International Accounting

S d d (IAS)-
Standard (IAS) 8

The
e sta
standard
da d dea
deals
s with
t

Accounting estimates Errors

Accounting policies
 International Accounting
S d d (IAS)-
Standard (IAS) 8
The standard deals with:
1.The criteria for selecting and changing
Accounting policies,
policies together with the
accounting treatment and disclosure of
changes in accounting policies
2. Changes in accounting estimates and
3. corrections of Errors
 Accounting policies
-Selection-
S l ti
• When an IFRS specifically applies
• Accounting policies t a transaction,
to t ti other
th eventt or
are the “specific condition, the accounting policy or
policies applied to that item shall be
principles, bases, determined by applying the IFRS.

conventions, rules
and practices” • In the absence, management
applied
li d by
b an entity
tit shall use its judgment in
developing and applying an
in preparing and accounting policy that
presenting financial results in information that is
statements “relevant and reliable”
 Accounting policies
-Selection-
S l ti
Management
g shall refer to,, and consider the applicability
pp y of,, the following
g
sources in following order while making judgment:

(a) the requirements in IFRSs dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework and

(to the extent that the ffollowing

g do not conflict
f with
requirements of other IFRSs and Framework)-
(c) management may also consider the most recent pronouncements of “other standard-
setting bodies” that use a similar conceptual framework to develop accounting
standards,
(d) other accounting literature and accepted industry practices,
(e) Guidance in Exposure drafts or in new standards but with care.
 Accounting policies
-Application-
A li i
• Consistency of accounting policies
• An entity shall select and apply its accounting
policies consistently for similar transactions, other
events and conditions, unless

If an IFRS requires or
permits such categorization,
an IFRS specifically
p y requires
q an appropriate accounting
Or “permits categorization” policy shall be selected and
with different policies applied consistently
to that category
 Changes in accounting policies
-Allowed
All d or Not-
N
An entity shall change an accounting policy only if the change:
• (a) is required by an IFRS; or
• (b) results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events or
conditions on the entity
entity’s
s financial position, financial performance or
cash flows.

The following are not changes in accounting policies:

• (a) “transactions
transactions, other events or conditions that differ in substance from
those previously occurring”; and
• (b) the application of a new accounting policy for transactions, other events
or conditions that did not occur previously or were immaterial.

• The initial application of a policy to revalue assets in accordance with

IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets is a
change in an accounting policy to be dealt with as a revaluation in
accordance with IAS 16 or IAS 38 rather than in accordance with this
Standard.
 Allowed changes in accounting policies
-How
H applied-
li d
‰ change in accounting policy resulting from the initial
application
li ti off an IFRS in i accordance
d with
ith th
the specific
ifi
transitional provisions,
[For example—IFRS 2 (share-based payment)

‰ IFRS that does not include specific transitional

provisions applying to that change
[For example —IAS 41 Agriculture]
or changes an accounting policy voluntarily,
[For example
example—IAS IAS 40 Investment Property]
it shall apply the change retrospectively.

(It mustt be
b noted
t d that
th t early
l application
li ti off an IFRS is
i nott a
voluntary change in accounting policy. )
 Applying changes in accounting
policies
li i
Retrospective application
• Subject to limitation, when a change in
accounting g policy
p y is applied
pp retrospectively,
p y,
the entity shall adjust 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.
 Applying changes in accounting
policies
li i
• Limitation on retrospective
p application:
pp
where it is impracticable to determine either
the period-specific effects or the cumulative
effect
ff t off th
the change,
h then
th change
h shall
h ll be
b
applied from as the beginning of the earliest
period for which retrospective application is
practicable, which may be the current period.
Applying a requirement is impracticable when
the entity cannot apply it after making every
reasonable effort to do so
 Disclosure
• Nature of the change in policy
• Amount of adjustment for each line item
affected within the financial statements
• If retrospective restatement is not
practicable.
ti bl
 2. Changes in accounting
estimates
i
• As a result of the uncertainties inherent in business activities, many
items in financial statements cannot be measured with precision but
can only be estimated.

• Estimation involves jjudgments

g based on the latest available,, reliable
information.
• For example, estimates may be required of:
(a) bad debts;
(b) iinventory
t obsolescence;
b l
(c) the fair value of financial assets or financial liabilities;
(d) the useful lives of, or expected pattern of consumption of the
future economic benefits embodied in, in depreciable assets; and
(e) warranty obligations
 Changes in an Accounting
estimates
i
• An estimate mayy need revision if changesg occur in the
circumstances on which the estimate was based or as a
result of new information or more experience.
By its nature, the revision of an estimate does not relate
to prior periods and is not the correction of an error.
• A change in the measurement basis applied is a change
in an accounting policy
policy, and is not a change in an
accounting estimate.
• When it is difficult to distinguish a change in an
accounting
ti policy
li from
f a change
h i an accounting
in ti
estimate, the change is treated as a change in an
accounting estimate.
 Change in an Accounting
E i
Estimate
• The effect of a change in an accounting
estimate shall be recognized prospectively
by including it in current and future (where
relevant) profit or loss.
• 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
shall be recognized by adjusting the carrying
amount of the related asset, liability or equity
item in the period of the change.
 Disclosures
• Nature and amount of change
• Impracticable determination of effect on
future periods
 Errors
Errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements.
Prior period errors are omissions from
from, and misstatements in
in, the entit
entity’s
’s
financial statements for one or more prior periods arising from a
failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were
authorized for issue and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.

Examples :
1. mathematical mistakes,
2. “mistakes in applying accounting policies”,
3. oversights or
4. misinterpretations of facts, and
5. “fraud”
 Correction of Errors
• An entityy shall correct material p
prior period
p
errors retrospectively in the first set of
financial statements authorized for issue
after their discovery by:
(a) restating the comparative amounts for the
prior period (s) presented in which the error
occurred; or
(b) 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
presented.
 Correcting an Error
• Where it is impracticable
p to determine either the
period-specific effects or the cumulative effect of the
error, then change shall be applied from the beginning
of the earliest p
period for which retrospective
p
application is practicable, which may be the current
period.

• Hindsight should not be used when applying a new

accounting policy to, or correcting amounts for, a
prior period
period, either in making assumptions about what
management’s intentions would have been in a prior
period or estimating the amounts recognized,
measured or disclosed in a prior period
period.
Disclosure of prior period errors
• the nature of the prior period error .
• for each prior period presented, to the
extent practicable
practicable, the amount of the
correction
• the
th circumstances
i t th
thatt led
l d tto th
the existence
i t
of condition of impracticability.
IAS 23 Borrowing Costs
• In March 2007 the IASB
i
issued d a revised
i d IAS 23.
23
Its effective date is
1 January 2009.
• Borrowing
B i costs t that
th t are
directly attributable to
the acquisition,
construction or
production of a
qualifying asset form
“part
p of the cost of that
asset”. Other borrowing
costs are recognized as
an expense
 Borrowing Costs-Scope
Costs Scope
• An entity is not • aqqualifying
y g asset measured
required to apply the at fair value for example a
biological asset
Standard to
• inventories that are
borrowing costs
manufactured, or
directly attributable otherwise produced, in
t the
to th acquisition,
i iti large quantities on a
construction or repetitive basis
production of: • The Standard
Th St d d d does
not deal with the
actual or implied cost
off equity, including
preferred capital not
classified as a liability
 Definitions
Borrowing costs are interest and other costs that an entity incurs in
connection with the borrowing of funds
funds.
A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. For
example:
(a) Inventories
(b) manufacturing plants
(c) power generation facilities
(d) intangible
i t ibl assetst
(e) investment properties.

Non-qualified
Non qualified Assets can include:
Financial assets, and inventories that are manufactured, or
otherwise produced, over a short period of time, are not qualifying
assets.
Assets that are ready for their intended use or sale when acquired
are not qualifying assets.
 Definitions
• Borrowing g costs mayy include:
(a) interest expense calculated using the effective
interest method as described in IAS 39
Financial Instruments: Recognition and
Measurement;
(b) finance charges in respect of finance leases
recognized
i d iin accordance
d with
ith IAS 17 Leases;
L
and
(c) eexchange
c a ge d differences
e e ces aarising
s g fromo foreign
o eg
currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
 Recognition
• Borrowing g costs that are directly
y attributable to the
acquisition, construction or production of a
qualifying asset form part of the cost of that asset.
Other borrowing costs are recognized as an expense

1. directly attributable means that would have been

avoided
id d if th
the expenditure
dit on th
the qualifying
lif i assett h
had
d
not been made. It includes both the specific borrowing
and general purpose borrowings.
2. Qualifying asset
3. Borrowing costs
 Recognition commencement
Recognition-commencement
An entity shall begin capitalising borrowing costs as part of the
cost of a qualifying asset on the commencement date date.
The commencement date for capitalisation is the date when the
entity first meets all of the following conditions:
((a)) it incurs expenditures
p for the asset;;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset
for its intended use or sale.

Expenditures are reduced by any progress payments received

and grants received in connection with the asset (see IAS 20
Accountingg for Government Grants and Disclosure of
Government Assistance).
 Recognition
-Suspension
S i anddC Cessation-
i
• Suspension of capitalization :
An entity shall suspend capitalization of
borrowing g costs duringg extended periods
p in
which it suspends active development of a
qualifying asset.
• Cessation of capitalisation
An entity shall cease capitalising borrowing
costs when substantially all the activities
necessary to prepare the qualifying asset for
it intended
its i t d d use or salel are complete.
l t
 Recognition
-Suspension
S i anddC Cessation-
i
• When an entity completes the
construction of a qualifying asset in
parts and each part is capable of being
used while construction continues on
other parts
parts, the entity shall cease
capitalising borrowing costs when it
completes substantially all the
activities necessary to prepare that part
for its intended use or sale
 MEASUREMENT

Borrowed funds

From the general

Specifically for the Pool of borrowing
Asset and applied to the
Asset.
Asset
 MEASUREMENT
• To the extent that an entity
y borrows funds
specifically for the purpose of obtaining a
qualifying asset,
- The
Th entity
tit shall
h ll determine
d t i the
th amountt off
borrowing costs eligible for capitalization as
the actual borrowing costs incurred on that
borrowing during the period
less
- any investment income on the temporary
investment of those borrowings
 MEASUREMENT
• To the extent that an entity borrows funds generally and uses them
for the purpose of obtaining a qualifying asset, the entity shall
determine the amount of borrowing costs eligible for capitalisation
by applying a capitalisation rate to the expenditures on that asset.

1. The capitalization rate shall be the weighted average of the

borrowing costs applicable to the borrowings of the entity that are
outstandingg during g the period,
p , other than borrowings
g made
specifically for the purpose of obtaining a qualifying asset. The
amount of borrowing costs that an entity capitalizes during a
period shall not exceed the amount of borrowing costs it incurred
g that period.
during p

2. The average carrying amount of the asset during a period,

including borrowing costs previously capitalised, is normally a
reasonable approximation of the expenditures to which the
capitalisation rate is applied in that period.
 Disclosure
• An entity shall disclose:
(a) the amount of borrowing costs
capitalised during the period; and

(a) the capitalisation rate used to

determine the amount of borrowing
costs eligible for capitalisation.
 Events after the Reporting Period
-History
Hi t andd Introduction-
I t d ti
• IAS 10 Contingencies and Events
Occurring After the Balance Sheet Date
(originally issued June 1978
1978, reformatted
1994
• IAS 10 Events After the Balance Sheet
Date (May 1999)
• The
Th titl
title off IAS 10 was changed
h d tto Events
E t
after the Reporting Period.
 Objective & Scope
• Objective
j is to p
prescribe:
(a) when an entity should adjust its financial statements for
events after the reporting period;
(b) the disclosures that an entity should give about the date
when the financial statements were authorized for issue
and about events after the reporting period.
( ) Reassessing
(c) R i ththe G
Going-concern
i A
Assumption
ti

• The scope is that:

This Standard shall be applied in the accounting for,
and disclosure of, events after the reporting period.
 DEFINITIONS
• Events after the reporting period are those
events,, favorable and unfavorable,, that occur
between the end of the reporting period and
the date when the financial statements are
authorized for issue.

• Two types of events can be identified:

(a) those that provide evidence of conditions
that existed at the end of the reporting period
(adjusting events after the reporting period);
(b) those that are indicative of conditions that
arose after the reporting period (non-adjusting
events after the reporting period)
 DEFINITIONS
• Date when Authorized for issue :
The process involved in authorizing the financial
statements for issue will vary depending upon the
management structure, statutory requirements and
procedures followed in preparing and finalizing the
financial statements.
Two of the cases can be :
1. Submitted its financial statements to its shareholders
for approval after the financial statements have been
i
issued.
d
2. Entity is required to issue its financial statements to a
p
supervisory y board for approval.
pp
 Case- (Date of Authorization for
i
issue)
)
Case1:The management of an entity completes draft financial statements
for
o the
t e yea
year to 3
31 December
ece be 20X1
0 o
on 288 February
eb ua y 20X2.
0 O
On 18
8 March
ac
20X2, the board of directors reviews the financial statements and
authorizes them for issue. The entity announces its profit and selected
other financial information on 19 March 20X2. The financial statements
are made available to shareholders and others on 1 April 20X2. The
shareholders approve the financial statements at their annual meeting
on 15 May 20X2 and the approved financial statements are then filed
with a regulatory body on 17 May 20X2.

Case 2
C 2:On
O 18 M March
h 20X2
20X2, th
the managementt off an entity
tit authorises
th i
financial statements for issue to its supervisory board. The
supervisory board is made up solely of non-executives and may
include representatives of employees and other outside interests. The
supervisory board approves the financial statements on 26 March
20X2. The financial statements are made available to shareholders and
others on 1 April 20X2. The shareholders approve the financial
statements at their annual meeting on 15 May 20X2 and the financial
statements are then filed with a regulatory body on 17 May 20X2.
 Recognition and measurement
• Recognition and • Adjusting
j g events
measurement of the
transactions, events
and other conditions
depends on whether
th events
the t are : • Non Adjusting events
 Recognition and Measurement
• Adjusting events after the reporting period: An entity shall
adjust the amounts recognised in its financial statements to
reflect adjusting events after the reporting period
• Examples of adjusting events:
1. The settlement after the reporting
p gpperiod of a court case that
confirms that the entity had a present obligation at the end of the
reporting period.
2. Information indicating that an asset was impaired at the end of the
reporting period
period, or that the amount of a previously recognized
impairment loss for that asset needs to be adjusted. For example:
bankruptcy of a customer, sale of inventories.
3. Determination after the reporting period of the amount of profit-
sharing or bonus payments
payments.
4. The discovery of fraud or errors that show that the financial
statements are incorrect.
 Recognition and Measurement
• Non-adjusting events after the reporting period:An
entity
tit shall
h ll nott adjust
dj t the
th amountst recognized
i d in
i its
it
financial statements to reflect non-adjusting events
after the reporting period.

• For example : (If non-adjusting events after the

reporting period are material, disclosure is required)

1. Decline in market value of investments as it reflects

circumstances that have arisen subsequently on the
b i off which
basis hi h price
i h has changed.
h d
2. If an entity declares dividends to holders of equity
instruments after the reporting period, the entity
shall
h ll nott recognize
i those
th dividends
di id d as a liability
li bilit att
the end of the reporting period. Contd...
 Recognition and Measurement
3. a major business combination after the reporting
period.
4. announcing gap plan to discontinue an operation.
p
5. the destruction of a major production plant by a
fire
6. changes in tax rates or tax laws enacted
7. e
entering
te g into
to ssignificant
g ca t co commitments
t e ts oor
contingent liabilities, for example, by issuing
significant guarantees
 Going concern
• An entityy shall not pprepare
p its financial statements
on a going concern basis if management determines
after the reporting period either that it intends to
q
liquidate the entity
y or to cease trading,
g, or that it has
no realistic alternative but to do so.
• Deterioration in operating results and financial position
after the reporting period may indicate a need to
consider whether the going concern assumption is still
appropriate.
• This Standard requires a fundamental change in the
basis of accounting, rather than an adjustment to the
amounts recognised within the original basis of
accounting.
accounting
 DISCLOSURES
• Date of authorization for issue and who
gave that authorization.
• Updating the disclosures for the Adjusting
events.
• Disclosures
Di l as per th
the appropriate
i t
standard applicable for non-adjusting
events
t