IND AS 8: Accounting Policies, Changes in Accounting Estimates and Errors

MAIN PRINCIPLES UNDER IND AS 8

a) Going concern
b) Profit or loss for the period
Difference in Indian GAAP and Ind AS (premium payable on redemption of
debentures/ impairment losses are adjusted against reserves not affecting P/L in
GAAP, not in Ind AS)
c) True and fair override
Entity should depart from a requirement if it is so misleading that it will conflict with
the objective of FS, if the relevant regulatory framework requires, or otherwise does
not prohibit, such a departure. In simpler words, an entity may depart from a
requirement as per IND AS if it is not prohibited, in order to give true and fair view of
the financial position)
d) Selection and application of accounting policies
Hierarchy of guidance to be considered in the selection of an accounting policy
where a particular event, transaction or other condition is not specifically addressed
by Ind AS. The primary requirement is that the management should use its
judgement in developing and applying an accounting policy that results in
information that is:
o Relevant to the decision-making needs of users, and
o Reliable, in that the financial statements:
 Represent true and fair view of the financial position, financial
performance and cash flows of the entity,
 Reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
 Are neutral, i.e. free from bias,
 Are prudents,
 Are complete in all material aspects
o Further in making the judgement, management should refer to the following
sources in descending order:
 Requirements and guidance in Ind AS dealing with similar and related
issues, and
 Definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
o Further management may also first consider the most recent
pronouncements of the IASB, or other standard setting bodies that use a
similar conceptual framework
e) Changes in Accounting polices
 Changes in accounting policies are made retrospectively from the earlier periods
presented. In some cases, retrospective application of change is not required to the
extent that it is impracticable to determine the period specific or the cumulative
effects of the change. (Rare instances)
Changes in accounting policies under Ind AS is not as easy choice. The change in
accounting policy should be properly justified. An entity can change an accounting
policy voluntarily only if the change results in the financial statements providing
reliable and more relevant information about the entity and its operations or any
other data.
f) Disclosure for change in accounting policies
Ind AS required detailed disclosures to be made in case of change in accounting
policies.
o Nature of change in accounting policy
o Reasons why new policy is more reliable and relevant
o Amount of adjustment for current period and each prior period for each
financial statement item affected and Basic and diluted earnings per share if
applicable
o Amount of adjustment relating to periods before those presented to the
extent practical
o If the retrospective application is impracticable, the circumstances that led to
such condition and description of how and when the change has been
applied.
In addition, Ind AS requires to present an additional balance sheet as at the
beginning of the preceding period.
g) Future changes in accounting policies
When an entity has not applied a new Ind AS which is introduced but not yet
effective the entity should disclose such fact and known or reasonably estimable
information relevant to the impact of new Ind AS

In the case of an error, there may be rare circumstances when the impact of error in
financial statements is so overwhelming that they may become completely unreliable. In
such cases, the company may need to withdraw the issued financial statements and reissue
the same after correction. The auditor may also choose to withdraw their audit report.

However in majority cases the impact of the error will not be so overwhelming requiring
withdrawal of already issued financial statements.

Issue: Whether restatement of comparative amounts in subsequent financial statements

will tantamount to revision and trigger compliance under section 131 of the Act.

View: Section 131 of the Act is triggered only in cases where the company needs to
withdraw previously issued financial statements and re-issue the same. For example, this
will be required when the impact of error on previously issued financial statements is so
overwhelming that they have become completely unreliable.
Ref: Section 131- It is about preparing (and consequently reissuing) revised financial
statements, at the behest of the board of directors. Section 131 can be triggered only if the
previously issued financial statements were not in compliance with section 129.

Ind AS 8’s requirements pertaining to change in accounting policies do not apply in an

entity’s first Ind AS financial statements. If during the first period covered under Ind AS and
entity changes its policies, it should explain the change between its first Ind AS interim
financial statements and its first Financial Statements and update the reconciliations
required to be prepared.

CHANGES IN ACCOUNTING ESTIMATES

Estimates need revision as changes occur in the circumstances on which they are based or
as a result of new information or more experience. Ind AS requires change in an accounting
estimate to be accounted prospectively. Accounting estimates by their nature are
approximation which may need updation as additional information becomes known.

Change in method of depreciation is regarded as a change in accounting estimate and hence

the effect is given prospectively

ERRORS/PRIOR PERIOD ITEMS

Financial reporting is not immune to errors. Errors are generally infrequent in nature and
can be distinguished from change in estimates.

Errors arise from failure to use or misuse of reliable information already available or that
could reasonably be expected to be obtained.

Main principles relating to errors/prior period items

- All omissions/ misstatements including balance sheet misclassifications.

- Immaterial errors made intentionally to achieve a particular presentation of an
entity's financial position, financial performance or cash flows are treated at par with
material errors.
- Entity will correct material prior period errors retrospectively in the first set of the
financials approved for issue after their discovery by restating the comparatives for
the period in which the error occurred.
- Disclosures required for correction of an error.
o Nature of prior period error
o Amount for each financial statement line item affected and Basic and diluted
earnings per share if applicable
o Amount of correction at the beginning of the earlier prior period affected
 o If retrospective restatement is impracticable then the circumstances that led
to it and a description of how and from when the error has been corrected
o In addition an additional BS to be presented as at the period beginning of the
preceding period of retrospective restatement
- Ind AS standards apply to both annual and interim financial statements and prior
period items will be corrected in the same manner as that of the annual financials.
- The restated comparative financials should be accompanied with the heading
“RESTATED” to highlight for users the fact that the comparative financials are not the
same as those previously published.

FIRST-TIME ADOPTION CHALLENGES AND PERSPECTIVE ON ERRORS AND ESTIMATES.

An entity that adopts Ind AS for the first time needs to assess carefully the impact of
information that has become available since it prepared its most recent previous GAAP
financial statements because the new information:

- May be a new estimate/ change in estimate, or

- May expose an error in the previous GAAP financial statements due to mathematical
mistakes, error in applying accounting policies, oversights or misinterpretations of
facts, and fraud.

Ind AS 101 requires any error under the previous GAAP to be disclosed separately in the
reconciliation from previous GAAP to Ind AS. Errors cannot be recognized as transitional
adjustments or clubbed with the effect of changes in accounting policies.

In case of Ind AS issued but not effective, a conservative view is to provide a complete list of
such Ind AS. In case a complete list is not provided, it may be wise to include a statement to
the effect that the impact of all other IndAS not yet adopted is not likely to be material.

TAX EFFECTS OF RETROSPECTIVE ADJUSTMENTS

Income tax effect is part of the retrospective adjustment. The tax effects of corrections of
prior period errors and of retrospective adjustments due to changes in accounting policies
are accounted for and disclosed in accordance with Ind AS 12 Income Taxes.