issue after their discovery
by (i) restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
(ii) if the
th error occurreddb
before
f th
the earliest
li t prior
i
period presented, restating the opening balances of
assets, liabilities and equity for the earliest prior
period presented.

Slide 20
 Any questions?

Thank You
Arpit mundra@in pwc com
Arpit.mundra@in.pwc.com
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