International Financial Reporting Standards

Topic 3:
IAS 8 – Accounting
Policies, Changes in
Accounting Estimates
and Errors
Instructor: Nguyễn Trí Tri, © 2015
IAS 8 2

• Learning Resources
– Mandatory Readings
• KTQT 2: Chapter 7
• IFRS Practical Guide: Chapter 5
• IASB (2005), IAS 8 – Accounting
Policies, Changes in Accounting
Estimates and Errors
– Recommended Readings

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LEARNING OBJECTIVES 3

After studying this topic, students should be able to:

1) Understand accounting policies

2) Understand changes in accounting estimates
3) Understand errors

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Accounting policies 4

• Definition of accounting policies

• Selection and application of accounting policies
• Consistency of accounting policies
• Changes in accounting policies

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Definition of accounting policies 5

• Accounting policies are the specific principles,

bases, conventions, rules and practices applied by
an entity in preparing and presenting financial
statements.

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Selection and application of
accounting policy 6

For a specific transaction or event -

 
First, look to the IFRS that deals specifically with that
situation:
– International Financial Reporting Standards,
– International Accounting Standards, and
– Interpretations developed by IFRIC or predecessor SIC

 
Appendices and implementation guidance attached to
these are an integral part of each only if stated on the
specific standard.
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Selection and application of
accounting policy 7

• IFRS standards and interpretations - top of the

GAAP hierarchy

• When applied – information is assumed to be

relevant and reliable

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Relevant and reliable information 8

a) relevant to the economic decision-making needs

of users; and
b) reliable, in that the financial statements:
i. represent faithfully the financial position, financial
performance and cash flows of the entity;
ii. reflect the economic substance of transactions,
other events and conditions, and not merely the
legal form;
iii. are neutral, i.e. free from bias;
iv. are prudent; and
v. are complete in all material respects.
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Selection and application of
accounting policy 9

• If no specific IFRS that applies:

– Use judgment
– Develop a policy that results in relevant and reliable
information
– Hierarchy of sources to use
– Other IFRS with similar situations and issues
– Conceptual framework basics
– If not in conflict with above, use other sources:
– Pronouncements of other standard setters with
similar frameworks, accounting literature,
accepted industry practice, etc.

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Consistency of accounting
policies 10

• An entity shall select and apply its accounting

policies consistently for similar transactions, other
events and conditions, unless an IFRS specifically
requires or permits categorization of items for
which different policies may be appropriate. If an
IFRS requires or permits such categorization, an
appropriate accounting policy shall be selected and
applied consistently to each category.

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Changes in accounting policies 11

• An entity shall change an accounting policy only if

the change:
a) is required by an IFRS; 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.

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Changes in accounting policies 12

• If change due to:

– different economic conditions
– new events or conditions
– previously immaterial effects
• Then NOT a change in accounting policy

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Changes in accounting policies 13

Is the change in policy

due to the initial
Yes application of an IFRS? No

Does the IFRS indicates

a specific transitional This is voluntary change
accounting method?

Yes No
Apply the change in
Apply the specific
accounting policy
transitional provisions
retrospectively

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Changes in accounting policies 14

• Initial application of an IFRS

– if transitional accounting method provided – follow it
– if no transitional method – retrospective application
•  Voluntary change in policy
– retrospective application
• Retrospective (retroactive) application
– means apply new policy as if it had always been
applied
– change past amounts

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Initial application of an IFRS -
Example 15

• The initial application of a policy to revalue assets

in accordance with IAS 16 Property, Plant and
Equipment, or IAS 38 Intangible Assets, is a
change in an accounting policy to be dealt with as a
revaluation in accordance with IAS 16 or IAS 38,
rather than in accordance with IAS 8

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Retrospective application 16

• Retrospective application:
– for the earliest prior period presented
– adjust opening balance of equity affected
– adjust opening balance of other comparative
amounts disclosed
• Unless
– impracticable to determine effects on
specific prior periods or cumulative effect of
change

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Retrospective application 17

• If impracticable to apply full retrospective

treatment, then
– apply the change to assets, liabilities, and
equity accounts at beginning of earliest
possible period for which effects are known
• If impracticable to determine cumulative effect
even on current period opening balances, then
– apply new policy prospectively

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Changes in accounting policies –
Disclosure 18

• For all changes in accounting policy, disclose

– nature of the change
– amounts of adjustments to all F/S items, EPS, and to prior
periods
– if judged impracticable to apply retrospectively, explain why,
and how applied
•  If on application of a new/revised IFRS, also report
– name of IFRS, that transitional provisions are applied, any
likely future effects
•  Also disclosures about new IFRS released but not yet
effective

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Retrospective application –
Example 19

• ABC LTD until now has valued inventory using

LIFO method. However, following changes to IAS 2
Inventories, the use of LIFO method has been
disallowed. Therefore, management of the
company intends to use FIFO method for the
valuation of the company's stock.

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Retrospective application –
Example 20

• Following are extracts of ABC LTD's most recent

financial statements before the application of FIFO
method.

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Retrospective application –
Example 21

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Retrospective application –
Example 22

• The switch from LIFO method to FIFO method

represents a change in accounting policy which
must be accounted for retrospectively in the
financial statements.
• Management estimates that the value of its
inventory using FIFO method would be as follows:

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Retrospective application –
Example 23

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Retrospective application –
Example 24

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Retrospective application 25

• Impracticable: not able to determine adjustments

needed after making reasonable effort, i.e.,
– effects of retroactive changes not determinable
– assumptions needed about management’s intentions in the
prior period
– cannot make estimates without knowing circumstances that
existed in the prior period; can only do using hindsight
• Example: need to estimate fair value of private
company three years ago. Need to know expectations
that existed then re cash flows and risk-adjusted
discount rate. Not possible in many situations.

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Changes in accounting estimates 26

• Accounting estimates
a) bad debts;
b) inventory obsolescence;
c) the fair value of financial assets or financial
liabilities;
d) the useful lives of, or expected pattern of
consumption of the future economic benefits
embodied in, depreciable assets; and
e) warranty obligations.

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Changes in accounting estimates 27

• Change in accounting estimate – adjustment to

carrying amount of an asset/liability or amount
of asset consumed in period resulting from its
present status and the expected future
benefits/obligations associated with it.
– Results from new information or new
developments
– If uncertain whether a change in policy or a
change in estimate, account for it as a
change in estimate
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Changes in accounting estimates 28

• Estimates are fundamental to the accounting

process
• Changes are expected and recurring
• Therefore, account for prospectively
• Prospective application – recognize effect of
change in current and future periods

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Changes in accounting estimates 29

• Disclose
– Nature of the change
– Amount of the change, unless effect on
future periods impracticable to estimate

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Errors 30

• Prior period error – an omission or misstatement in

previously reported financial statements from failing
to use/misuse of reliable information that
– Was available when F/S were authorized, and
– Could reasonably be expected to have been used in
preparing those F/S
• e.g., arithmetic mistakes, mistakes in applying
accounting policies, oversights, misrepresentation
of facts, fraud

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Errors 31

• Accounting for correction of an error –

– Retrospective restatement
– As if error had never been made
– If impracticable to determine period-specific
adjustments, use partial retrospective
application, or even prospective treatment
(see change in accounting policy)

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Errors 32

• Disclose
– Nature of the error
– Amount of correction for each F/S item,
EPS, and to prior periods
– If judged impracticable to apply
retrospectively, explain why, how applied
and date from which error is corrected

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Correction of error –
Example 33

• Management of ABC LTD, while preparing financial

statements of the company for the period ended
31st December 20X2, noticed that they had failed
to account for depreciation in last year's accounts
in respect of an office building acquired in the
preceding year.

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Correction of error –
Example 34

• Following are extracts of ABC LTD's most recent

financial statements before correction of error

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Correction of error –
Example 35

The omission of depreciation of office building in the previous

year's financial statements represents a prior period accounting
error which must be accounted for retrospectively in the financial
statements.
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 36

• Financial statement extracts of ABC LTD would

appear as follows after the retrospective correction
of the prior period accounting error.

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 37

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The End! 38

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