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FINANCIAL ACCOUNTING & REPORTING
FAR 02: ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS (IAS 8)
Objective
The objective of this Standard is to prescribe the
criteria for selecting and changing accounting policies,
together with the accounting treatment and disclosure
of changes in accounting policies, changes in
accounting estimates and corrections of errors. The
Standard is intended to enhance the relevance and
reliability of an entity’s financial statements, and the
comparability of those financial statements over time
and with the financial statements of other entities.
ACCOUNTING POLICIES
Accounting policies (definition) are the specific
principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting
financial statements.
Selection and application of accounting policies
A specific Standard applies. When a Standard or an
Interpretation specifically applies to a transaction,
other event or condition, the accounting policy or
policies applied to that item must be determined by
applying the Standard or Interpretation and
considering any relevant Implementation Guidance
issued by the IASB for the Standard or Interpretation.
[PAS 8.7]
 International Financial Reporting Standards are
standards and interpretations adopted by the
International Accounting Standards Board
(IASB). They comprise:
o International Financial Reporting
Standards (IFRSs);
o International Accounting Standards
(IASs); and
o Interpretations developed by the
International Financial Reporting
Interpretations Committee (IFRIC) or the
former Standing Interpretations
Committee (SIC) and approved by the
IASB.
No specific Standard applies. In the absence of a
Standard or an Interpretation that specifically applies
to a transaction, other event or condition,
management must use its judgment in developing and
applying an accounting policy that results in
information that is relevant and reliable. [PAS 8.10]
In making that judgment, management must refer to,
and consider the applicability of, the following sources
in descending order:
 the requirements and guidance in IASB
standards and interpretations dealing with
similar and related issues; and
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 the definitions, recognition criteria and
measurement concepts for assets, liabilities,
income and expenses in the Framework. [PAS
8.11]
Management may also consider the most recent
pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop
accounting standards, other accounting literature and
accepted industry practices, to the extent that these
do not conflict with the sources in paragraph 11. [PAS
8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies
consistently for similar transactions, other events and
conditions, unless a Standard or an Interpretation
specifically requires or permits categorisation of items
for which different policies may be appropriate. If a
Standard or an Interpretation requires or permits such
categorisation, an appropriate accounting policy shall
be selected and applied consistently to each category.
[PAS 8.13]
Changes in Accounting Policies
Note that changes in accounting policies do not
include applying an accounting policy to a kind of
transaction or event that did not exist in the past. [PAS
8.16]
The following are not changes in accounting policies:
(a) the application of an accounting policy for
transactions, other events or conditions that
differ in substance from those previously
occurring; and
(b) the application of a new accounting policy for
transactions, other events or conditions that
did not occur previously or were immaterial.
[PAS 8.16]
Note that when an entity changes from the cost
model to the revaluation model under IAS 16 –
Property, Plant and Equipment – or IAS 38 – Intangible
Assets, these are not changes in accounting policy
that are covered by IAS 8 in the usual manner, but
instead required to be treated as a revaluation in the
period. [IAS 8.17]
An entity is permitted to change an accounting policy
only if the change:
(a) is required by a standard or interpretation; or
(b) results in the financial statements providing
reliable and more relevant information about
the effects of transactions, other events or
conditions on the entity's financial position,
financial performance, or cash flows. [PAS
8.14]
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If a change in accounting policy is required by a new
IASB standard or interpretation, the change is
accounted for as required by that new
pronouncement or, if the new pronouncement does
not include specific transition provisions, then the
change in accounting policy is applied retrospectively.
[PAS 8.19]
Retrospective application (definition) is applying a
new accounting policy to transactions, other events
and conditions as if that policy had always been
applied.
It means adjusting 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. [PAS 8.22]
 However, if it is impracticable to determine
either the period-specific effects or the
cumulative effect of the change for one or more
prior periods presented,
→ the entity shall apply the new accounting
policy to the carrying amounts of assets
and liabilities as at the beginning of the
earliest period for which retrospective
application is practicable, which may be
the current period, and shall make a
corresponding adjustment to the opening
balance of each affected component of
equity for that period. [PAS 8.24]
 Also, if it is impracticable to determine the
cumulative effect, at the beginning of the
current period, of applying a new accounting
policy to all prior periods,
→ the entity shall adjust the comparative
information to apply the new accounting
policy prospectively from the earliest date
practicable. [PAS 8.25]
Impracticable (definition) Applying a requirement is
impracticable when the entity cannot apply it after
making every reasonable effort to do so. For a
particular prior period, it is impracticable to apply a
change in an accounting policy retrospectively or to
make a retrospective restatement to correct an error
if:
(a) the effects of the retrospective application or
retrospective restatement are not
determinable;
(b) the retrospective application or retrospective
restatement requires assumptions about what
management’s intent would have been in that
period; or
(c) the retrospective application or retrospective
restatement requires significant estimates of
amounts and it is impossible to distinguish
objectively from other information, information
about those estimates that:
(i) provides evidence of circumstances that
existed on the date(s) as at which those
amounts are to be recognised, measured
or disclosed; and
(ii) would have been available when the
financial statements for that prior period
were authorised for issue
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Prospective application of a change in accounting
policy (definition) is applying the new accounting
policy to transactions, other events and conditions
occurring after the date as at which the policy is
changed
Disclosures Relating to Changes in Accounting
Policies
Note: Disclosure requirements for accounting policies,
except those for changes in accounting policies, are
set out in IAS 1 Presentation of Financial Statements.
Disclosures relating to changes in accounting policy
caused by a new standard or interpretation include:
[PAS 8.28]
 the title of the standard or interpretation
causing the change;
 the nature of the change in accounting policy;
 a description of the transitional provisions,
including those that might have an effect on
future periods;
 for the current period and each prior period
presented, to the extent practicable, the
amount of the adjustment:
o for each financial statement line item
affected; and
o for basic and diluted earnings per share
(only if the entity is applying PAS 33);
 the amount of the adjustment relating to
periods before those presented, to the extent
practicable; and
 if retrospective application is impracticable, an
explanation and description of how the change
in accounting policy was applied.
Financial statements of subsequent periods need not
repeat these disclosures.
Disclosures relating to voluntary changes in
accounting policy include: [PAS 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:
o for each financial statement line item
affected; and
o for basic and diluted earnings per share
(only if the entity is applying PAS 33);
 the amount of the adjustment relating to
periods before those presented, to the extent
practicable; and
 if retrospective application is impracticable, an
explanation and description of how the change
in accounting policy was applied.
Financial statements of subsequent periods need not
repeat these disclosures.
If an entity has not applied a new standard or
interpretation that has been issued but is not yet
effective, the entity must disclose that fact and any
and known or reasonably estimable information
relevant to assessing the possible impact that the
new pronouncement will have in the year it is
applied. [PAS 8.30]
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CHANGES IN ACCOUNTING ESTIMATE
A change in accounting estimate (definition) is an
adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing
the expected future benefits and obligations
associated with that asset or liability.
The effect of a change in an accounting estimate shall
be recognised prospectively by including it in profit or
loss in: [PAS 8.36]
 the period of the change, if the change affects
that period only; or
 the period of the change and future periods,
if the change affects both.
Prospective application of a change in an accounting
estimate (definition) is recognising the effect of the
change in the accounting estimate in the current and
future periods affected by the change.
However, to the extent that a change in an accounting
estimate gives rise to changes in assets and liabilities,
or relates to an item of equity, it is recognised by
adjusting the carrying amount of the related asset,
liability, or equity item in the period of the change.
[PAS 8.37]
Disclosures Relating to Changes in Accounting
Estimate
 the nature and amount of a change in an
accounting estimate that has an effect in the
current period or is expected to have an effect
in future periods.
 if the amount of the effect in future periods is
not disclosed because estimating it is
impracticable, an entity shall disclose that fact.
[PAS 8.39-40]
ERRORS
Material (definition) Omissions or misstatements of
items are material if they could, individually or
collectively, influence the economic decisions that
users make on the basis of the financial statements.
Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a
combination of both, could be the determining factor.
Prior period errors (definition) are omissions from,
and misstatements in, an entity's financial statements
for one or more prior periods arising from a failure to
use, or misuse of, reliable information that was (a)
available and (b) could reasonably be expected to
have been obtained and taken into account in
preparing those statements. Such errors result from
mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of
facts, and fraud.
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The general principle in PAS 8 is that an entity must
correct all material prior period errors retrospectively
in the first set of financial statements authorised for
issue after their discovery by retrospective
restatement: [PAS 8.42]
 restating the comparative amounts for the
prior period(s) presented in which the error
occurred; or
 if the error occurred before the earliest prior
period presented, restating the opening
balances of assets, liabilities and equity for
the earliest prior period presented.
Retrospective restatement (definition) is correcting
the recognition, measurement and disclosure of
amounts of elements of financial statements as if a
prior period error had never occurred.
 However, if it is impracticable to determine the
period-specific effects of an error on
comparative information for one or more prior
periods presented,
→ the entity must restate the opening
balances of assets, liabilities, and equity for
the earliest period for which retrospective
restatement is practicable (which may be
the current period). [PAS 8.44]
 Further, if it is impracticable to determine the
cumulative effect, at the beginning of the
current period, of an error on all prior periods,
→ the entity must restate the comparative
information to correct the error
prospectively from the earliest date
practicable. [PAS 8.45]
Disclosures Relating to Prior Period Errors include
[PAS 8.49]
 the nature of the prior period error;
 for each prior period presented, to the extent
practicable, the amount of the correction:
o for each financial statement line item
affected; and
o for basic and diluted earnings per share
(only if the entity is applying PAS 33);
 the amount of the correction at the beginning
of the earliest prior period presented; and
 if retrospective restatement is impracticable, an
explanation and description of how the error
has been corrected.
Financial statements of subsequent periods need not
repeat these disclosures.
Note: The tax effects of corrections of prior period
errors and of retrospective adjustments made to apply
changes in accounting policies are accounted for and
disclosed in accordance with IAS 12 Income Taxes.
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DRILLS
1. An accounting policy
A. Comprises the principles applied in preparing the
financial statements
B. Is a judgment applied in deciding whether to
recognize a transaction
C. Is the application of judgment in deciding on the
measurement of an item
D. Is the judgment used in deciding on whether to
disclose a particular item
2. Proper application of accounting principle is most
depended upon the
A. Existence of specific guidelines
B. Oversight of regulatory bodies
C. External audit function
D. Professional judgment of the accountant
3. Which of the following statement best describes
“retrospective application”?
A. Recognizing a change in accounting policy in the
current and future periods
B. Correcting the financial statements as if a prior
period had never occurred
C. Applying a new accounting policy to transaction
occurring after the date at which the policy is
changed
D. Applying a new accounting policy to transactions
as if that policy had always been applied
4. Which of the following statements best describes
prospective application?
A. Recognizing a change in accounting policy in the
current and future periods affected by the
change.
B. Correcting the financial statements as if a prior
period error had never occurred.
C. Applying a new accounting policy to transactions
occurring after the date at which the policy
changed
D. Applying a new accounting policy to transactions
as if that policy had always been applied.
5. The effect of a change in accounting policy should be
reported as a(n)
A. Separate line item on face of the income
statement in the year of the change
B. Adjustment to the opening balance of retained
earnings
C. Extraordinary item in the year of the change
D. Prior period adjustment in the year of the change
6. Prospective application of a change in accounting
policy is required
A. Anytime
B. When the amount of adjustment to the
opening balance of retained earnings can be
reasonably determined
C. When the amount of adjustment to the
opening balance of retained earnings cannot
be reasonably determined
D. When ordered by management
FINANCIAL ACCOUNTING & REPORTING
7. Which type of accounting change should always be
accounted for in current and future periods?
A. Change in accounting estimate
B. Correction of an error
C. Change in accounting principle
D. Change in reporting entity
8. Which of the following is a characteristic of a change
in accounting estimate?
A. It does not affect the financial statements of
prior periods.
B. It requires the reporting of pro forma amounts
for prior periods.
C. It never needs to be disclosed.
D. It should be reported through restatement of the
financial statements.
9. In 20x2, a firm changed from the FIFO method of
accounting for inventory to Weighted Average. The
firm’s 20x1 and 20x2 comparative financial
statements will reflect which method or methods?
A. 20x1: Weighted Average, 20x2: Weighted
Average
B. 20x1: FIFO, 20x2: FIFO
C. 20x1: FIFO, 20x2: Weighted Average
D. 20x1: Weighted Average, 20x2: FIFO
10. In 20x2, a firm changed from straight-line (SL)
method of depreciation to double declining balance
(DDB). The firm’s 20x1 and 20x2 comparative
financial statements will reflect which method or
methods?
A. 20x1: SL, 20x2: SL
B. 20x1: SL, 20x2: DDB
C. 20x1: DDB, 20x2: DDB
D. 20x1: SL, 20x2: either SL or DDB
11. When it is impracticable to distinguish between a
change in estimate and in accounting policy, then an
entity should
A. Treat the entire change as a change in estimate
with appropriate disclosure
B. Treat the entire change as a change in accounting
policy
C. Reasonably apportion the relative amounts of
change in estimate and the change in accounting
policy
D. It is best to ignore in the year of change; the
entity should then wait for the following year to
see how the change develops and treat it
accordingly
12. A statement of financial position as at the beginning
of the earliest comparative period should be
prepared by an entity in any of the following
circumstances, except
A. When the entity applies an accounting policy
retrospectively.
B. When the entity makes retrospective
restatement of items in the financial statements.
C. When the entity reclassifies items in the financial
statements.
D. When the entity changes any of its estimates
used in accounting.
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