Part 02. IFRS Principles - IAS 8 Accounting policies, accounting estimates and errors

In the part 01 on core IFRS accounting principles, we identified 9 principles from the conceptual framework, which were:

1. Principal of the general purpose of financial information
2. Principal of going concern assumption
3. Principal of the reporting entity (RE)
4. Principal of relevance or significance of financial information
5. Principal of faithful representation
6. Principal of prudence
7. Principal of substance over form
8. Principle of cut-off
9. Principle of historical & current cost

Diving into some standards will help us uncover another key principle for financial reporting in IFRS.

IAS 8 - Accounting policies, changes in accounting estimate and errors

• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
• Change in accounting estimate is an:

 (1) adjustment of the carrying amount of an asset or a liability, or the

(2) amount of the periodic consumption of an asset, that result from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

       -    Errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.         See. IAS 8.5

One of the aims of the IAS 8 standard It to allow a faithful representation of an entity financial information. As said in the Part 01 on conceptual framework, reports should be comparable though time and across different entities. This leads to another principle:

10.         Principle of consistency in accounting policies

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 times for which different policies may be appropriate. (see. IAS 8.13)

A.  Change in accounting policy

An entity shall change an accounting policy only if the change:

• Is required by an IFRS; 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 statements. This one is a voluntary change in accounting policy.
• See IAS 8.14

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. And, 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 (IAS 8.5).

What information should be disclosed for initial application of an IFRS?

When initial application of an IFRS has an effect on the current period or any prior period, or might have an effect on future periods, an entity shall disclose in notes (IAS 8.28):

• The title of the standard;
• The nature of the change in accounting policy;
• When applicable, that the change in accounting policy is made in accordance with its transitional provisions;
• The description of the transitional provisions;
• The transitional provisions that might have an effect on future periods;
• The amount of the adjustment relating to periods before those presented, to the extent practicable; and
• If retrospective application is practicable, the amount of the adjustment relating to the current and prior periods:
• For each financial statement line item affected; and
• If IAS 33 Earnings per share applies to the entity, for basic and diluted earnings per share;
•  If retrospective application required is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied;
• Financial statements of period that will come do not need to repeat these disclosures.

For a voluntary change, except the two first information, the entity should disclose the reasons why applying the new accounting policy provides reliable and more relevant information. See. IAS 8.29.

But, the initial application of a policy to revalue assets in accordance with IAS 16 PPE or IAS 38 Intangible assets is 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 this standard. See IAS 8.17

What if an entity has not applied a new IFRS that is not yet effective, but issued?

The entity shall disclose (IAS 8.30):

• the title of the new IFRS;
• the nature of the impending change or changes in accounting policy;
• the date by which application of the IFRS is required;
• the date as at which it plans to apply the IFRS initially; and
• either: a discussion of the impact that initial application of the IFRS is expected to have on the entity’s financial statements; or if that impact is not known or reasonably estimable, a statement to that effect.

B.  Changes in accounting estimates

As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. (IAS 8.32) For example, estimates may be required of: (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.

By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error (IAS 8.34)

Any confusion between change in accounting policies and change in accounting estimate?

Any change in accounting policies will be treated retrospectively, but a change in accounting estimate will be treated prospectively. This shows how important it is to make the difference between them.

Let’s remind that the principle of historical and current cost is a measurement basis principle. In IFRS, a change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. See. IAS 8.35

The IAS 16 (property, plant and equipment) states that the depreciation method applied to an asset shall be accounted for as a change in an accounting estimates. See IAS 16.61 For PPE, changes in estimates can be due to: residual values; the estimated costs of dismantling, removing or restoring items of property, plant and equipment; useful lives; and depreciation methods. See IAS 16.76

Let precise that the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial. See. IAS 8.16

What information should be disclosed in notes for change in accounting estimates?

‘1’ The nature and ‘2’ amount of a change in an accounting estimate that has an effect in the current period or is expected to have… see. IAS 8.39

C.  Errors

Errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. IAS 8.5

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue. IAS 8.42

What information should be disclosed in notes for correcting errors? (IAS 8.49)

- the nature of the prior period error;

- for each prior period presented, to the extent practicable, the amount of the correction: for each financial statement line item affected; and if IAS 33 applies to the entity, for basic and diluted earnings per share;

- the amount of the correction at the beginning of the earliest prior period presented; and

if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Financial statements of subsequent periods need not repeat these disclosures.

Please see Part 03 on IFRS core principles for other principles related to the following standards: Events after the reporting period (IAS 10); the effects of changes in foreign exchange rates (IAS 21) and fair value measurement (IFRS 13).

We hope you enjoyed it! Your suggestions are welcome and your thumps up as well (hahhaha)!