IAS 8

ACCOUNTING POLICIES, CHANGES

IN ACCOUNTING ESTIMATES
AND ERRORS
 Contents

1. Definitions
2. Objective
3. Accounting policies
4. Changes in accounting estimates
5. Errors

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 What is accounting?
Accounting is the system of:
- Recording and summarizing business and financial transactions;
and
- Analyzing, verifying and reporting the results.

Business and financial transactions

(Economic events)

Record the event

(Recognition and measurement)

Report the event

(Presentation and disclosure)

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What is the event in IAS 8?

• Change in accounting policy

• Change in accounting estimate
• Prior period error

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 Accounting policies

The specific principles, bases, conventions, rules

and practices applied by an entity in preparing and
presenting financial statements.

o Measurement
o Recognition
o Presentation and Disclosure

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 Accounting estimates

An adjustment of carrying amount of an asset or

liability, or related expense, resulting from
reassessing the expected future benefits and
obligations associated with the asset or liability.
Examples:
o Useful life
o Receivable
o Warranty provision…

That results from the from new information or new developments

and, accordingly, are not corrections of errors
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 Errors

Omissions and misstatements for one or more

prior periods arising from failure to use or misure
of reliable information.

o Fraud
o Omission
o Misstatement

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 Example 1

Q. Account Ltd ( A/C policy and A/C estimate)

1. Q. Account Ltd charged interest expenses
incurred from the construction of tangible non-
current asset to the income statement before but
now it capitalizes the interest as an addition to
the cost of tangible non-current asset as IAS 23
– Borrowing costs.
Change in A/C policy:
Change the recognition basis

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 Example 1

Q. Account Ltd ( A/C policy and A/C estimate)

2. Q. Account Ltd depreciates the machine using
the reducing balance basis method at 30% but
now it uses the new depreciation method over
10 years.

Change in A/C estimate:

Change the measurement basis

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 Example 1

Q. Account Ltd ( A/C policy and A/C estimate)

3. Q. Account Ltd shows overhead expenses
within cost of sale before but now it shows under
administrative expenses.

Change in A/C policy

Change the recognition/presentation basis

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 Example 1

Q. Account Ltd ( A/C policy and A/C estimate)

4. Q. Account Ltd has previously measured
inventory at weighted average cost but now it
uses FIFO method

Change in A/C policy

Change the measurement basis

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 Objective of IAS 8

The goal of this standard is:

• to prescribe the criteria for selecting and changing
accounting policies, as well as the accounting treatment
• to disclose information about changes in accounting
policies, changes in accounting estimates and correction
of errors.
• to enhance the relevance and reliability of financial
statements of an entity, as well as comparability with the
financial statements issued by it in previous years, and
with those developed by others.

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 Contents of IAS 8
• Objective
• Concepts:
– Faithful representation
– Comparability
• Principles:
– Change in A/c policy: Retrospective
– Change in A/c estimate: Prospective
– Prior period error: Retrospective
• Rules:
– Impracticable
– Disclosures
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Change in accounting Policies

Accounting policies

Rules and Conventions

Selection Consistency Change

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 Selection
Determine A/C policy with
reference to the IFRS

Other IFRS

Selection
A/C
Framework
policy

Management
uses Other standards
judgement

A/C literature

Other industry
practice

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 Consistency

Select an accounting policy

To ensure
and apply consistently
comparability
for similar items

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 Change

Standard or Interpretation Change will provide

requires it more relevant and reliable
information

Note that these items are not considered changes in accounting policies:
• The application of an accounting policy for transactions, other events, or
conditions that differs in substance from those previously occurring.
• The application of a new accounting policy for transactions, other events, or
conditions, that did not occur previously or were immaterial.

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 Retrospective application

▪ 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.

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 Retrospective application

Retrospective application

Comparatives Current

Adjust
opening balance
of each affected Adjust
component of comparative amounts
equity for the disclosed for each
earliest prior prior period presented
period presented

When a change in accounting policy is applied retrospectively, the entity shall

adjust… as if the new accounting policy had always been applied.

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 Example 2

• During 20X6, Entity A changed its accounting policy in relation to

the treatment of borrowing costs that are directly attributable to
the acquisition of a new power plant.
• Previously such costs were capitalised.
• Entity A has now decided to treat these costs as an expense.
• During 20X5 Collins had incurred borrowing costs of CU 2,600
and CU 5,200 in periods before 2005. All of these costs had been
capitalised.
• No depreciation has been recognised on the power plant as it is
not yet in use.
• In 20X5 Entity A reported profit before interest & tax of CU 18,000
and income taxes of CU 5,400.
How would this change in accounting policy be accounted for
under IAS 8?
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 Disclosure

• 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

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 Change in accounting Policies
Accounting policies
Specific principles, bases,
conventions, rules and
practices applied in preparing
financial statements Detailed disclosures
required depending on
whether required change
or voluntary change
Change in Accounting policies

Only if required by new Impact

standard or interpretation; or Retrospective application
provides more reliable and
relevant information
[IAS 8.14]

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 Change in accounting estimates

Uncertainties inherent in business activities result in

certain items that cannot be measured with precision
but need to be estimated

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 Change in accounting estimates

Estimates may need revision if:

▪ Change in the circumstances on which the estimate was based
▪ New information
▪ More experience

Change in Correction
A/C estimate an error

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 Prospective application

Prospective application of a change in

accounting policy and of recognising the
effect of a change in an accounting estimate,
respectively, are:
a. applying the new accounting policy to
transactions, other events and conditions
occurring after the date as at which the
policy is changed; and
b. recognising the effect of the change in the
accounting estimate in the current and future
periods affected by the change.

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 Prospective application

Prospective application

Comparatives Current

Adjust
prospectively

Recognise the change prospectively in profit or loss in:

▪ Period of change, if only affects that period or
▪ Period of change and future periods (if applicable)

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 Example 3

• During 2010, Entity A changed its accounting estimate in

relation to the recognition of obsolete inventories.
• Company earlier used to provide for 50% of inventories
aged over 2 years and 100% aged over 3 years.
• The Company now estimates that its inventories would be
provided for as 15% aged over 1 year, 35% aged over 2
years and 75% aged over 3 years

How would this change in accounting estimate

be accounted for under IAS 8?

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 Example 3

• The Company shall not adjust the opening retained

earnings or prior period presented numbers.
• The Change will be accounted for in the current year
(being year of change).
• The carrying value of the closing inventories shall be
adjusted to reflect the new basis of estimating allowances
and difference shall go in a current year consumption.
• The Company needs to disclose the effect of change in
the notes.

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 Example 4

Giant LTD has an asset which was purchased for $ 80.000

on 1/1/2005 when its useful life was estimated to be 10
years with residual value of $ 10.000. A straight line
depreciation policy was selected.
On 1/1/2011 the Director reviewed the useful life of the asset
and found that it had a remaining life of 8 years.
Required: Calculate the net book value of the asset at
31/12/2011

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 Disclosure

▪ Nature and amount of a change in an accounting estimate

for the current year and future period if practicable.
▪ If estimation is impracticable, disclosure of this fact.

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 Change in accounting estimates

Accounting estimates
Judgments made by
management e.g. bad debts,
inventory obsolescence, Disclose nature and
warranty obligations, amount of change in
useful life of PPE accounting estimate that
has had an effect on
current or future periods
Includes change of
Change in Accounting estimates
depreciation method
Changes based on new
information or more experience Impact
Does not relate to prior periods Prospective application

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 Prior period Errors

Errors can arise from recognition,

measurement, presentation or disclosure.
Material errors could possibly only be
detected in subsequent periods

Potential current period error is corrected

before financial statements are authorised for issue

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 Prior period Errors

Comparatives Current

Retrospective restatement is correcting the recognition,

measurement and disclosure of amounts of elements of financial
statements as if a prior period error had never occurred.

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 Example 5

• During 2013, JJK Ltd discovered certain items that has

been include in inventory at 31/12/2012 at a value of $ 2,5m
but they had been in fact sold before the year end.
• The income statement of JJK for 2012 & 2013 are follows:
2013 2012
Sale 52.100 48.300
Cost of sale (35.500) (30.200)
Gross profit 18.600 18.100
Tax expense (4.600) (4.300)
Profit after tax 14.000 18.000
The retained earning at 1/1/2012 was $ 11.2m
Required: Show the 2013 income statement with
comparative figure and the retained earning for each year.
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 Disclosure

▪ Nature of the prior period error.

▪ For each prior period presented, if practicable, disclosure
the correction
– For each line item affected
– For EPS
▪ Amount of correction at the beginning of earliest period
presented.
▪ If retrospective application is impracticable, explain and
describe how the error was corrected.

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THE END

THANK YOU!

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