ACCOUNTING POLICIES, ACCOUNTING

ESTIMATES
AND ERRORS
(IAS8)
 Overview
• Accounting policies
• Selection of accounting policies
• Changes in accounting policies
• Accounting for a change in accounting policy
• Disclosure of a change in accounting policy
• Accounting estimates
• Prior period errors
• Correction of a prior period error
• Disclosure of prior period errors
 Accounting policies
IAS8 defines accounting policies as "the specific
principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting
financial statements".

For example, one of an entity’s accounting policies

might be to measure property, plant and
equipment at a current valuation rather than at
historical cost.
 Selection of accounting policies
An accounting policy should be selected so as to
comply with applicable international standards (if any).
Otherwise, the entity should refer to:
• international standards which deal with similar and
related issues
• the IASB Conceptual Framework
• the pronouncements of other standard-setting
bodies
• accounting literature and accepted industry
practices.
 Changes in accounting policies
An accounting policy may be changed only if:
• the change is required by an international
standard, or
• the change results in reliable and more relevant
information.
 Accounting for a change in accounting
policy
If a change in policy results from the application of
an international standard, the change is accounted
for in accordance with the transitional provisions
(if any) provided in that standard.
Otherwise, the change is accounted for
retrospectively i.e. comparative figures are
adjusted and are presented as if the new policy
had always been applied.
 Disclosure of a change in
accounting policy
• for changes caused by the initial application of an
international standard:
– the title of the standard and a description of any
transitional provisions in that standard
• for voluntary changes in accounting policies:
– the reasons for making the change
• for all changes in accounting policies
– the nature of the change
– adjustments made in the current period and in each
prior period presented
 Accounting estimates
IAS8 states the following:
"many items in financial statements cannot be measured
with precision but can only be estimated"
"the use of reasonable estimates is an essential part of the
preparation of financial statements and does not undermine
their reliability"

Changes in accounting estimates should be accounted for

prospectively. Comparative figures for prior periods should
not be restated.
 Prior period errors
IAS8 defines prior period errors as "omissions from, and
misstatements in, the entity's financial statements for
one or more prior periods arising from a failure to use, or
misuse of, reliable information that:

(a) was available when financial statements for

those periods were authorised for issue; and
(b) could reasonably be expected to have been
obtained and taken into account in the
preparation and presentation of those financial
statements".
 Correction of a prior period error
Material prior period errors must be corrected
retrospectively. This involves:
• restating comparative figures for the prior
period(s) in which the error occurred, or
• if the error occurred before the earliest prior
period for which comparatives are
presented, restating the opening balances of
assets, liabilities and equity for the earliest
prior period presented.
 Disclosure of prior period errors
• the nature of the prior period error
• for each prior period presented, the amount of the
correction to each affected line item in the financial
statements
• the amount of the correction at the beginning of
the earliest prior period presented
• if retrospective restatement is impracticable for a
particular prior period, a description of the
circumstances that have led to this condition and a
description of how (and from when) the error has
been corrected.