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Chapter 8
Learning objectives
 IAS 8 Accounting
Policies, Changes in
Accounting Estimates
and Errors
 Introduction
IAS 8 governs the following topics:
• selection of accounting policies
• changes in accounting policies
• changes in accounting estimates
• correction of prior period errors.

Accounting policies are the specific

principles, bases, conventions, rules and
practices applied by an entity in preparing and
presenting financial statements' (IAS 8, para 5).
 Accounting policy’s
information
The financial statements provide 'information that is:
• relevant to the economic decision-making needs of
users
• reliable in that the financial statements
Ø represent faithfully the financial position, financial
performance and cash flows of the entity
Ø reflect the economic substance of transactions, other
events and conditions and not merely the legal form
Ø are neutral, i.e. free from bias
Ø are prudent, and
Ø are complete in all material respects' (IAS 8, para 10)
 Changing accounting
policies
IAS 8 requires accounting policies to be
changed 'only if the change:
• is required by an IFRS Standard or
• results in the financial statements
providing reliable and more relevant
information' (IAS 8, para 14).
The change to recognition,
presentation, measurement basis.
Accounting for a change
in accounting policy
The required accounting treatment is that:
• the change should be applied retrospectively, with
an adjustment to the opening balance of
retained earnings in the statement of changes in
equity
• comparative information should be restated
unless it is impracticable to do so
• if the adjustment to opening retained earnings
cannot be reasonably determined, the change
should be adjusted prospectively, i.e. included in
the current period’s statement of profit or loss.
 Accounting estimates
An accounting estimate is a method adopted by
an entity to arrive at estimated amounts for the
financial statements.
Most figures in the financial statements require
some estimation:
• the exercise of judgement based on the latest
information available at the time
• at a later date, estimates may have to be
revised as a result of the availability of new
information, more experience or subsequent
developments.
 Changes in accounting
estimates
• The effects of a change in accounting estimate
should be included in the statement of profit or
loss in the period of the change and, if subsequent
periods are affected, in those subsequent periods.
• The effects of the change should be included in the
same income or expense classification as was
used for the original estimate.
• If the effect of the change is material, its nature
and amount must be disclosed.
Examples of changes in
accounting estimates
• the useful lives of non-current assets
• the residual values of non-current assets
• the method of depreciating non-current
assets
• warranty provisions, based upon more
up-to-date information about claims
frequency and value.
 Illustration 2
Which of the following is a change in accounting
policy as opposed to a change in estimation
technique?
1. An entity has previously charged interest
incurred in connection with the construction of
tangible non-current assets to the statement of
profit or loss. Following the revision of IAS 23
Borrowing Costs, and in accordance with the
revised requirements of that standard, it now
capitalizes this interest.
2. An entity has previously depreciated vehicles
using the reducing balance method at 40% pa. It
now uses the straight-line method over a period
of five years.
 Illustration 2. (cont.)
3. An entity has previously shown certain
overheads within cost of sales. It now
shows those overheads within
administrative expenses.
4. An entity has previously measured
inventory at weighted average cost. It
now measures inventory using the first
in first out (FIFO) method.
 Prior period errors
Such errors include mathematical
mistakes, mistakes in applying
accounting policies, oversights and
fraud.

Correction of prior period errors will be

retrospectively
Illustration 3
IFRS 13 Fair Value
Measurement
 Definition
• Fair value is the price that would be
received to sell an asset or paid to transfer
a liability in an orderly transaction between
market participants at the measurement
date (i.e. an exit price).
• Fair value may be required to be
measured on a recurring basis or a
nonrecurring basis
• IFRS 13 establishes a hierarchy that
categorizes the inputs to valuation
techniques used to measure fair value
 Level 1 and 2
• Level 1 inputs comprise quoted prices (‘observable’)
in active markets for identical assets and liabilities
at the measurement date. This is regarded as
providing the most reliable evidence of fair value
and is likely to be used without adjustment.
• Level 2 inputs are observable inputs, other than
those included within Level 1 above, which are
observable directly or indirectly. This may include
quoted prices for similar (not identical) assets or
liabilities in active markets, or prices for identical
or similar assets and liabilities in inactive markets.
Typically, they are likely to require some degree of
adjustment to arrive at a fair value measurement.
 Level 3
Level 3 inputs are unobservable inputs for
an asset or liability, based upon the best
information available, including information
that may be reasonably available relating to
market participants.
 Disclosure
An entity shall disclose information that helps users
of its financial statements assess both of the
following:
• for assets and liabilities that are measured at fair
value on a recurring or non-recurring basis in the
statement of financial position after initial
recognition, the valuation techniques and inputs
used to develop those measurements.
• for recurring fair value measurements using
significant unobservable inputs, the effect of the
measurements on profit or loss or other
comprehensive income for the period.
Accounting for inventory
 IAS 2 Inventories
• Inventories are valued at the lower of
cost and net realizable value (NRV).
• Cost is the cost of bringing items of
inventory to their present location
and condition (including cost of
purchase and costs of conversion).
 Cost of purchase
• purchase price including import duties,
transport and handling costs
• any other directly attributable costs,
less trade discounts, rebates and
subsidies.
 Cost of conversion
• costs which are specifically attributable
to units of production, e.g. direct labour,
direct expenses and subcontracted
work
• production overheads, which must be
based on the normal level of activity
• other overheads, if any, attributable in
the particular circumstances of the
business to bringing the product or
service to its present location and
condition.
 Costs should be
charged as expenses
• abnormal waste
• storage costs
• administrative overheads which do not
contribute to bringing inventories to
their present location and condition
• selling costs.
 NRV and Inventory
valuation methods
NRV is the estimated selling price, in the
ordinary course of business, less the
estimated costs of completion and the
estimated costs necessary to make the
sale.
Valuation methods:
• actual unit cost
• first in, first out (FIFO)
• weighted average cost (AVCO).
Disclosure requirements
The main disclosure requirements of IAS 2 are:
• accounting policy adopted, including the cost
formula used
• total carrying amount, classified appropriately
• amount of inventories carried at NRV
• amount of inventories recognized as an
expense during the period
• details of any circumstances that have led to
the write-down of inventories to their NRV.
Illustration 4 – Inventory
valuation
Value the following items of inventory.
a) Materials costing $12,000 bought for processing
and assembly for a profitable special order. Since
buying these items, the cost price has fallen to
$10,000.
b) Equipment constructed for a customer for an agreed
price of $18,000. This has recently been completed
at a cost of $16,800. It has now been discovered
that, in order to meet certain regulations, conversion
with an extra cost of $4,200 will be required. The
customer has accepted partial responsibility and
agreed to meet half the extra cost.
IAS 41 Agriculture
 Scope of IAS 41
IAS 41 Agriculture relates to Biological
assets, government grants and
agricultural produce at the point of
harvest.
Products which are the result of
processing after harvest will be dealt
with under IAS 2 Inventories, or other
applicable standards.
 Biological assets
• Sheep • Tea bushes
• Trees in a timber • Grape vines
plantation • Fruit trees
• Dairy cattle • Oil palms
• Pigs • Rubber trees
• Cotton plants
• Sugarcane
• Tobacco plants
Biological assets (cont.)
 Agricultural produce
• Wool • Picked leaves
• Felled trees • Picked grapes
• Milk • Picked fruit
• Carcass • Harvested latex
• Harvested cotton
• Harvested cane
 Products resulting from
processing after harvest
(outside the scope of IAS 41)
• Yarn, carpet • Cured tobacco
• Logs, lumber • Tea
• Cheese • Wine
• Sausages, cured • Processed fruit
hams
• Palm oil
• Thread, clothing
• Rubber products
• Sugar
Biological assets (1/2)
A biological asset is a living animal or
plant. A biological asset should be
recognized if:
• It is probable that economic
benefits will flow to the entity
• The cost or fair value of the asset
can be reliably measured, and
• The entity controls the asset.
Biological assets (2/2)
Recognition and measurement
Initial measurement is at:
• Fair value less any estimated 'point of
sale' costs
• If there is no fair value, then the cost
model should be used.
Subsequent measurement:
• Revalue to fair value less point of sale
costs at year-end, taking any gain or
loss to the statement of profit or loss.
 Bearer plants
Bearer plants are accounted for under
IAS 16 Property, Plant and Equipment,
rather than IAS 41 Agriculture. A bearer
plant is a living plant that:
• is used in the production or supply of
agricultural produce;
• is expected to bear fruit for more than
one period; and
• has a remote likelihood of being sold as
agricultural produce, except for
incidental scrap sales
 Agricultural produce
At the date of harvest the produce should be
recognized and measured at fair value less
estimated costs to sell.
• Gains and losses on initial recognition are
included in profit or loss (profit from
operations) for the period.
• After produce has been harvested, IAS 41
ceases to apply. Agricultural produce
becomes an item of inventory. Fair value less
costs to sell at the point of harvest is taken as
cost for the purpose of IAS 2 Inventories,
which is applied from then onwards.
 TYU 1
A herd of five 4 year-old pigs was held on 1
January 20X3. On 1 July 20X3 a 4.5 year-old
pig was purchased for $212.
The fair values less estimated point of sale
costs were:
• 4 year-old pig at 1 January 20X3 $200
• 4.5 year-old pig at 1 July 20X3 $212
• 5 year-old pig at 31 December 20X3 $230
Required: Calculate the amount that will be
taken to the statement of profit or loss for
the year ended 31 December 20X3.
 TYU 2
McDonald operates a dairy farm. At 1 January
20X1, he owns 100 cows worth $1,000 each
on the local market. At 31 December 20X1, he
owns 105 cows worth $1,100 each. During
20X1 he sold 40,000 gallons of milk at an
average price of $5 a gallon. When cows are
sold at the local market, the auctioneer
charges a commission of 4%.
Show extracts from the financial
statements for 20X1 for these activities,
assuming that no cows were purchased or
sold during the year.
Any questions?