ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND ERRORS AND

DISCLOSURES
Dr Barbara Voss
 Accounting Policies,
Changes in Accounting
Estimates and Errors
AASB 108/IAS 8
AASB 108/IAS 8

Source: IFRS Box: https://www.ifrsbox.com/ias-8-policies-estimates-errors/

Accounting policies
• AASB 108/IAS 8 defines accounting policies as:
­ ‘the specific principles, bases, conventions, rules and practices applied by
an entity in preparing and presenting financial statements’.
Disclosure of Accounting policies
 The contents of the summary of significant accounting
policies (AASB 101 para 117)
 The Standard states that the management needs to
present their judgments (AASB 101 para 122)
 The accounting policies must be part of the notes (AASB
101 para 122)
Disclosure of Accounting policies
There are five important items:
• The note must state whether the statements are prepared in accordance with:
 accounting standards or,
 interpretations of accounting standards.
• Second, the note should disclose the measurement basis or bases used in
preparing the financial statements.
• Third, the notes should provide a description of accounting policies.
• Fourth, the notes should disclose those judgements.
• Finally, the notes should disclose information about the assumptions made
concerning the future.
Changes in Accounting policies
­ Paragraph 13 of AASB 108/IAS 8 requires that an entity must apply
accounting policies consistently for similar transactions, events or
conditions unless otherwise required by an accounting standard.
­ Paragraph 14 specifies only two circumstances in which an entity is
permitted to change an accounting policy. These are:
 if the change is required by an accounting standard
 if the change, made voluntarily, 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.
Disclosure of changes in
accounting policies (para 28)
‘28 When initial application of an Australian Accounting Standard has
an effect on the current period or any prior period, would have such an
effect except that it is impracticable to determine the amount of the
adjustment, or might have an effect on future periods, an entity shall
disclose:
(a) the title of the Australian Accounting Standard;
(b) when applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
Disclosure of changes in
accounting policies (para 28)
‘(e) when applicable, the transitional provisions that might have an effect on future
periods;
(f) for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if AASB 133 Earnings per Share applies to the entity, for basic and diluted earnings
per share;
(g) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(h) if retrospective application required by paragraph 19(a) or (b) is impracticable for
a particular prior period, or for periods before those presented, the circumstances
that led to the existence of that condition and a description of how and from when
the change in accounting policy has been applied’
Accounting policies or
accounting estimates?

Source: IFRS Box: https://www.ifrsbox.com/ias-8-policies-estimates-errors/

Examples of changes in the accounting
estimates

Source: IFRS Box: https://www.ifrsbox.com/ias-8-policies-estimates-errors/

Effect of a change in
accounting estimates (para 36)
’36 The effect of a change in an accounting estimate, other than
a change to which paragraph 37 applies, shall be recognised
prospectively by including it in profit or loss in:

(a) the period of the change, if the change affects that period only; or

(b) the period of the change and future periods, if the change affects both.’
Disclosure of changes in estimates

‘39 An entity shall disclose the nature and amount of a change in an

accounting estimate that has an effect in the current period or is
expected to have an effect in future periods, except for the disclosure
of the effect on future periods when it is impracticable to estimate that
effect.

40 If the amount of the effect in future periods is not disclosed

because estimating it is impracticable, an entity shall disclose that fact.’
Errors
• Prior period errors (Paragraphs 41–49 of AASB 108/IAS 8)
­ Omissions from, and other misstatements in, the entity’s financial
statements for one or more previous reporting periods that are
discovered in the current period.
­ Such errors can occur for a number of reasons, including calculation
errors, mistakes in applying accounting policies, oversights or
misinterpretation of facts, and fraud.

Omissions Misstatements mistakes fraud

If error is material

Source: IFRS Box: https://www.ifrsbox.com/ias-8-policies-estimates-errors/

Materiality
Materiality (AASB, 2019, p. 14)
2.11 Information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of
general-purpose financial reports (see paragraph 1.5) make on the basis
of those reports, which provide financial information about a specific
reporting entity. In other words, materiality is an entity-specific aspect
of relevance based on the nature or magnitude, or both, of the items to
which the information relates in the context of an individual entity’s
financial report. Consequently, the Board cannot specify a uniform
quantitative threshold for materiality or predetermine what could be
material in a particular situation.
Discussion on Materiality
• Part of the definition of relevance under the fundamental qualitative
characteristics of the Conceptual Framework.
• Materiality is based on qualitative as well as quantitative factors.
• Materiality is also entity-specific — what is material to one entity
may not be material to another.
• The IASB did not see it appropriate to specify quantitative thresholds.
• But, in practice, many accountants and auditors use a quantitative
threshold.
Retrospective restatement
or retrospective application
• The terms ‘retrospective application’ and ‘retrospective restatement’
are defined in paragraph 5 of AASB 108/IAS 8:
­ 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.

Which one is
harder to apply?
Retrospective restatement
or application
• Retrospective restatement:
­ Used for the correction of a material error that occurred in a previous
period in the first financial statements issued after the discovery of the
error.

Is it practical?

• Impracticable refers to the inability of a company to apply a requirement

of AASB 108/IAS 8 after making every reasonable effort to do so.
• For example, in some circumstances the data may not have been collected in prior
periods to adjust comparative information in a way that allows retrospective
application of a new accounting policy.
Disclosure of prior period errors
’49 . . .an entity shall disclose the following:
(a) the nature of the prior period error;
(b) for each prior period presented, to the extent practicable, the amount of the
correction:
(i) for each financial statement line item affected; and
(ii) if AASB 133 applies to the entity, for basic and diluted earnings per share;
(c) the amount of the correction at the beginning of the earliest prior period
presented; and
(d) 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.
Financial statements of subsequent periods need not repeat these disclosures’
Reference

Australian Accounting Standards Board (AASB). (2021) AASB 108 Accounting

Policies, Changes in Accounting Estimates and Errors (issue date: March
2020). Retrieved from Melbourne. Available at:
https://aasb.gov.au/admin/file/content105/c9/AASB108_08-15_COMPmar20_07-21.pdf

Loftus, J., et al. (2023). Financial Reporting (4th ed.). Milton, QLD: John Wiley
and Sons Australia, Ltd. Available at: https://www.wileydirect.com.au/buy/financial-reporting/