Accounting concepts and policies

• International accounting standard 8

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 Accounting concepts and policies
Selection of accounting policies

• Accounting policies are the principles bases,

conventions, rules and practices applied by an
entity which specify how the effects of
transactions and other events are reflected in
the financial statements.

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Accounting concepts and policies
Selection of accounting policies

IAS 8 requires an entity to select and apply

appropriate accounting policies complying
with International Financial Reporting
Standards (IFRSs) and interpretations to
ensure that the financial statements provide
information that is:

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 Accounting concepts and policies
Selection of accounting policies

• Relevant to the decision-making needs of users

• Reliable in that way:
– Represent faithfully the results of financial position of
the entity
– Are neutral, i.e. free from bias
– Are prudent
– Are complete in all material respects
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 Accounting concepts and policies
Changing accounting policies

• The general rule is that accounting policies are

normally kept the same from period to period to
ensure comparability of financial statements over time.
• IAS 8 requires accounting policies to be changed only if
the change:
– Is required by IFRSs or
– Will result in a reliable and more relevant presentation of
events or transactions

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 Accounting concepts and policies
An entity is permitted to change an accounting
policy only if the change:
• is required by a standard or interpretation; or
•  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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Accounting concepts and policies
Changing accounting policies

The consistency theory means that a

company’s accounting policies will generally
remain the same from year to year. There may,
however, be circumstances where the policies
do have to change:

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 Accounting concepts and policies
Changing accounting policies

• If required by a standard or interpretation

• If the change will result in a more reliable and
relevant presentation of events in financial
statements

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 Accounting concepts and policies
Changing accounting policies

• 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 income statement.
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 Accounting concepts and policies
Changes in accounting estimates

An accounting estimates 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:

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 Accounting concepts and policies
Changes in accounting estimates

• 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

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 Accounting concepts and policies
Changes in accounting estimates
The requirement of IAS 8 are:

• The effects of a change in accounting estimate

should be included in the income statement in the
period of the change and, if subsequent periods
are affected, in those subsequent periods
• If the effect of the change is material, its nature
and amount must be disclosed.
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 Accounting concepts and policies
Changes in accounting estimates
Examples of changes in accounting estimates are
changes in :
• 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
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 Accounting concepts and policies
Example – Accounting estimates

• If anon-current asset has a depreciable

amount of Rs5000 to be written off over 5
years, different depreciation methods such as
straight line, reducing balance, sum of the
digits, etc. all represent different estimation
techniques

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 Accounting concepts and policies

• The choice of method of depreciation would

be the estimation technique whereas the
policy of written off the cost of non-current
assets over their useful lives would be the
accounting policy

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