IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors L1

Unit 14: Accounting Policies,
Changes in Accounting
Estimates and Errors
IAS 8
Introduction to IFRS, Chapter 5
1
Learning outcomes
• Understand the basic theory of changes in accounting policies.

• Understand the basic theory of changes in accounting estimates.
• Understand the basic theory of errors.
• Understand how the items above are accounted for.
• Prepare the disclosure of these items in the financial statements.
• Apply the theory in discussion questions.
• Prepare the financial statements according to IFRS.
2
Overview and approach
• Objective of IAS 8: To enhance the relevance and reliability of an entity’s financial
statements by prescribing:
• For Accounting Policies:

• The criteria for selecting and changing accounting policies, and
• the accounting treatment and disclosure of changes in accounting policies.
• For Accounting Estimates:

• The accounting treatment and disclosure of changes in accounting estimates.
• For Prior period errors:

• The accounting treatment and disclosure of corrections of prior period errors.
3
Unit 14: Accounting Policies
14.1
• Definition of Accounting policies (IAS 8: 5)
• The specific principles, bases, conventions, rules and practices adopted by an
entity in preparing and presenting financial statements.
• In other words: The IFRS principles that an entity uses to include
(measure, recognise, present, disclose, etc.) transactions and events
in their annual financial statements.
• Example of an accounting policy, as an extract from the notes to the financial

statements:
4
14.1
• QUICK TEST:
• Consider IAS 16, Property, plant and equipment:

• What do you think would be an applicable accounting policy for this standard?
5
14.1
• QUICK TEST:
• If you guessed the calculation of depreciation you would be Spot on!
• See the following extract of the notes to the Illustrative Financial Statements:
6
14.1
• How are Accounting Policies selected?
• When an IFRS specifically applies: Apply the IFRS (IAS 8: 7)
• Results in financial statements that are:
• Relevant &
• Reliable (IAS 8: 8)
• No applicable IFRS?
• Management uses judgement to develop & apply
accounting policies that will lead to information that
is:
• Relevant &
• Reliable (IAS 8: 10)
7
14.1
• Accounting policies needs to be selected and applied consistently
(IAS 8: 13)
• Why? Ensures that financial statements of an entity can be
compared over time to identify trends. (IAS 8: 15)
• Changes are permitted ONLY if the change:

• Is required by an IFRS or
• Result in the financial statements providing reliable and more
relevant information (IAS 8: 14)
8
14.1
QUICK TEST:
• A consulting firm, who previously only provided advice on specific
customer enquiries, decides to start trading in office equipment. The entity
decides to adopt the accounting policy of valuing the office equipment
(their inventory) using a FIFO measurement basis.
• Is this a change in an accounting policy?
9
14.1
QUICK TEST:
• If you guessed NO - you would be Spot on! (IAS 8: 16)
• When an accounting policy has to be applied to transactions or

events that is different from those that have occurred before, or if it
is new types of transactions or events, the application of
accounting policies to account for these transactions/events are not
changes – they did not exist before, so it is something completely
new.
10
14.1
QUICK TEST:
• An entity decides to change the valuation of their inventory from the FIFO
method to the Weighted Average method (because this valuation basis
would result in more reliable and relevant information).
• Is this a change in an accounting policy?
11
14.1
QUICK TEST:
• If you guessed YES - you would be Spot on! (IAS 8: 14b)
• Changes in accounting policies are permitted ONLY if the change:

• Is required by an IFRS or
• Result in the financial statements providing reliable and more
relevant information (IAS 8: 14)
12
14.1
• Theory made practical: handout
13
14.1
• How do we account for these changes? (IAS 8: 19)
• If change is due to initial (1st) application of a standard/interpretation
• Apply the change by following the transitional provisions included
in the specific standard; or
• If the standard does not include these transitional provisions, the
change is applied:
• RETROSPECTIVELY
• i.e. RETROSPECTIVE APPLICATION
• If voluntary change
• Change is applied:
• RETROSPECTIVELY
• i.e. RETROSPECTIVE APPLICATION
14
14.1
• What is RETROSPECTIVE APPLICATION? (IAS 8: 5 & 22)
• This means the entity will adjust (change) 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.
• In other words – it is when the entity recalculates the applicable

amounts for transactions related to the specific changed accounting policy
as if the new accounting policy was always applied. The financial
statements (including the comparative amounts) are adjusted to show the
new recalculated amounts. 15
14.1
• What is RETROSPECTIVE APPLICATION? (IAS 8: 26)
• When an entity applies a new accounting policy retrospectively, it

applies the new accounting policy to comparative information for
prior periods as far back as it is practicable.
16
14.1
• What is RETROSPECTIVE APPLICATION? (IAS 8: 26)
• Prior period and comparative information/figures explained:
Explanation:
• Figures for 2018: Current
period
• Figures for 2017: Prior

/comparative period
• Revenue amount of 96 629:

comparative
information/figure for
revenue 17
14.1
• Changes in accounting policies are only applied RETROSPECTIVELY if it is not
impracticable (not possible) to determine either the period-specific effects
or the cumulative effect of the change (IAS 8:23)
• When will retrospective application be impracticable? (IAS 8: 5)
• Retrospective application is impracticable when the entity cannot

apply it after making every reasonable effort to do so.
18
14.1
• It is deemed impracticable to apply a change in accounting policy if (IAS 8: 5):
• The effects of the retrospective application cannot be determined;
• The retrospective application requires assumptions about what
management’s intent would have been in that period; or
• The retrospective application requires significant estimates of amounts and it
is impossible to distinguish objectively information about those estimates
that:
• Provides evidence of circumstances that existed on the date(s) as at which
those amounts are to be recognised, measured or disclosed; and
• Would have been available when the financial statements for that prior
period were authorised for issue, from other information.
19
14.1
• What if RETROSPECTIVE APPLICATION is impracticable (not possible)?(IAS 8:
23 - 27)
• If it is impracticable to determine the effects of the change in accounting

policy, we distinguish between two types of effects:
• Period-specific effects:
• The effect on Profit/Loss for the specific period (think:
Statement of Profit/Loss and Other Comprehensive Income)
• Cumulative effects:
• The effect on related balances (think: Statement of Financial
Position)
20
14.1
• What if RETROSPECTIVE APPLICATION is impracticable (not possible)?(IAS
8: 23 - 27)
• Retrospective application to a prior period is not practicable

unless it is practicable to determine the cumulative effect on the
amounts in both the opening and closing statements of financial
position for that period. (IAS 8: 26)
21
14.1
• Period-specific effects (IAS 8: 24):
• If it is impracticable to determine the period-specific effects of a
change in accounting policy on comparative information (for one/more
prior periods presented), the new accounting policy will be applied to the
carrying amounts of assets and liabilities at the earliest periods for
which retrospective application is practicable - This may be the current
period-
• AND
• A corresponding adjustment to the opening balance of each affected
component of equity shall be made for that period.
22
14.1
• Period-specific effects (IAS 8: 26):
• The amount of the resulting adjustment relating to periods before those
presented in the financial statements is made to the opening balance of each
affected component of equity of the earliest prior period presented.
• Usually the adjustment is made to RETAINED EARNINGS.
23
14.1
• Cumulative effects (IAS 8: 25):
• If it is impracticable to determine the cumulative effect of a change in
accounting policy applied to all prior periods, at the beginning of the current
period, the entity shall adjust the comparative information to apply
the new accounting policy prospectively from the earliest date practicable.
24
14.1
• Cumulative effects (IAS 8: 27):
• When the cumulative effect of applying the new accounting policy to all prior
periods cannot be determined, the new accounting policy will be applied
prospectively from the start of the earliest period practicable.
• The portion of the cumulative adjustments to balances arising before that
date is thus disregarded/ignored.
25
14.1
• Prospective application?(IAS 8: 5)
• To apply the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed.
Retrospective application
Prospective application
____________________________________________________________
2018 Prior Current year Next 2022
year (2020): Change year
(2019) in accounting (2021)
policy
26
14.1
• Disclosure (IAS 8: 28 - 31):
• Disclosures regarding changes in accounting policies are only presented in
the year of the change, not in subsequent periods.
• When an accounting policy is applied retrospectively, and the adjustment has
a material effect on the information in the statement of financial position
at the beginning of the preceding period, IAS 1 requires that a third
statement of financial position as at the beginning of the
preceding period should be included.
• The statement of financial position must then be prepared at;
• End of current period
• End of preceding period
• Beginning of preceding period
27
14.1
• Disclosure:
• Application of accounting policy as a result of initial application of
Standard/Interpretation (IAS 8: 28):
• Title of Standard/Interpretation;
• When applicable, that the change in accounting policy is made in accordance
with its transitional provisions;
• The nature of the change in accounting policy;
• When applicable, a description of the transitional provisions;
• When applicable, the transitional provisions that might have an effect of
future periods;
28
14.1
• Disclosure:
• Application of accounting policy as a result of initial application of
Standard/Interpretation (IAS 8: 28) (continued):
• For the current period and each prior period presented, to the extent
practicable, the amount of the adjustment for each financial line
item affected;
• The amount of the adjustment relating to periods before those
presented; and
• If retrospective application 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 ahs been applied. 29
14.1
• Disclosure: Voluntary change in accounting policy (IAS 8: 29):
• The nature of the change in accounting policy;
• The reasons why applying the new accounting policy provides reliable and
more relevant information;
• For the current period and each prior period presented, to the extent
practicable, the amount of the adjustment for each financial statement
line item affected;
• The amount of the adjustment relating to periods before those
presented, to the extent practicable; and
• If retrospective application 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. 30
14.1
• Suggested work method:
• 1.) Calculate the current and retrospective cumulative and period
specific effects with due consideration to the possible impracticability in
certain scenarios.
• 2.) Write the applicable journals to account for the current and
retrospective application of the new accounting policy.
• 3.) Change the actual amounts in the financial statements by
applying these journals to each individual line item affected. (**)
• 4.) Disclose the effect of the changes to each financial statement
line item in the notes to the financial statements.
31
14.1
• (**) Note the example of the specific presentation on the face of the statement
of changes in equity where a change in accounting policy has been
retrospectively applied:
32
14.1
• Theory made practical: Example
• Police Ltd, a company incorporated on 1 January 20.17, changed its policy for the
valuation of inventory from the weighted average method to the FIFO method.
• The following information, before accounting for the change in accounting policy,
is relevant for the years ended 31 December:
20.19 (R) 20.18 (R)
Revenue 1 600 000 1 300 000
Cost of sales (800 000) (520 000)
Other expenses (520 000) (498 000)
Profit before tax 280 000 282 000
Profit for the year 280 000 282 000
Total Comprehensive Income for the year 280 000 282 000 33
Theory made practical: Example (continued)

14.1
• Closing balances for inventories:
20.19 (R) 20.18 (R) 20.17 (R)
FIFO (new method) 220 000 280 000 240 000
Weighted average (old method) 180 000 275 000 260 000
• Retained earnings at the beginning of each year, before accounting for change in
accounting policy:
20.19 (R) 20.18 (R)
193 800 24 000
• IGNORE TAX
34
14.1
• Applying the suggested work method to example:
specific effects of the change in accounting policy:
• Remember:
• Cost of Sales = Opening inventory + Purchases – Closing
Inventory
• The value of purchases will not change due to the change in accounting
policy, BUT, when the closing value of inventory changes, the opening
inventory of the next period will change and the value of cost of sales
will change. 35
Theory made practical: Applying the suggested work method to example (continued)

14.1
specific effects of the change in accounting policy:
Cumulative Period Specific Cumulative Period Specific Cumulative
20.19 20.19 20.18 20.18 20.17
SFP P/L SFP P/L SFP
Weighted average (Old) (180 000) (275 000) (260 000)
FIFO (New) 220 000 280 000 240 000
Increase/(Decrease) in Inventory-SFP 40 000 5 000 (20 000)
Increase/(Decrease) in Profit for the 35 000 25 000
year (note 1)
Effect on Effect on P/L Effect on Effect on P/L Effect on
Inventory because Cost Inventory because Cost Inventory
balance in of Sales balance in of Sales balance in
SFP changed in SPL SFP changed in SPL 36SFP

14.1
• Note 1.1: How do we calculate the period-specific effects by using the
cumulative effects?
• Remember: Cost of Sales = Opening inventory + Purchases – Closing Inventory
• It should be clear that the signs (+/-) of opening inventory and closing inventory
are opposites.
• Period-specific calc for 20.18 (i.e. the effect on cost of sales and thus profit/loss
for the year):
• Opening inventory decreased by 20 000; Closing Inventory increased by 5 000.
• The effect on the calculation of cost of sales is:
• Cost of sales = (20 000) +0 - 5 000
• Cost of sales = (25 000) –> this is a decrease.
• If cost of sales (an expense) decreases, profit for the year will increase, thus
the period-specific increase in profit for the year of 25 000. 37

14.1
• Note 1.1: How do we calculate the period-specific effects by using the
cumulative effects?
• Remember: Cost of Sales = Opening inventory + Purchases – Closing Inventory
• It should be clear that the signs (+/-) of opening inventory and closing inventory
are opposites.
for the year):
• Opening inventory increased by 5 000; Closing Inventory increased by 40 000.
• Cost of sales = 5 000 +0 - 40 000
the period-specific increase in profit for the year of 35 000. 38

14.1
• Note 1.2:
The period-specific effect on Cost of Sales, and consequently on Profit/Loss for
the year, can also be calculated as follows:
20.19 20.18 Note
FIFO (new) Weighted FIFO (New) Weighted
average (old) average (old)
Opening Inventory 280 000 275 000 240 000 260 000 A
Plus Purchases 100 000 100 000 100 000 100 000 B
Less: Closing Inventory (220 000) (180 000) (280 000) (275 000) A
= Cost of Sales 160 000 195 000 60 000 85 000
Increase/(Decrease) in cost of sales (35 000) (25 000) C
Increase/(Decrease) in profit for the year 35 000 25 000 D
39

14.1
• Explanatory notes:
• A: Remember that the closing inventory of one year will be the opening
inventory of the following year.
• B: The amount for purchases is a figure that is just included so that the
calculation makes sense – this is an assumption and is not given in the
question. The value for purchases will not differ for the different valuation
policies.
• C: The increase/decrease in cost of sales is the difference between the new
and the old balances of inventory based on the new (FIFO) and old (Weighted
Average) valuation policies.
• D: Cost of sales is an expense, so if cost of sales increases, expenses increase
and profit for the year will thus decrease. If cost of sales decreases, expenses
will decrease and profit for the year will thus increase.
40

14.1
• Ask yourself: Is retrospective application practicable? YES!
• Why? Because the full cumulative and period-specific effect for all
comparative periods are available – this is clear from our calculations in
the previous slide.
• What does this mean?

• The amounts in the financial statements for the 31 December 20.18
year (the comparative period) can be restated for the cumulative
effect of the change in accounting policy on all prior periods.
• (let’s assume that the accounting system of Police Ltd allows us to re-
open the system to be able to process the journals.)
• FULL RETROSPECTIVE APPLICATION is thus possible. 41

14.1
DR CR
Journal 1
Follow the
1 January 20.18
amounts
Retained earnings – opening balance (SCE) 20 000 back to the
Inventories (SFP) 20 000 calculations
Restate the opening balance of the earliest period presented (20.18) for the in step 1!
cumulative effect of the change in accounting policy (the change in the 20.17
closing inventory balance only as the entity was incorporated on 1 Jan 20.17).
42

14.1
DR CR
Journal 2
Follow the
31 December 20.18
amounts
Inventories (SFP) 25 000 back to the
Cost of sales (P/L) 25 000 calculations
Account for the period-specific and cumulative effect of the change in in step 1!
accounting policy of 20.18
43

14.1
DR CR
Journal 3
Follow the
31 December 20.19
amounts
Inventories (SFP) 35 000 back to the
Cost of sales (P/L) 35 000 calculations
Account for the period-specific and cumulative effect of the change in in step 1!
accounting policy of 20.19
44

14.1
applying the journals in step 2 to each individual line item affected.
Police Ltd
Statement of profit or loss and other comprehensive income for the year ended 31 December 20.19
Note 20.19 20.18
Revenue 1 600 000 1 300 000
Cost of sales a (765 000) (495 000)
Gross profit 835 000 805 000
Other expenses (520 000) (498 000)
Profit before tax 315 000 307 000
Profit for the year 315 000 307 000
45

14.1
• Note a:
• Calculation of cost of sales for 20.18:
• 520 000 – 25 000 (Journal 2) = 495 000
• Calculation of cost of sales for 20.19:

• 800 000 – 35 000 (Journal 3) = 765 000
46

14.1
Police Ltd
Extract from the statement of financial position as at 31 December 20.19
Note 20.19 20.18
Assets
Current assets
Inventories b 220 000 280 000
Equity and Liabilities

Equity
Retained Earnings 626 000 311 000
47

14.1
• Note b:
• Calculation of inventory balance for 20.18:
• 275 000 – 20 000 (Journal 1) + R25 000 (Journal 2) = 280 000->
Cumulative balance
• Calculation of inventory balance for 20.19:

• 180 000 – 20 000 (Journal 1) + R25 000 (Journal 2) + R35 000 (Journal
3) = 220 000 -> Cumulative balance
• To note! Cumulative means that the changes adds up. For 20.18 journals 1
and 2 are included; For 20.19 journals 1, 2 and 3 are included 48

14.1 Police Ltd
Statement of changes in equity for the year ended 31 December 20.19
Note Retained Earnings
Balance at 31 December 20.17 24 000
Change in accounting policy (jnl 1) 2. (20 000)
Restated balance 4 000
Changes in equity for 20.18
Total comprehensive income for the year – restated 307 000
Profit for the year – restated 307 000
Changes in equity for 20.19
Total comprehensive income for the year 315 000
Profit for the year 315 000
49

14.1
• This example illustrates a Voluntary change in accounting policy – thus

Refer to the disclosure requirements in IAS 8: 29
Police Ltd
Notes for the year ended 31 December 20.19
1. Accounting policy
1.1 Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is determined according to
the first-in, first-out method. This represents a change in accounting policy (refer to note 2).
50

14.1
Police Ltd
Notes for the year ended 31 December 20.19
2. Change in accounting policy
This During the year, the company changed its policy for the valuation of inventory from the
description weighted average to the first-in, first-out method. Due to the inventory turnover this will
is result in a more reliable presentation of information. The change in policy has been
compulsory accounted for retrospectively and the comparative amounts have been appropriately
and restated. The effect of the change is as follows:
addresses
IAS 8: 29 a • Note continues on next slide
&b 51

14.1
2. Change in accounting policy (continued)
20.19 20.18 1 Jan. 20.18
Increase/(Decrease) in cost of sales (35 000)d (25 000)b -
Increase/(Decrease) in profit for the year 35 000 25 000 -
Increase/(Decrease) in total comprehensive income 35 000 25 000 -
Increase/(Decrease) in inventories 40 000e 5 000c (20 000)a
Increase/(Decrease) in current and total assets 40 000 5 000 (20 000)
Increase/(Decrease) in total equity 40 000 5 000 (20 000)
Increase/(Decrease) in retained earnings *(20 000)
This table is compulsory and addresses IAS 8: 29 c – Each line item affected * This amount
addresses IAS
52 8: 29d

14.1
• Explanatory comments:
• a: Journal 1 – this is the cumulative effect at the beginning of the earliest period
presented (20.18)
• For cumulative effects, the journals relates to the line items in the SFP
• b: Journal 2 – this is the period-specific effect in the comparative period (20.18)
• For period-specific effect, the journals relates to the line items in the SPL
• c: This is the cumulative effect on the value of closing inventory in the SFP on the
comparative period (20.18). Cumulative – thus journal 1 and 2 combined.
• For cumulative effects, the journals relates to line items in the SFP
53

14.1
• Explanatory comments (continued):
• d: Journal 3 – this is the period-specific effect in the current period (20.19)
• For period-specific effects the journals relates to line items in the SPL
• e: This is the cumulative effect on the value of closing inventory in the SFP on the
current period (20.19). Cumulative – thus journal 1 and 2 and 3 combined.
• For cumulative effects, the journals relates to line items in the SFP
54
14.1
• Accounting Policy Changes:
• For Accounting purposes: Changes are applied Retrospectively
• This means the entity will adjust (change) 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.
• Tax implications?
• Consider both Current tax and Deferred tax.
55
14.1
• Tax implications
Current tax Deferred tax
- Calculation: Taxable Income * Tax rate (27%) - Accounting calculation only – SARS does not care
about this. HOWEVER, the calculation takes into
- Taxable Income: Calculated by adjusting accounting account the SARS principles (allowances, deductions
profit with the permanent and temporary differences etc.) in terms of the Income tax act.
that results from the difference between the IFRS - Based on the carrying amounts of assets, liabilities
treatment and the SARS treatment of items. and income received in advance as reflected on the
face of the SFP at the end of the period.
Consider:
- What line item(s) is affected by the change in Consider:
accounting policy? How does this line item affect the - What line item(s) is affected by the change in
calculation of accounting profit (including the years accounting policy; what is the accounting carrying
affected)? amount (including the years affected) of the
- What will SARS allow in this respect? Same applicable line item?
56
calculation? - Will SARS accept this carrying amount?
Tax implications (continued)

14.1
CONSIDERATIONS FOR A CHANGE IN ACCOUNTING POLICY: CHANGE IN THE VALUATION OF INVENTORY
Current tax considerations Application
1. What line item(s) is affected by the Line items affected:
change in accounting policy? • Inventory closing balance (and as a result the opening balance of
2. How does this line item affect the the following year)
calculation of accounting profit • Due to the closing and opening balances of inventory changing,
(including the years affected)? the calculation of cost of sales will be affected.
• When cost of sales (an expense) is increased/decreased, the
resultant accounting profit for the year will increase or decrease.
3. What will SARS allow in this respect? READ the given information. If SARS accepts the accounting
Same calculation? treatment – then there is no difference and no adjustment is
needed.
HOWEVER, if SARS does not accept the accounting treatment, there
will be a difference that needs to be accounted for.
57

14.1
Current tax considerations Application
1. What will SARS allow in this SARS does not accept the accounting treatment, thus a difference.
respect? Same calculation? Calculation of Cost Accounting profit Taxable Income
Scenario: of Sales: 20.19 20.18 20.19 20.18
Current year: 20.19
Previous year: 20.18 Opening Inventory 60 000 new 80 000 new 30 000 old 40 000old
First year of incorporation: 20.17 + Purchases 100 000 100 000 100 000 100 000
Valuation of inventory: - Closing Inventory (20 000) new (60 000) new (20 000)new (30 000)old
20.19 20.18 20.17 Cost of sales 140 000 120 000 110 000 110 000
Old Policy 10 000 30 000 40 000
The difference is because SARS uses the old policy for the calculation of
New Policy 20 000 60 000 80 000 cost of sales used for taxable income (see figuresold) except for the
SARS only accepts the new valuation closing inventory of the current year. Accounting uses the new policy for
of inventory from the end of the the calculation of cost of sales used for profit before tax for ALL years.
current year. (See figuresnew) 58

14.1
Deferred tax considerations Application
1. What line item(s) is affected by SARS does not accept the accounting treatment, thus a difference in the
the change in accounting policy; carrying amount and tax base of inventory.
what is the accounting carrying Accounting SARS
amount (including the years
affected) of the applicable line 20.19 20.18 20.17 20.19 20.18 20.17
item? 20 000new 60 000new 80 000new 20 000new 30 000old 40 000old
- Will SARS accept this value as the
tax base for the specific line item?
The difference is because the fact that SARS only accepts the new
20.19 20.18 20.17 valuation as at the end of the current year - the old policy needs to be
used for the calculation of the tax base of inventory(see figuresold) except
Old Policy 10 000 30 000 40 000
for the tax base of inventory of the current year. Accounting uses the
New Policy 20 000 60 000 80 000 new policy for the calculation of the carrying amount of inventory for ALL
years. (See figuresnew) 59
14.1
• Theory made practical: Example
• Stones Ltd is a wholesale diamond dealer and is listed on the Johannesburg
Securities Exchange.
• During the year ended 28 February 20.10 the board decided to change the policy
regarding the valuation of inventory from first-in-first-out (FIFO) to the weighted
average method. The following information relating to the inventory is available
on 28 February:
• Closing balances for inventories:
20.10 (R) 20.9 (R) 20.8 (R) 20.7 (R)
FIFO (old method) 45 000 35 000 30 000 15 000
Weighted average (new method) 60 000 45 000 38 000 18 000
60

14.1
• The South African Revenue Services (SARS) will not reopen the previous years’
assessments as a result of the abovementioned change in accounting policy.
• Assume a tax rate of 27%.
• Profit before tax, before taking the change in accounting policy into account,
amounted to R880 000 (20.9: R790 000).
61

14.1
a. Calculate profit before tax of Stones Ltd for the financial year ended
28 February 20.10.
b. Calculate the current tax for the year ended 28 February 20.10. (Start your
calculation with the profit before tax as calculated above.)
c. Calculate the deferred tax balance in the statement of financial position at
28 February 20.9 and 28 February 20.10 as well as the deferred tax amount
charged to the statement of comprehensive income for the years ended
28 February 20.9 and 20.10. (Indicate whether it is a debit or credit entry.)
d. Show how all the information above would be disclosed in the notes to the
financial statements of Stones for the year ended 28 February 20.10.
Comparative figures are required, accounting policy notes are not required.
• Profit before tax
• Income tax expense 62
Theory made practical: Solution to example (continued)

14.1
• Solution to example:
a.) Calculate profit before tax of Stones Ltd for the financial year ended
28 February 20.10.
Profit before tax – given 880 000

Change in accounting policy (C1): 5 000
Profit before tax: 885 000
63

14.1
a.) C1:
Cumulative Period Cumulative Period Cumulative

20.10 Specific 20.9 Specific 20.8
20.10 20.9
SFP P/L SFP P/L SFP
Weighted average (New) 60 000 45 000 38 000
FIFO (Old) (45 000) (35 000) (30 000)
Increase/(Decrease) in Inventory SFP 15 000 10 000 8 000
Increase/(Decrease) in Profit before tax 5 000 2 000
Increase/(Decrease) in tax (4 050) 1 350 (2 700) 540 (2 160)
Increase/(Decrease) in Profit for the year 10 950 3 650 7 300 1 460 5 840
64

14.1
• Alternative calculation for previous slide: The period-specific effect on Cost
of Sales, and on Profit/Loss for the year, can also be calculated as follows:
20.10 20.9 Note
Weighted FIFO (old) Weighted FIFO (old)
average (new) average (new)
Opening Inventory 45 000 35 000 38 000 30 000 A
Plus Purchases 100 000 100 000 100 000 100 000 B
Less: Closing Inventory (60 000) (45 000) (45 000) (35 000) A
= Cost of Sales 85 000 90 000 93 000 95 000
Increase/(Decrease) in cost of sales (5 000) (2 000) C
Increase/(Decrease) in Profit before tax 5 000 2 000 D
Increase/(Decrease) in tax 1 350 540 E
Increase/(Decrease) in Profit for the year 3 650 1 460 65 F

14.1
• A: Remember that the closing inventory of one year will be the opening
inventory of the following year
• B: The figure for purchases is a figure that is just included so that the
calculation makes sense – this is an assumption and Is not given in the
question. The vale for purchases will not differ for the different valuation
policies.
• C: The increase/decrease in cost of sales is the difference between the new
and the old balances of inventory based on the new (Weighted Average) and
old (FIFO) valuation policies for a specific year.
• D: Cost of sales is an expense, so if cost of sales decreases, expenses
decrease and profit for the year will thus increase. If cost of sales increases,
expenses will increase and profit for the year will thus decrease. 66

14.1
• E: Income tax expense is based on the taxable income for a year; so if cost of
sales decreases, expenses decrease and profit for the year will thus increase;
when profit increases, taxable income will increase and thus your income tax
for the year will also increase. (and vice versa)
• F: If cost of sales decreases, expenses decrease and profit for the year will
thus increase; when profit increases, taxable income will increase and thus
your income tax for the year will also increase. (and vice versa)
The net effect on the profit for the year will be the difference between the
increase in profit before tax and the increase in income tax expense. (and
vice versa)
67

14.1
b.) Calculate the current tax for the year ended 28 February 20.10. (Start your
calculation with the profit before tax as calculated above.)
Profit before tax – as calculated 885 000

Change in accounting policy (C2):
Opening inventory – old (35 000)
Opening inventory - new 45 000
Taxable income: 895 000
Current tax expense: 241 650
(895 000 * 27%)
68

14.1
b.) C2
SARS will only accept the new valuation of inventory as the tax base of inventory
for the current year. So, for the current year, the difference between Accounting
and SARS is the value of the opening inventory.
Thus: New policy valuation – Old policy valuation of opening inventory:

45 000 – 35 000 = 10 000 increase in taxable income
69

14.1
b.) C2 explained in detail
Remember: Cost of Sales = Opening inventory + Purchases – Closing Inventory
for the year) for ACCOUNTING PURPOSES:
• Opening inventory increased by 10 000; Closing Inventory increased by 15 000.
• Cost of sales = 10 000 +0 - 15 000
the period-specific increase in profit for the year is 5 000. 70

14.1
Remember: Cost of Sales = Opening inventory + Purchases – Closing Inventory
• Period-specific calc for 20.10 (i.e. the effect on cost of sales and thus TAXABLE
INCOME for the year) for SARS PURPOSES:
• Tax base of opening inventory HAD NO CHANGE; Tax base of closing Inventory
increased by 15 000.
• The effect on the calculation of ‘cost of sales’ from a tax perspective is:
• Cost of sales = 0 +0 - 15 000
• If cost of sales (an expense) decreases, taxable income will increase, thus the71
period-specific increase in taxable income is 15 000.

14.1
Per the previous calculation:
Increase in profit before tax (accounting effect) 5 000
Increase in taxable income (SARS effect) 15 000
Difference that taxable income should be adjusted by? 10 000 (Increase)
Why the difference?

Because the increase in profit before tax has already been taken into
account in the calculation of profit before tax in a) – this answer is what we
started the calculation with.
72

14.1
It is important to understand that ‘cost of sales’ is used as a way to calculate the
difference between the accounting treatment and the tax treatment of the change
in accounting policy.
From a technical perspective the basic principle for the calculation of current tax
applies as follows:
- The value of a certain item that has been included for accounting purposes,
that is not allowed/accepted by SARS, has to be written back (reversed);
and
- the value of of the noted item that will be allowed/accepted by SARS is
included/subtracted.
73

14.1
i.e.
- The opening inventory that is valued according to the new accounting policy for
accounting purposes is added back (because it was subtracted as part of cost of
sales); and
- the opening inventory that is valued according to the old accounting policy that is
accepted by SARS is subtracted.
There is thus only a temporary difference with regards to the value of opening
inventory (carrying amount: new accounting policy and tax base: old accounting
policy) differs and no difference in the value of closing inventory.
74

14.1
The period-specific effect on Cost of Sales, and consequently on Profit/Loss and
taxable income for the year, can also be calculated as follows:
20.10
Accounting SARS:
Opening Inventory 45 000 35 000
Plus Purchases 100 000 100 000
Less: Closing Inventory (60 000) (60 000)
= Cost of Sales 85 000 75 000
• Cost of sales for tax purposes should be 10 000 less, therefore taxable income
should be 10 000 more.
75

14.1
c.) Calculate the deferred tax balance in the statement of financial position at
28 February 20.9 and 28 February 20.10 as well as the deferred tax amount
charged to the statement of comprehensive income in for the years ended
28 February 20.9 and 20.10. (Indicate whether it is a debit or credit entry.)
CA TB TD D/TAX SFP D/TAX SPL
taxable/(deductible) dr dta / (cr) (dtl) dr/(cr)
20.8
Inventory 38 000new 30 000old 8 000 (2 160)
20.9
Inventory 45 000new 35 000old 10 000 (2 700) 540
20.10
Inventory 60 000new 60 000new - - (2 700)
SARS: old policy for the value of inventory (see figuresold) except for the closing inventory of the
current year. Accounting: new policy for the value of inventory for ALL years. (See figures76new )

14.1
d.) Show how all the information above would be disclosed in the notes to
financial statements of Stones for the year ended 28 February 20.10. Comparative
figures are required, accounting policy notes are not required.
• Change in accounting policy
• Income tax expense
77

14.1
d.) The change was a Voluntary change in accounting policy – thus
Refer to the disclosure requirements in IAS 8: 29
Stones Ltd
Notes to the financial statements for the year ended 28 February 20.10
2. Change in accounting policy
During the year, the company changed its policy for the valuation of inventory from
the first-in, first-out to the weighted average method. Due to the inventory turnover
this will result in a more reliable presentation of information. The change in policy
has been accounted for retrospectively and the comparative amounts have been
appropriately restated. The effect of the change is as follows:
78

14.1
2. Change in accounting policy (continued)
20.10 20.9 20.8 Notes
Increase/(Decrease) in cost of sales (5 000) (2 000) -
Increase/(Decrease) in income tax expense 1 400 560 - A
(Increase)/Decrease in profit for the year (3 600) (1 440) -
Increase/(Decrease) in inventories 15 000 10 000 8 000
(Increase)/Decrease in current tax due (4 050) - -
B C
(Increase)/Decrease in deferred tax liability - (2 700) (2 160)
Increase/(Decrease) in total equity 10 950 7 300 5 840
Increase/(Decrease) in retained earnings 5 840 D
79

14.1
Decrease vs Increase and use of brackets
Easiest way to think about the brackets when disclosing an increase or decrease:
Expenses/Loss/Assets: Increase/(Decrease)
Income/Profit/Liabilities:(Increase)/Decrease
80

14.1
• Explanatory comments:
• A: These three lines discloses the period-specific changes on the affected line items in the
SPL in the current and comparative period. Pay careful attention to whether it is an increase
or a decrease – this is very important to show in your answer
• B: These four lines discloses the cumulative effect on the affected line items in the SFP in
the current and comparative period.
• C: Pay careful attention to how the tax effects are disclosed. SARS will only allow the new
valuation of inventory for the current period, thus only the current period’s current tax
expense may be adjusted. For the previous periods there will be a temporary difference
(and thus deferred tax consequences) between the carrying value of the inventory (per the
new policy applied for accounting) and the old policy) applied for tax purposes). Trace these
amounts back to your calculations in a, b and c.
• E: This disclosure addresses IAS 8: 29d 81

14.1
4. Income tax expense
20.10
Current taxation 241 650
Deferred taxation (2 700)
Inventory (2 700)
Income tax expense per statement of profit or loss and other comprehensive 238 950
income
Numerical reconciliation between the standard tax rate and the average effective tax rate
Standard tax rate (885 000 * 27%) 27% 238 950
Average effective tax rate 27% 238 82 950
Homework question to complete
• Please attempt the following homework question from the module pack for IAS 8:
• Question: Jetpro Ltd
83

IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors L1

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Unit 14: Accounting Policies,

• Understand the basic theory of changes in accounting policies.

• For Accounting Policies:

• For Accounting Estimates:

• For Prior period errors:

• Example of an accounting policy, as an extract from the notes to the financial

• Consider IAS 16, Property, plant and equipment:

• Changes are permitted ONLY if the change:

• Is this a change in an accounting policy?

• If you guessed NO - you would be Spot on! (IAS 8: 16)

• When an accounting policy has to be applied to transactions or

• Is this a change in an accounting policy?

• If you guessed YES - you would be Spot on! (IAS 8: 14b)

• Changes in accounting policies are permitted ONLY if the change:

• In other words – it is when the entity recalculates the applicable

• When an entity applies a new accounting policy retrospectively, it

• Figures for 2017: Prior

• Revenue amount of 96 629:

• When will retrospective application be impracticable? (IAS 8: 5)

• Retrospective application is impracticable when the entity cannot

• If it is impracticable to determine the effects of the change in accounting

• Retrospective application to a prior period is not practicable

• Usually the adjustment is made to RETAINED EARNINGS.

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

• What does this mean?

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

• Calculation of cost of sales for 20.19:

Unit 14: Accounting Policies

Equity and Liabilities

Unit 14: Accounting Policies

• Calculation of inventory balance for 20.19:

Unit 14: Accounting Policies

Unit 14: Accounting Policies

• This example illustrates a Voluntary change in accounting policy – thus

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

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Unit 14: Accounting Policies

Profit before tax – given 880 000

Unit 14: Accounting Policies

Cumulative Period Cumulative Period Cumulative

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Unit 14: Accounting Policies

Profit before tax – as calculated 885 000