IAS 8

Accounting Policies, Changes in Accounting

Estimates and Errors
 Objective Of IAS 8
IAS 8 Prescribes the Criteria for:
ACCOUNTING POLICIES:
 Selection of accounting policies; How to Choose Accounting Policies

 Changes in accounting policies & Accounting Treatment of Changes in

Accounting Policies
 Disclosure of changes in accounting policies: Reporting Changes in
Accounting Policies
ACCOUNTING ESTIMATES:
 Changes in accounting estimates & and Reporting Changes in Accounting
Estimates
ACCOUNTING ERRORS:
 Correction of errors & Reporting the Correction of Errors
The achievement of the objective would result
in:
 Enhancement of:
 Relevance and reliability of financial
statements;

 Comparability of financial statements with the

financial statements of other entities;
 Characteristics of Accounting Policy

 In devising an accounting policy, it should be:

 Ø      Relevant;
 Ø      Reliable;
 Ø      Faithful;
 Ø      Having economic substance;
 Ø      Neutral;
 Ø      Prudent;
 Ø      Complete;
 Characteristics of Accounting Policy
 Relevant to the economic decision making needs of user;
and
 Reliable in that the financial statements:
 Represents faithfully the financial position, financial
performance and cash flows of the entity;
 Reflect the economic substance of transactions, other events
and conditions, and not merely legal form;
 Are prudent; and

 Are complete in all material respects.

WHAT ARE ACCOUNTING POLICIES?

 These are:
 Specific principles;
 Bases;
 Conventions;
 Rules;
 Practices;
 These are applied in preparing and presenting
financial statements.
 Definitions

 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.

 Impracticable: Applying a requirement is impracticable when

the entity cannot apply it after making every possible effort
 Changes in Accounting Policy
A change in accounting policy should be made
only if:
Required by a standard or an interpretation, or

Voluntary:
The change results in the financial statements
providing reliable and more relevant information
about the effects of events or transactions on the
financial position and performance and cash flows
 Changes in Accounting Policy
 A change in accounting policy which is made on the adoption of a Standard
should be accounted for:

1. In accordance with the specific transitional provisions in that Standard

2. If no transitional provisions  Retrospective Application (Any resulting

adjustment should be reported as an adjustment to the opening balance of
retained earnings and/or each component of equity. Comparative
information should be restated unless it is impracticable to do so.)

 A voluntary change in accounting policy should be applied retrospectively

Early Application is not a voluntary change

 Changes in Accounting Policy
 Retrospective Application:
 Adjust the Opening balance of each affected
component of equity for the earliest prior period
presented and the other comparative amounts disclosed
for each period presented
 As if the new accounting policy had always been
applied
 If impracticable (Undue Cost and Effort), restate
prospectively from the earliest date practicable
 Significant disclosures of changes in accounting
policies
1. The title of the standard (If the Change is Required by a
Specific Accounting Standard or IFRS)
2. Is made in accordance with the transactional provisions, if
applicable
3. The nature of the change
4. The amount of adjustment on current and each prior period
presented
5. The amount of adjustment related to periods prior to those
presented

6. For each financial statement line item affected;

7. Earnings per share – revised

 Consistency of Accounting Policies

 Consistency of Accounting Policies:

 Once Selected accounting policies should be applied

consistently for similar transactions, other events and

conditions.
 The exception to this where a IFRS requires or allows

categorization of items where different policies may be

applied to each category. Apply accounting policy for
each category consistently
 Changes in Accounting Policy: Illustration
 During 2013, Gamma Co changed its accounting policy for the
treatment of borrowing costs that are directly attributable to
the acquisition of a hydro-electric power station under
construction for use by Gamma. In previous periods, Gamma
had capitalized such costs. Gamma has now decided to treat
these costs as an expense, rather than capitalize them.
Management judges that the new policy is preferable because it
results in a more transparent treatment of finance costs and is
consistent with local industry practice, making Gamma’s
financial statements more comparable.
 Changes in Accounting Policy: Illustration
 Gamma capitalized borrowing costs incurred of $2,600 during
2012 and $5,200 during 2011. All borrowing costs incurred in
previous years in respect of the acquisition of the power
station were capitalized.

 Gamma’s accounting records for 2013 show profit before

interest and income taxes of $30,000; interest expense of
$3,000 (which relates only to 2013); and income taxes of
$8,100.

 Gamma has not yet recognized any depreciation on the power

station because it is not yet in use.
 Changes in Accounting Policy: Illustration
Income Statement of Gamma during 2012 before changes in accounting
Policy:

$
Profit before interest and income taxes 18000
Interest Expense 0
Profit before Income Taxes 18000
Income Taxes 5400
Net Income 12600
• 2012 Opening retained earnings was $20,000 (Closing balance of 2011)
and closing retained earnings was $32,600.
• Gamma’s tax rate was 30% for 2013, 2012 and prior periods.
• Gamma had $10,000 of share capital throughout, and no other
components of equity except for retained earnings. Its shares are not
publicly traded and it does not disclose earnings per share.
 Restated Income Statement of Gamma for
Year 2013 &2012 after Change in Accounting
Policy
2013 2012

Income before Interest and Income $30,000 $18,000

Taxes
Less: Interest Expense 3,000 2,600

Income before Income Taxes 27,000 15,400

Less: Income Taxes 8,100 4,620

Net Income 18,900 10,780

 Statement of changes in equity after change
Share Retained Total
Capital Earnings

Balance as of December 31, 2011 as previously $10,000 $20,000 $30,000

reported

Changes in Accounting Policy for the (3,640) (3,640)

Capitalization of Interest *Note 1

Balance at December 31, 2011 Restated 10,000 16,360 26,360

Profit for the year ended December 31, 2012 10,780 10,780
Restated

Balance at December 31, 2012 Restated 10,000 27,140 37,140

Profit for the year ended December 31, 2013 18,900 18,900

Balance at December 31, 2013 10,000 46,040 56,040

 Notes to the financial Statement
During 2013, Gamma changed its accounting policy for the treatment of borrowing costs
related to a hydro-electric power station under construction for use by Gamma.
Previously, Gamma capitalized such costs. They are now written off as expenses as
incurred. Management judges that this policy provides reliable and more relevant
information because it results in a more transparent treatment of finance costs and is
consistent with local industry practice, making Gamma’s financial statements more
comparable. This change in accounting policy has been accounted for retrospectively, and
the comparative statements for 2012 have been restated. The effect of the change on 2012
is tabulated below. Opening retained earnings for 2012 have been reduced by $3,640,
which is the amount of the adjustment relating to period 2011.

Note 1: Impact on Net Income of 2011:

Interest Expenses (2011) $5,600
Less: Taxes 1,560
Net decrease in Net Income 3,640
 Changes in Accounting Policy
 PROSPECTIVE APPLICATION:
 Prospective application of a change in accounting policy
and of recognizing the effect of a change in an
accounting estimate, respectively, are:
 Applying the new accounting policy to transactions, other
events and conditions occurring after the date as at which
the policy is changed; and.
 Recognizing the effect of the change in the accounting
estimate in the current and future periods affected by the
change.
 Changes in Accounting Policy – Prospective
Application – Retrospective Application is not
Practicable - Illustration
 During 2013, Delta Co changed its accounting policy for depreciating

property, plant and equipment, so as to apply much more fully a components

approach, whilst at the same time adopting the revaluation model.

 In years before 2013, Delta’s asset records were not sufficiently detailed to

apply a components approach fully. At the end of 2012, management

commissioned an engineering survey, which provided information on the

components held and their fair values, useful lives, estimated residual values

and depreciable amounts at the beginning of 2013.

 Changes in Accounting Policy – Prospective
Application – Retrospective Application is not
Practicable - Illustration
 However, the survey did not provide a sufficient basis for reliably
estimating the cost of those components that had not previously been
accounted for separately, and the existing records before the survey did not
permit this information to be reconstructed.
 Delta’s management considered how to account for each of the two aspects
of the accounting change. They determined that it was not practicable to
account for the change to a fuller components approach retrospectively, or to
account for that change prospectively from any earlier date than the start of
2013. Also, the change from a cost model to a revaluation model is
required to be accounted for prospectively. Therefore, management
concluded that it should apply Delta’s new policy prospectively from the
start of 2013.
 Additional Information

Delta's Tax Rate is 30% $

Property, Plant & Equipment at the end of 2012
Cost 25,000
Accumulated Depreciation 14,000
Net Book Value 11,000
Prospective Depreciation Expense for 2013 (Existing Policy) 1,500
Some Results from the Engineering Survey
Revalued Amount of Property, Plant & Equipment 17,000
Salvage Value at the end of Life 3000
Remaining Useful Life 7 Years
Depreciation Expense on Existing PP&E under new Policy 2,000
 Notes to the Financial Statements: Changes in
Accounting Policy – Prospective Application
 From the start of 2013, Delta changed its accounting policy for depreciating
property, plant and equipment, so as to apply much more fully a components
approach, whilst at the same time adopting the revaluation model.
Management takes the view that this policy provides reliable and more
relevant information because it deals more accurately with the components
of property, plant and equipment and is based on up-to-date values. The
policy has been applied prospectively from the start of 2013 because it was
not practicable to estimate the effects of applying the policy either
retrospectively, or prospectively from any earlier date. Accordingly, the
adoption of the new policy has no effect on prior years.
 Notes to the Financial Statements: Changes in
Accounting Policy – Prospective Application

 The effect on the current year is to

 Increase the carrying amount of property, plant and

equipment at the start of the year by 6,000;
 Increase the opening deferred tax provision by 1,800
(6000*0.3);
 Create a revaluation reserve at the start of the year of 4,200
(6000 – 1800);
 Increase depreciation expense by 500 (2000 – 1500); and

 Reduce tax expense by 150 (2000 – 1500)*0.3.

 Accounting Estimate
 Accounting Estimates arise in relation to business activities because of
the uncertainties inherent within them.
 Judgments are made based on the latest available reliable
information.
 The use of such estimates is a necessary part of the preparation of
Financial Statements.
 Some Example of Accounting Estimates:

1. A necessary Bad Debt Allowance

2. Useful Working Lives of Depreciable Assets

3. Adjustments for Obsolescence of Inventory

4. Fair market value of Financial Assets and Liabilities

 CHANGE IN ACCOUNTING ESTIMATE
An adjustment of carrying amount of an asset or liability;

An adjustment of the amount of periodic consumption of an asset; that

results from:
 The assessment of the present status of assets and liabilities

 Expected future benefits of assets

 Obligations associated with liabilities

 Change in accounting estimates result from:

 New information; or

 New developments

Changes in Accounting Estimates are NOT corrections of errors

 Accounting Treatment of Changes in
Accounting Estimates
 Ø  The effect of changes accounting estimates should be
included in the determination of Net Income or Loss in:    
 Ø  The period of the change, if the change affects that
periods only, or   
 Ø The period of the change and future periods, if
changes affects both    
This suggest that the Accounting Treatment for
effect of Changes in Accounting Estimates is to be
recognized Prospectively
Changes in Accounting Estimate - Illustration

 Management estimates that provision for doubtful debts is

estimated up to 5 percent of the total population of trade
debts. However, upon identifying the age of the trade
debts, it revealed that bad debts are about 6.5 percent of
total population of trade debts. Management immediately
recognizes the increase in bad debts expense in the books
of accounts.
 DISCLOSURE REQUIREMENTS OF CHANGE IN
ACCOUNTING ESTIMATE

 Where a change in an Accounting Estimate has a material

effect in the current period or expected to have a material
effect in the subsequent periods the following should be
disclosed:

 Ø Nature and amount of a change in an accounting estimate

for the current year and future period if practicable

 Ø If estimation is impracticable, disclosure of this fact

 PRIOR PERIOD ERRORS
 Ø Omissions from; or

 Ø  Misstatements in

 The financial statements for one or more prior periods arising from:

 Ø Failure to use or misuse of reliable information that was

available when financial statements for those periods were
authorized for issue;

 Ø Failure to use or misuse of reliable information that could

reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.
 Examples of prior period errors are:

 Ø Effect of mathematical mistakes

 Ø Mistakes in applying accounting policies

 Ø Oversight and misinterpretation of facts and

fraud.
 Rectification Criteria
 An entity shall correct material prior period errors
retrospectively in the first set of financial statements
authorized for issue after their discovery by:
 Ø Restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
 Ø  If the error occurred before the earliest prior
period presented, restating the opening balances of
assets, liabilities and equity for the earliest prior
period presented.
 DISCLOSURE REQUIREMENTS
 Ø Nature of the prior period error
 Ø To the extent practicable, the amount of the correction:

o       For each financial statement line item affected; and

o       Revision in earnings per share (EPS)

 Ø The amount of the correction at the beginning of the earliest prior

period presented; and

 Ø If retrospective restatement is impracticable for a particular prior

period, the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
 Problem: Changes in Accounting Policy
 (a) All Change Co. Inc. changed its accounting policy in
2013 with respect to the valuation of inventories. Up to
2012, inventories were valued using a weighted-average
cost (WAC) method. In 2013 the method was changed to
first-in, first-out (FIFO), as it was considered to more
accurately reflect the usage and flow of inventories in the
economic cycle. The impact on inventory valuation was
determined to be
 At December 31, 2011: an increase of $10,000
 At December 31, 2012: an increase of $15,000
 At December 31, 2013: an increase of $20,000
 Problem: Changes in Accounting Policy
 (b) The income statements prior to adjustment are 2013 & 2012
 Revenue $250,000 $200,000
 Cost of sales 100,000 80,000
 Gross profit 150,000 120,000
 Administration costs 60,000 50,000
 Selling and distribution costs 25,000 15,000
 Net profit $65,000 $55,000
  
 Required
 Present the change in accounting policy in the Income Statement and
the Statement of Changes in Equity in accordance with requirements
of IAS 8.
Problem: Changes in Accounting Policy:

Linton Company commenced business three years ago, on January 1, 2011. The following
information is extracted from its Balance Sheets of last three years:

2013 2012 2011

Non-Current Assets:
Property, Plant & Equipment (PP&E) $23100 $23000 $18000
Other 16900 12000 12000
Total 40000 35000 30000
Current Assets:
Various Current Assets 80000 80000 80000
Total Assets 120000 115000 110000
Liabilities & Owners Equity
Owners Equity:
Common Stock 10000 10000 10000
Retained Earnings 45000 40000 35000
Total Equity 55000 50000 45000
Liabilities:
Non-Current Liabilities 45000 45000 45000
Current Liabilities 20000 20000 20000
Total Liabilities 65000 65000 65000
Total Liabilities & Equity 120000 115000 110000
Additional Information:

a. The Net Income for each of the last three years was: $50,000.
b. The movements on PP&E were as follows:
2013 2012 2011
Opening Balance 23000 18000 0
Additions 8000 9000 18000
Interest Capitalized 1000 1000 2000
Total 32000 28000 20000
Accumulated Depreciation 8900 5000 2000
Closing Balance 23100 23000 18000

c. PP&E is depreciated at the rate of 10% on cost per annum.

d. The directors now believe that more relevant information would be provided if interest
was not capitalized, so the decision has been made to change the accounting policy and to
recognize all interest as expenses in the year in which it is incurred.

Required:

Prepare the revised Balance Sheets at December 31 of each year, together with extracts from the
statement of changes in equity for each of the three years ended.