Accounting2 Notes P3

IAS 8: Accounting Policies, Changes in Accounting Estimates, Errors

What is the objective of IAS 8?

The Standard IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors tells us:
 How to select and apply our accounting policies;
 How to account for the changes in accounting policies;
 How to account for changes in accounting estimates; and
 How to correct errors made in the previous reporting periods.
Accounting Policies
Accounting policies are anything from rules, guidelines, conventions, principles and similar
norms used by entities for the preparation of the financial statements.
How to select accounting policy?
The question here is whether there IS some IFRS or interpretation IFRIC/SIC dealing with your
specific transaction or situation, or NOT.

If there is some standard or interpretation, then you simply apply it. For example, when your
account for your new machines, then you obviously need to apply IAS 16 Property, plant and
equipment.

When there is NO specific standard or interpretation dealing with your transaction or item, then
management needs to use judgement and develop its own policy, but careful, the policy needs to
provide as reliable and relevant information as possible.

Example:
 I wrote an article about accounting for artwork under IFRS, because it is not
specifically addressed by the standards and in many cases, you need to develop
your own accounting policy.

How should you develop your accounting policy?

First, you need to look at IFRS and IFRIC/SIC dealing with the similar or related issues. For
example, if you are selecting your accounting policy for artwork, maybe IAS 16 Property, Plant
and Equipment or IAS 40 Investment Property are standards dealing with similar issues.
Second, you need to apply concepts from the Conceptual Framework for Financial Reporting.
Also, in order to help, you can look to other standard setting bodies and their own rules or
standards for guidance. Many companies do it regularly.
For example, many software companies accounting under IFRS often look to US GAAP for
guidance on revenue recognition from software projects, as IAS 18 Revenue does not contain
detailed guidance (although this will be changed by new IFRS 15 Contracts with Customers).

Let’s also add that you must apply every accounting policy consistently, to all transactions
within the same category or of the same type. In some cases, IFRS permit to categorize your
transactions – in this case, you can apply different accounting policies to different categories.

When and how to change your accounting policy?

Life brings many twists and tweaks and sometimes, you need to change your accounting policy.

When can you change the accounting policy?

Only at 2 circumstances:

1. When it is required by another IFRS. This will be the case when new IFRS is issued and
you HAVE TO apply it mandatorily.
2. When new accounting policy provides better, more reliable and relevant information. In
this case, you apply new accounting policy voluntarily.

How can you change the accounting policy?

If you apply new IFRS and this IFRS contains some transitional guidance, then you simply
follow the rules in that transition provisions. New IFRS will tell you exactly how.

However, if there’s no transitional guidance, or you change your accounting policy voluntarily,
then you should apply it retrospectively (there are some exceptions).

“Retrospectively” means going back to the previous reporting periods and restating every single
component of equity as if the new policy had always been in place. Be careful here because you
need to restate comparatives, too!

Accounting Estimates
Accounting estimate is not defined by IAS 8 directly, just indirectly via changes in accounting
estimates.
When you change the accounting estimate, you change either some amount of an asset or a
liability, or pattern of its consumption in both current and future reporting periods.
 If these changes result from some new information or new trend, or development, then
they are changes in accounting estimates.
 If these changes result from some error, such as incorrect calculation or wrong
application of accounting policies – then they are NOT changes in accounting estimates,
but errors and they must be accounted for as for errors.
Typical examples of changes in accounting estimates are:
 Bad debt provisions,
 Depreciation rates and useful lives of your assets,
  Provisions for warranty repairs, etc.
How can your account for change in accounting estimate?

Unlike accounting for change in accounting policy, we need to change our accounting estimates
prospectively, either:

 In the current reporting period, in form of so-called “catch-up adjustment “;

 In both the current and future reporting periods, if the change affects both (for
example, change in useful lives affects depreciation charges in both the current
and the future reporting periods).
“Prospectively” means that you do NOT restate comparatives and equity. You do NOT touch
financial statements in the previous reporting periods; you simply adjust calculations in the
current and future reporting periods.

Difference between accounting policy and accounting estimate

1. While accounting policy is a principle or rule, or a measurement basis, accounting
estimate is the amount determined based on selected basis or some pattern of future
consumption of the asset. For example: choice fair value vs. historical cost is a choice in
accounting policy (remember, measurement basis), but updating some provision based on
fair value change is a change in accounting estimate.
2. While change accounting policy is accounted for retrospectively, you need to account for
change in accounting estimate prospectively.

Errors
Prior-period errors are some omissions from (that’s when you forget something) or
misstatements in the financial statements as a result of ignoring or misusing the information that
was available or could be reasonably obtained when preparing these financial statements.
It does not really matter why the error happened – whether it was intentional (fraud) or
unintentional, you still need to correct it if it is material.
The question is:
Is the error material?
The concept of materiality is explained in IAS 1 Presentation of Financial Statements, but to
simplify: anything that can affect the decisions of users of financial statements is material. In
other words – anything significant.
Do not forget that something can be material not only because of its size, but also due to its
nature: for example, bonuses paid to your management are always significant, whether they
amounted to a few dollars or to millions.
Back to our errors:
1. If the error is NOT material, then you can correct it in the current reporting period.
Remember, if the error is NOT material, then your financial statements still might be
reliable and relevant.
2. If the error IS MATERIAL, then you always correct it retrospectively, by going back and
restating your figures in the previous periods.

IAS 10: Events After the Reporting Period

When should you consider events after the reporting period?
By definition (IAS 10. 3), events after the reporting period are those events, both favorable and
unfavorable, that occur between:
 The end of the reporting period, and
 The date when the financial statements are authorized for issue
The standard IAS 10 specifically says that if the financial statements need to be approved by the
supervisory board made up solely of non-executives, still the management’s approval date is
more important and decisive (i.e., you don’t care about the date of approval by the supervisory
board).
What should you report on events after the reporting period?

Two types of events:

1. Adjusting events
These are events that provide evidence of conditions that existed at the end of the reporting
period.
Examples:
 The court case is settled after the end of the reporting period and it confirms that an
entity had a present obligation and should have created a provision in line with IAS 37.
 Bankruptcy of a customer after the end of the reporting period confirming that a client
was credit-impaired and ECL should have been recognized in line with IFRS 9.
 Sale of inventories after the end of the reporting period at below-cost price suggesting
that the inventories’ NRV was lower that their cost.
 Profit-sharing or bonus payments determined after the end of the reporting period
suggesting that there was a present obligation at the year-end.
 Discovery of errors or fraud showing that the financial statements are incorrect.
What to do with those events?
In line with IAS 10.8, you should adjust the amounts recognized in your financial statements to
reflect adjusting events after the reporting period.
Short illustration:
DEF faces the court case for selling contaminated food to its customers. DEF denied all claims
and no provision was made in its financial statements at 31 December 20X1.
On 2 February 20X2, the court awards CU 1 mil. damages against DEF. The financial statements
have not yet been authorized for issue at that time.
Therefore, this adjusting event must be reflected in the financial statements at 31 December
20X1.
DEF needs to create a provision for the damages because the present obligation existed at 31
December 20X1 (they sold contaminated food prior that date):
 Debit Legal costs in profit or loss: CU 1 mil.;
 Credit Provision against legal costs: CU 1 mil.

2. non-adjusting events
These are events that are indicative of conditions that arose after the reporting period.
Examples:
 Decline in fair value of investments after the reporting period,
 Natural disasters, wars, pandemics, etc. happening after the reporting period
What to do with those events?
In line with IAS 10.10, you shall NOT adjust the amounts recognized in your financial
statements to reflect non-adjusting events after the reporting period.
Instead, in line with IAS 10.21, you should disclose, for each material category of non-adjusting
events after the reporting period, both:
1. The nature of the event, and
2. An estimate of its financial effect (or say it cannot be made if that’s true).
Short illustration:
DEF owns a plant. On 15 January 20X2, huge earthquake in the area destroyed the plant.
The financial statements for the year ended 31 December 20X1 have not been yet authorized for
issue by the management at the time of earthquakes.
Dividends after the reporting period
The standard IAS 10 specifically says in par. 12, that the dividends declared after the reporting
period are NOT reported as a liability at the end of the reporting period.
In other words, you need to treat them like they are non-adjusting event
Let’s say that in January 20X2 DEF declared dividend in total amount of CU 10 000 from profit
of 20X1.
The dividend liability is recognized when the shareholder’s right to receive them has been
established – that is supposedly in January 20X2, but NOT in 20X1.

IAS 10 and going concern

IAS 10.14 says that you should NOT prepare your financial statements on a going
concern basis if the management determines after the reporting period either that:
 it intends to liquidate the entity, or
 it intends to cease trading, or
 it has no realistic alternative but to do one of the above two.
IAS 24: Related Party
What it does:
o It helps identify:
 Related party relationships and transactions;
 Outstanding balances between the reporting entity and its related parties,
 When the disclosures should be made.
o It determines what disclosures should be made.
o An entity must present related party disclosures even though there have been no
transactions.
Definition of a related party:
1. A person or a close member of that person’s family is related to a reporting entity if that
person:
 o Has control or joint control over the reporting entity;
o Has significant influence over the reporting entity; or
o Is a member of the key management personnel of the reporting entity or of a
parent of the reporting entity?
2. An entity is related to a reporting entity if any of the following applies:
o The entity and the reporting entity are member of the same group.
o One entity is an associate or joint venture of the other entity (or a group).
o Both entities are joint ventures of the same third party.
o One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.
o The entity is a post-employment defined benefit plan for the benefit or employees
of either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also related to
the reporting entity.
o The entity is controlled or jointly controlled by a person identified in (1).
o A person identified in (1)(i) has significant influence over the entity or is a
member of the key management personnel of the entity (or of a parent of the
entity).
o The entity, or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of the
reporting entity.

Disclosures required by IAS 24

1. Relationships between parents and subsidiaries:
o Name of a parent of an entity,
o The ultimate controlling party,
o Next most senior parent that produces financial statements for public use (if
neither of 2 above do so).
This must be disclosed even if there are no related party transactions.
2. Management compensation, both total and by the categories:
o Short-term employee benefits,
o Post-employment benefits,
o Other long-term benefits,
o Termination benefits,
o Share-based payment benefits
3. Related party transactions
These represent any transfer of resources, services or obligations between related
parties regardless of whether a price is charged (IAS 24.9).
An entity should disclose:
o Nature of the relationship and
o Information about transactions and outstanding balances
The disclosures are presented separately for each category of related parties and include (IAS
24.18):
o Number of transactions;
o Number of outstanding balances, together with:
 their terms and conditions (are they secured? What consideration is to be
provided in settlement?), and
 guarantees.
o Provisions for doubtful debts related to the number of open balances; and
o The expense during the period for bad or doubtful debts due from related parties.

IAS 34: Interim Financial Reporting

I. NATURE
IAS 34:
 prescribes the minimum content of an interim financial report and the recognition and
measurement principles in complete or condensed financial statements for an interim
period.
 does not mandate which entities should produce interim financial reports. PAS 34 is
applied when an entity chooses, or is required by the government or other institution, to
publish interim financial report that complies with PFRSs.
 encourages publicly listed entities to provide at least a semi-annual financial report for
the first half of the year to be issued not later than 60 days after the end of the interim
period.
II. PRESENTATION
An interim financial report is a financial report prepared for an interim period and contains
either:
a. A complete set of financial statements as described in IAS 1; or
b. A set of condensed financial statements as described in IAS 34
An entity presenting an interim financial report has the option of applying either IAS 1
or IAS 34.
a. The entity applies IAS 1 if it opts to provide a complete set of financial statements in its
interim financial report.
b. The entity applies IAS 34 if it opts to provide a condensed set of financial statements in its
interim financial report.
IAS 1 Complete Set of FS
1. Statement of financial position
2. Statement of profit or loss and other
comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
Comparative Information
6. Additional statement of financial position
(Required only when certain instances
occur)
IAS 34 Condensed Set of FS
1. Condenses statement of financial
position
2. Condensed statement of profit or loss
and other comprehensive income
3. Condensed statement of changes in
equity
4. Condensed statement of cash flows
5. Selected explanatory notes

III. RECOGNITION AND MEASUREMENT

The same accounting policies are used in interim reports as those used in annual except for
accounting policy changes made after the date of the most recent annual financial statements
that are to be reflected in the next annual financial statements.

IV. OTHER DISCLOSURES

In addition to significant events and transactions, the following are also disclosed in the
interim financial report:
a. A statement that the same accounting policies were used in the interim financial statements
as those in the latest annual financial statements. If there have been changes, those changes
are disclosed.
b. Explanation of seasonality or cyclicality of interim operation
c. unusual items affecting the financial statement elements
d. Changes in accounting estimates
e. Issuances and settlements of debt and equity securities
f. Dividends paid
g. Segment information (if the entity is covered by IFRS 8)
h. Events after the reporting period
I. Changes in the composition of the entity, e.g... business combinations, obtaining or losing
control of subsidiaries, restructurings, and discontinued operations
j. Disclosures on the fair value of financial instruments
k. Disclosures required by PFRS 12 when the entity becomes or ceases to be an investment
entity
l. Disaggregation of revenue from contracts with customers as required by IFRS 15
 IFRS 8: Operating Segments
 What it does:
o It prescribes the information that an entity must disclose about its:
 Operating segments;
 Products and services;
 Geographical areas in which it operates; and
 Its major customers.
o It defines operating segments;
o It prescribes the conditions for the segments to be reportable.

Operating segment is a component of an entity:

 that engages in business activities from which it may earn revenues and incur
expenses (including internal revenues with other segments of the same entity);
 whose operating results are reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance; and
 for which discrete financial information is available.

Who must apply IFRS 8?

Each entity:
 whose debt or equity instruments are traded in a public market; or
 that files, or is in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of trading its instruments on
a public market.
This applies to both individual (separate) financial statements and consolidated financial
statements.

Which segments must be reported (are reportable)?

Not every single identified segment is reportable.
If one segment, or aggregated segments based on aggregation criteria, meet at
least ONE quantitative threshold, it must be reported separately:
1. The segment's total revenue (including external and intersegment) is 10% or more of the
total combined revenue of all operating segments (careful - not total entity's revenue); or
2. The absolute amount of its reported profit or loss is 10% or more of the greater, in
absolute amount, of
o the combined reported profit of all operating segments that did not report a loss;
and
 o the combined reported loss of all operating segments that reported a loss; or
3. Its assets are 10% or more of the combined assets of all operating segments.
However, even if a segment does not meet any of the above thresholds, management can still
decide to present it separately.

Few more rules on reportable segments

 If the total external revenue reported by operating segments constitutes less than 75% of
the entity's revenue, additional operating segments must be identified as reportable
segments until at least 75% of the entity's revenue is included in reportable segments.
 Information about other business activities and operating segments that are not reportable
shall be combined and disclosed in an "all other segments" category.
 If the number of reported segments exceeds 10, then the entity should assess whether it is
practical to report them all separately and whether the information is too detailed.
 If the management identifies new reportable segment based on quantitative thresholds in
the current reporting period, the comparative information for the previous reporting
period should be restated in order to disclose the new segment separately also in the
comparative period.

What information to disclose?

Once the segment has been identified as reportable, the entity must disclose the following
information:
1. General information:
o Factors used to identify reportable operating segments;
o Judgements used in applying the aggregation criteria;
o Types of products and services generating revenues.
2. Information about profit or loss, assets and liabilities
o Measurement of these amounts shall be on the same basis as reported to chief
operating decision maker;
o On top of the total amounts of profit or loss, assets and liabilities, the entity shall
present the information about specified revenues and expenses (revenues from
external customers, internal revenues, depreciation and others);
o Entity should provide the explanation of the measurement basis, including the
explanation of nature of differences between the amounts reported per segments
and total entity's amounts
3. Reconciliations
The entity should reconcile total amount per operating segments with total amount
reported in the entity's financial statements for:
o Revenues;
o Profit or loss;
o Assets;
o Liabilities;
o Other material information.
4. Entity-wide information
 o Information about products and services;
o Information about geographical areas, namely:
 Revenues from external customers (in the country of domicile and in
foreign countries;
 Certain non-current assets (in the country of domicile and in foreign
countries;
o Information about major customers

IAS 29: Reporting in Hyperinflationary Economy

 What it does:
o It prescribes rules for financial reporting of any entity whose functional
currency is the currency of hyperinflationary economy.
o It requires to state all the amounts in terms of measuring unit current at the end
of the reporting period.
o General price index shall be applied to restate the amounts stated in historical or
transaction-date costs.
o It provides further guidance on how to restate monetary and non-monetary assets
and liabilities, equity components, profit or loss and other comprehensive income,
cash flows and comparative information.
o It prescribes the reporting rules when the economy stops being hyperinflationary
and number of disclosures, too.
What is hyperinflationary economy?
The standard IAS 29 does NOT define what the hyperinflationary economy is.
Also, IAS 29 does not provide the list of hyperinflationary countries, but IAS 29 contains certain
characteristics of hyperinflationary economies as guidance.
The most exact indicator is that the cumulative inflation rate over 3 years of this country
approaches to or exceeds 100%.
Currently, International Monetary Fund publishes the information about the inflation and its
forecasts. According to the information updated at the end of 2020, there are 8 hyperinflationary
countries including Argentina, Iran, Lebanon, South Sudan, Sudan, Syria, Venezuela and
Zimbabwe.

How to report in hyperinflationary economy

The results reported in hyperinflationary currency are no longer useful for the readers of the
financial statements, because current prices are changing crazy.
Just imagine you bought an asset for 1 000 CU (=currency unit) last year, the inflation rate
reached 100% and as a result the same asset costs 2 000 CU at the end of this year.
Perhaps it is more relevant to state that asset in the amount of 2 000 CU rather that in its original
cost of 1 000 CU, because it better reflects the company assets in terms of its purchasing power.
Therefore, the results should be reported in terms of measuring unit current at the end of the
reporting period.
It means you actually need to restate the numbers in your financial statements to reflect
hyperinflation.
The three basic steps are:
 1. Determine the general price index (GPI);
 General price index (GPI) is a certain measure of the inflation.
In other words, it is a factor by which you would restate the historical information to
reflect the change in the purchasing power.
In most cases, consumer price index (CPI) represents generally accepted measure of
inflation, however it is crucial that selected CPI is representative of the hyperinflationary
currency.
It practically means that different kinds of goods and services representative of that
economy are included in its calculation. Usually, you can get it from the local institutions like
national or central banks, statistical offices, or even IMF (International Monetary Fund) provides
useful information about CPI in many different countries.
However, it can happen that a reliable CPI or GPI is simply not available.
In this case, you can impute the index by comparing the movement in the exchange rate
between some solid currency (e.g., EUR…) and the hyperinflationary currency.

2. Restate the financial statements at the end of the current reporting period using that
GPI;
2.1: Decide on monetary vs. non-monetary items
The first thing you do, after selecting your GPI, is to determine which assets and liabilities are
monetary and which are non-monetary.
Leave out equity items for now; we will deal with these later.
Many items are straightforward:
 Monetary items are: cash, cash equivalents, loans, receivables, debt securities, payables,
borrowings, taxes payable.
 Non-monetary items are: property, plant and equipment, intangible assets, biological
assets, investment property, equity investments (e.g., ordinary shares), inventories,
deferred income, some provisions, etc.
Some items are not that straightforward and we need to help ourselves with the definition of
monetary items directly from IAS 29.12: “money held and items to be received or paid in
money”.
There will still be troubles. For example, deferred tax assets and liabilities are quite difficult to
assess because there are arguments for stating they are either one, so just be aware it requires
careful assessment and restatement here, especially when they are related to temporary
differences of different nature.

2.2: Restate assets and liabilities

The rules for restatement of assets and liabilities are:
 Monetary assets and liabilities: Do NOT restate at all, because they already reflect the
purchasing power at the end of the reporting period.
The exception here are inflation-linked items like inflation linked-bonds that you need to
adjust in line with terms of that instrument.
 Non-monetary items carried at current cost: Do NOT restate them at all. The current
cost simply means the value reflecting the current purchasing power of these items at the
end of the period. For example, items revalued at the year-end to the fair value are at their
current cost.
  Non-monetary items carried at historical cost: Restate them using the formula below.

3: Restate equity items

Here it goes a bit tricky again, because you actually need to determine WHEN you are making
a restatement:
1. Equity components at the beginning of the first period when IAS 29 is applied:
o Revaluation surplus: eliminate that completely;
o Retained earnings: derive from all the other amounts in the restated statement of
financial position. In other words, this will be your balancing figure;
o Other equity components: restate by the application of GPI from the dates of
contribution or other acquisition whatever way that component of equity was
created.
2. Equity components at the end of the first period when IAS is applied AND
subsequently: restate by the application of GPI from the beginning of the period or from
the date of contribution if the component arose during the year.

2.4: Restate profit or loss and other comprehensive income

The rule is very simple here: restate all the amounts by applying the general price index from
the transaction date.
The formula to use:

A few notes:
 Use of GPI fraction:
Let me draw your attention to the GPI – it is expressed as a fraction because you would have GPI
for certain period that might not be the same as the period passed between the transaction date
and the year-end.
This fraction expresses just that and some literature and practice call it the conversion factor.
It might be quite a challenge to gather GPIs for every single day, but you can use approximation,
for example some average weekly GPI if it is appropriate.
However, if inflation soars out of the roof and the prices change like crazy, that would NOT be
appropriate to use, so you need to use your judgment.
 Different restatement of some items:
Also, some items are calculated in a different way.
For example, deferred tax is derived from the changes in the temporary differences.
 Gain or loss on the net monetary position:
You will have that as a separate line item in your profit or loss.
This is the number that expresses how much purchasing power you lost to inflation during the
period on your monetary assets (if they are greater than non-monetary assets) or how much you
gained if the situation is the opposite.
It is calculated as a change in GPI applied to the weighted average of a difference between your
monetary assets and monetary liabilities.
It is extremely impractical to calculate that way and therefore in practice, it is assumed that gain
or loss on the net monetary position is simply the opposite of the gain or loss on non-monetary
items – which is the sum of your restatement adjustments,
2.5: Restate cash flows
The standard IAS 29 does not say much about the restatement of cash flows, but it does require
that all items should be expressed in the measuring unit that is current at the end of the
reporting period.
It practically means that you need to restate all the amounts, similarly as with profit or loss and
other comprehensive income.

3. Restate the comparative information at the end of the previous reporting period.
the same principle applies: all items should be expressed in the measuring unit that is current
at the end of the reporting period.
This time it will be much easier than with statement of cash flows and profit or loss, because you
just take GPI and apply it to all the numbers by simple mathematical calculation.
The reason is that all items were there at the beginning of the period and none of them arose
during the year, so no fraction is necessary to use.