Chapter 5

Accounting policies,
changes in accounting
estimates and errors
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
Introduction
 Requirement to present
comparative information
• When can comparative figures be changed?
• Reclassification of information, without changing
totals
• Changes to the profits and net assets in prior
periods (adjusted retrospectively)
• Prior period errors or change in accounting policy
• Changes in accounting estimates are adjusted
prospectively
 Selecting, applying and
disclosing accounting policies
 How should an entity select an
accounting policy?
• Management is
required to use
judgement in
selecting an
appropriate
accounting
policy
• Accounting
policies must
then be applied
consistently
May an entity change an
accounting policy?
 May an entity change an
accounting policy?
• Adjusted retrospectively, to adjust the opening
balance of retained earnings, unless:
• Transitional provisions allow prospective adjustment
• New accounting policy applies to new events that
are significantly different to previous events
• The effect is immaterial
• It is impracticable to adjust retrospectively
 How should an entity record
changes in accounting policy?
• Adjust
retrospectively,
unless required
to adjust
prospectively by
IFRS
• All voluntary
changes
adjusted
retrospectively
 How should an entity record
changes in accounting policy?
• Need to adjust amounts as if new policy has always
been applied
• Change relates to:
• Current year (prepare current year P&L by applying new
policy)
• Prior period (adjust comparative figures)
• Years before that (adjust opening retained earnings)
• An adjustment to the carrying amount of assets or
liabilities must equal the total adjustment to equity in
current and prior years
 How should an entity record
changes in accounting policy?
Where prior year profits increased:
Dr Asset
Cr Retained earnings
Cr Deferred tax

Where prior year profits decreased:

Dr Retained earnings
Dr Deferred tax
Cr Asset
 What are the disclosure requirements
for a change in accounting policy?

• Reasons for the change

• Nature of the change, reasons why the change
results in more reliable and relevant information
• Amount of the adjustment for each line item
• Cumulative effect on prior year retained
earnings
• Whether comparatives have been restated or
not
• Where retrospective adjustment is
impracticable the reasons why
What are the disclosure requirements
for a change in accounting policy?
 What types of change in
accounting policy can occur?
• Where IFRS allows alternative treatment
• Examples:
• Investment property
• Cost less accumulated depreciation vs Fair value
• Inventory
• Different measurement bases, such as FIFO and
weighted average cost

Will the change in measurement basis

make the financial statements more
useful to users?
Will the information be more relevant and
reliable?
• Examples:
• Bad debts
collectability
• Inventory
obsolescence
• Residual value and
useful life of assets
• Fair value of
financial instruments
• Provisions for
warranty obligations
Changes in accounting
estimates
 Errors
• IAS 8 refers to errors as ‘omissions from, and
misstatements in, the prior financial statements
of an entity that have already been issued’
(paragraphs 11 and 12)

The most common errors are:

Misapplication of accounting policies
Arithmetical errors
Omission of transactions or events
Misunderstanding or failing to notice
information available at the time or
preparation
Fraud
 What are prior period errors?
• Misstatements of prior period financial
statements
• Result from the failure to use or misuse
available information at the time or preparation

• Required to be corrected if it doesn’t result in

undue cost and effort
How should prior period errors
be accounted for?
 How should prior period errors
be accounted for?
• Retrospective adjustment
• Either:
• Adjust records for the difference between the incorrect and correct
amounts
• Reverse incorrect journal entries and record correct journal entries
• Current year transactions are recorded as if the error
didn’t occur
• If the error is discovered after the reporting date but
before the financial statements are authorised –
adjusted for as an event after the reporting date
• If impracticable to adjust retrospectively the error is
adjusted for prospectively
 What are the disclosure
requirements of prior period errors?

• Nature of the prior period error

• Amount of the restatement at the start of the
earliest period reported
• Amount of the correction for each line item
restated for comparative information
• If comparatives not restated – provide details
giving reason(s)