International Accounting

Standard – IAS 8
Accounting Policies, Changes in
Accounting Estimates and Errors
 Objective
To prescribe the criteria for selecting and
changing accounting policies
together with
accounting treatment and disclosure of
change in
 accounting policies
accounting estimates
Correction of errors
 Scope
• This is applicable to prescribe the criteria for
selecting and changing accounting policies
together with accounting treatment and
disclosure of change in accounting policies,
accounting estimates and prior period errors
• This standard is intended to enhance the
relevance, reliability and comparability of
financial statements.
 Definitions

Accounting Policies
Principles, bases, conventions, rules and
practices adopted by an enterprise to
make financial statements.
 Criteria for selection of accounting
policies
• Relevance
• Reliability
• Faithful Presentation
• Substance over form
• Free from Bias
• Prudent
• Complete in all material respects
 Examples of accounting policies

• Valuation of inventory using FIFO, Average Cost or other

suitable basis as per IAS 2
• Classification, presentation and measurement of
financial assets and liabilities under categories specified
under IAS 32 and IAS 39 such as held to maturity,
available for sale or fair value through profit and loss
• Timing of recognition of assets, liabilities, expenses and
income
• Basis of measurement of non-current assets such as
historical cost and revaluation basis
• Accruals basis of preparation of financial statements
 Change in accounting policies
• A change in accounting policies should be
made only if it is required by:
• A statute
• An accounting standard setting body
• Or if the change will result in more appropriate
presentation
Changes in accounting policies
• The following are not the changes in
accounting policies
• The adoption of accounting policy for events or
transactions that are different in substance from
previous ones
• A new accounting policy for events that did not
occur before or if occurred then were immaterial
 Adoption of an IAS
• If an accounting policy is changed
because of adoption of new accounting
standard then it should be in accordance
with that accounting standard
 Other changes in accounting
policies – Benchmark treatment
• The change in accounting policy should be
applied retrospectively unless the amounts
relating to adjustments from prior periods
are not reasonably determinable. Any
resulting adjustment should be reported in
opening balance of retained earnings.
• The following should also be disclosed
• The reason of change
• The amount of change in all periods
• The amount of change of prior period
included in comparative statements
• The fact that comparative statements are
restated or it was impracticable to do so
 Changes in Accounting Estimates
 The accounting estimates are for items such as

 bad debts
 inventory obsolescence
 useful lives of assets etc.

 The effect of change in the accounting estimate should

be included in the calculation of profit and loss and the
period or periods of change should also be mentioned
that are affected.
 To the extent that a change in accounting estimate give
rise to changes in assets and liabilities, or relates to an
item of equity, shall be adjusted by changing the
carrying amounts thereof in the period of change.
 Changes in Accounting Estimates

• Disclosure

– An entity shall disclose the nature and amount

of a change in the current period or is
expected to have an effect on future periods,
except for disclosures of the effect on future
periods when it is impracticable to estimate
that effect (an entity shall disclose this fact)
 Prior period errors
• Prior period errors 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
available and 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.
 Prior Period Errors
• Material errors or immaterial errors made
intentionally not discovered until
subsequent periods are prior period errors
• Errors can arise in respect of
– Recognition
– Measurement
– Presentation
– Disclosure of elements of financial statements
 Prior Period Errors
• An entity shall correct material prior period errors
retrospectively in the first set of financial statements
authorized for issue after their discovery by:
– Restating the comparative amount for the prior period/periods
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.
– The correction of prior period error is excluded from the profit
and loss account in which error is discovered.
 Prior Period Errors
• Limitation of retrospective restatements
– A prior period error shall be corrected by
retrospective restatement except to the extent
that it is impracticable to determine either the
period specific effects or the cumulative effect
of error.
 Prior Period Errors
• Disclosure
– An entity shall disclose the followings:
• The nature of prior period error
• For each prior period presented, to the extent possible, the
amount of the corrections
– For each financial statement line item affected and
– If IAS 33 applies to the entity, for basic and diluted earning per
share.
• The amount of correction at the beginning of the earliest prior
period presented and
• If retrospective restatement is impracticable for a particular
prior period, the circumstances that led to the existence of
that condition and a description of how and from when the
error has been corrected.
 Example
• During 2006 Beta Co. discovered that certain
products that had been sold during 2004 were
incorrectly included in inventory at 31st
December 2004 at Rs. 6,500. Beta’s accounting
records for 2005 show sales of Rs.104,000 cost
of goods sold of Rs. 86,500 including Rs. 6,500
for error in opening inventory. And income taxes
of Rs. 5,250. In 2004 the sales were Rs. 73,500
and cost of sales were Rs. 53,500 income taxes
were 30%. Opening retained earnings of 2004
were Rs. 20,000 and of 2005 were Rs. 34,000.