International Accounting

Standard-8
Accounting Policies, Changes in Accounting
Estimates and Errors
Slides Prepared By: Zain Tareen
Effective date of IAS-8
 This standard was applied to annual
periods begun on or immediately after

1st January, 2005.

Objective Of IAS 8
It prescribes the criteria for:
 Selection of accounting policies;
 Changes in accounting policies;
 Accounting treatment;
 Disclosure of changes in accounting
policies;
 Changes in accounting estimates;
And
 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 and of prior periods of the
same entity.
Key Concepts
Retrospective Application:

• Retrospective application is applying a

new policy to transactions, other events &
Conditions as if that policy had always
been applicable.
 Retrospective
Restatement:

 It is basically the after effect of

Retrospective application on the Prior
Periods presented along the current
year’s Financial Statement.
 Prospective Application
 Prospective Application means
applying the changes on current and
future periods only.
In the past what’s done is done no
such alteration is required in the books
of the accounts.
 Impracticable Applying:

 Applying a requirement is
impracticable when the entity cannot
apply it after making every possible
effort.
Accounting Policies
 What are Accounting
Policies??
 Basis;
 Rules;
 Conventions;
 Practices;
 Specific Principles;

That are applied in preparing and

presenting financial Statements
 Reasons for Change in
Accounting Policies

 Change in International Financial

Reporting Standard
 Change in Local Legislation
 For More True & Fair View
 Accounting Treatment of
Change in Accounting
Retrospective
Policy
 When a change in
accounting policy is applied
retrospectively, the entity
shall adjust the opening
balances 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.
Impracticable
 When 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.
DISCLOSURE
REQUIREMENTS OF CHANGE
IN ACCOUNTING POLICY
 Nature of change
 Description of transitional provision if any
 For the current period and each prior period
presented, to the extent practicable, the amount of
adjustment:
◦ For each financial statement line item
affected;
◦ Earnings per share – revised
Accounting Estimates
What is a Change in Accounting
Estimates?
Change in Accounting Estimates is an
Adjustment in
 Carrying value of an Asset ;
 or a liability;
 Or the amount of Periodic
consumption of an Asset;
As a Result of Present
Conditions and Circumstances
 What are the Reasons for
Estimation??

When an item of financial statements

cannot be measured precisely, it can
only be estimated. This is because of:
 Uncertainties inherent in the business;
 Where judgments are involved;
 Where Estimation is
Required??
Estimates may be required of
 Bad Debts
 Inventory obsolescence
 Fair value of financial assets or
financial liabilities
 The useful lives of, or expected
pattern of consumption of the future
economic benefits embodied in,
depreciable assets
 Warranty Obligations etc.
 When Change in Accounting
Estimate Becomes
Necessary??

 If changes occur in the circumstances

on which the estimate was based
◦ As a result of a new information
◦ As a result of new development
◦ More Experience
 What is the Recognition Criteria
of Change in Accounting
Estimate??
 Adjusting the carrying amount of the
related asset, liability or equity item in
the period of change recognizes a
change in an accounting estimate
 Example:
◦ Management estimated that provision for
doubtful debts 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.
Accounting Treatment of Change
in Accounting Estimates

 International Accounting Standard 8

Requires Recognizing the effect of the
change in the accounting estimate in the
 Current;
 and future periods;
affected by the
change.
Disclosures Required for Change
in Accounting Estimates
 If the effect of a change in estimate is
immaterial (as is usually the case for
changes in reserves and allowances),
we do not disclose the alteration.
 However, we disclose the change in
estimate if the amount is material. Also, if
the change affects several future periods,
e.g., the effect on income from continuing
operations, net income, and per share
amounts.
Errors
 What are Errors??
 Errors are Mistakes by literal
meanings.

They can be Classified as shown.

Errors Related To Prior
Reporting Periods
Errors

Prior Period

Current Period
Errors Related To Current
Reporting Period
 What are Prior Period
Errors?
 Failure to use or misuse of reliable
information that was available when
financial statements for those periods
were authorized for issue.
 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.
 What are the Examples of Prior
Period Errors??
 Effect of mathematical mistakes
 Mistakes in applying accounting
policies
 Oversight
 Misinterpretation of facts
 Fraud.

Change in accounting estimates result from New

information or New developments are NOT corrections of
 What is the Accounting
Treatment for Rectification of
Errors??
 An entity shall correct material prior
period errors retrospectively in the first
set of financial statements authorized
for issue after their discovery by:
◦ Restating the comparative amounts for
the prior period(s) presented in which the
error occurred; or
◦ If the error occurred before the earliest
prior period presented, restating the
opening balances of assets, liabilities and
equity for the earliest prior period
 What are the Disclosure
Requirements of IAS-8??
 Nature of the prior period error
 To the extent practicable, the amount of
the correction:
◦ For each financial statement line item
affected; and
◦ Revision in earnings per share (EPS)
The amount of the correction at the beginning
of the earliest prior period presented; and
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.