IAS-8: Accounting Policies, Changes in Accounting

Estimates and Errors

Md Mashiur Rahaman ACA

Accounting policies Matter of choice

♦ Consistency of policies : from year to year and on items of similar nature. (IAS 16 - class of assets/ IAS 27
– Measurement of subsidiaries / associates)
♦ Changes in accounting policies:
✓ Is required by IFRS
✓ results in the financial statements providing reliable and more relevant information about the
effects of transactions, other events or conditions on the entity’s financial position, financial
performance, or cash flows.
✓ Extensive disclosure requirements
Application of accounting policy

o If a change in accounting policy is required by a new IASB standard or interpretation, the change is
accounted for as required by that new pronouncement or, if the new pronouncement does not
include specific transition provisions, then the change in accounting policy is applied
retrospectively. [IAS 8.19]

o Retrospective application means adjusting the opening balance of each affected component of
equity for the earliest prior period presented and the other comparative amounts disclosed for
each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]

o However, if it is impracticable to determine either the period-specific effects or the cumulative

effect of the change for one or more prior periods presented, the entity shall apply the new
accounting policy to the carrying amounts of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practicable, which may be the current
period, and shall make a corresponding adjustment to the opening balance of each affected
component of equity for that period. [IAS 8.24]

o Also, if it is impracticable to determine the cumulative effect, at the beginning of the current
period, of applying a new accounting policy to all prior periods, the entity shall adjust the
comparative information to apply the new accounting policy prospectively from the earliest date
practicable. [IAS 8.25]
 Matter of
Accounting estimates Judgments

Estimates : due to the inherent uncertainties regarding business activities, economic and
financial conditions. Generally affects Valuation and measurement considerations.

The effect of a change in an accounting estimate shall be recognised prospectively by

including it in profit or loss in: [IAS 8.36]
• the period of the change, if the change affects that period only, or
• the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in assets
and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount
of the related asset, liability, or equity item in the period of the change. [IAS 8.37]
Errors

♦Errors are caused arithmetic mistakes, omission, incorrect application of

accounting standards, oversights, misinterpretation of facts or any other
misrepresentation of information.
♦Only material errors are rectified retrospectively.
♦Prior year errors must be transactions/events reasonably expected to have been
obtained and taken into account while preparing previous years financial
statements.
♦Standard provides impracticability clause applicable after every reasonable effort
has been made. Impracticable if:
– Effects not determinable
– Requires information about what management’s intent would have
been
– Significant estimates when it is impossible to distinguish whether information
would’ve been expected to exists when prior period financial statements were
authorized for issue.
Previous questions
March April 2022
3. a) As an accounts manager in ABC Ltd., you are in charge of preparation of financial statements
with 31 December accounting year ends. The 2021 financial statements of the company, which are
prepared in compliance with IASs/ IFRSs, are expected to be authorized for issue in late March 2022.
Your accounts assistant manager has approached you for advice on the following cases:
i) ABC Ltd. has a building, comprising, a factory, a warehouse and an administrative office, which
was built at a cost of Taka10 crore and were put into operation starting on 1 January 2014. In
January 2021, it was discovered that the company had adopted the accounting policy of
carrying the building at cost without depreciation since the market value of the building has
been increasing. To comply with the relevant IAS/ IFRS and the company’s accounting policy,
the cost of the building should be depreciated using straight line basis over its estimated
useful life of 50 years.
ii) ABC Ltd.’s inventory is carried at cost, since cost is lower than NRV for each unit of inventory.
In the past years, the company has used the FIFO method to determine the cost of inventory.
However, in view of the escalating cost of manufacturing, the company has decided to use the
weighted average cost method to determine the cost of inventory from 1 January 2021. The
cost of inventory under the two methods at the end of 2020 and 2021 are as follows: FIFO
Tk’000 Weighted Average Cost Tk’000 At 31 December 2020 26,000 24,000 At 31 December
2021 29,000 28,000
Requirement: Identify the specific accounting issues involved in each case, and pass the relevant
journal entries for the year ended 31 December 2021. Ignore the tax effects. 4+5= 9
Thank You