3/21/2017 IAS8AccountingPolicies,ChangesinAccountingEstimatesandErrors(detailedreview)

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IAS8AccountingPolicies,ChangesinAccounting OBURAPGuide

EstimatesandErrors(detailedreview)
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Objective

Thisstandardpurportstoenhanceandmaintainthereliabilityandcomparabilityoffinancialstatements
byprovidingguidelinesfortheselectionandapplicationofaccountingpolicy,treatmentofchangein
accountingpolicyandaccountingestimatesalongwiththeguidanceforthecorrectionoferrors.Italso
providestherelateddisclosurerequirementsrequiredbytheentity.
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Scope

Therequirementsofthisstandardareapplicablefortheselectionandapplicationofaccountingpolicy,
treatmentofchangeinaccountingpolicyandaccountingestimatesalongwiththeaccountingforthe
correctionoferrorsrelatedtopreviousperiods.
LastAccounting
News
Definition
M&ADealActivityReached
AccountingPolicies
itshighestpointSince2008

Therules,practices,basesandprinciplesadoptedbytheentityinthepreparationandpresentationof
RecentACCAReportonthe
financialstatementsaretermedasaccountingpolicy
IncreasingscopeofShared
Services
ChangeinAccountingEstimate

MicrobusinessesOpinion
Itistheadjustmentinthecarryingvalueofanassetorliabilityasaresultofreview,ofthecurrentstatus,
withRegardstoMakingTax
oftheestimatedfutureeconomicbenefitsandobligationsrelatedtotheassetandliability.
DigitalProposal
Accountingestimateschangesduetotheavailabilityofnewandadvancedinformation
ordevelopments.
AccountantscanPlayan
ImportantRoleinReducing
InternationalFinancialReportingStandards(IFRSs)
Corruption
TheseareaccountingstandardsandrelatedInterpretations,whichareissuedandregulatedbythe
AATHasBeenApprovedas
InternationalAccountingStandardsBoard(IASB)andtheseencompasses:
anApprenticeAssessment
InternationalFinancialReportingStandards(IFRS)
Organization

InternationalAccountingStandards(IAS) IPSAS40,NewPublic
InterpretationsissuedbyIFRICand SectorAccountingStandard
IssuedbytheIPSASB
InterpretationsissuedbySIC

Material IAASBReleasesitsTwo
yearWorkPlantoEnhance
Theomissionormisstatementoftheinformationisconsideredasmaterial,ifitcan,individuallyor AuditQuality
collectively,effecttheeconomicdecisionoftheuserstakenonbasisofthefinancialstatements.The
informationcanbematerialbysize,ornature.
Allaccountingnews

PriorPeriodErrors
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PriorPeriodErrors

Itisdefinedastheomissionsandmisstatementsinthefinancialstatementsofanentity,inoneormore
Have10minutestorelax?
previousaccountingperiods,whichoccursduetofailureofuseofinformation:
Playourunique
Whichwasavailablewhenfinancialstatementsofsuchaccountingperiodswerepreparedor Balancegame

Whichcouldbeavailableifcertainprocedurewouldhaveapplied PlayTheGame

Thismaycomprisethenumericalmistakes,misapplicationofaccountingpolicies,ormisinterpretationsof
circumstances,andfraud.

RetrospectiveApplication

Itistheapplicationofnewaccountingpolicytotherelatedeventsandtransactions,suchthatnew
accountingpolicyhadalwaysbeeninapplication.

RetrospectiveRestatement

Itisthecorrectionofamountsofelementsoffinancialstatementsrelatedtorecognitionand
measurement,suchthatifapreviousperioderrorhadnevertakenplace

ProspectiveApplication

Itistheapplicationofchangeinaccountingpolicyandchangeinanaccountingestimate,totherelated
eventsandtransactionsafterthedatewhentheaccountingpolicyischangedandincorporatingthe
effectofchangeinaccountingestimateinthecurrentandfutureaccountingperiods.

Impracticable

iftheentityisunabletoapplyaparticularrequirementofthestandard,makingeveryreasonableeffort,
suchasituationistermedasimpracticablesuchaswhentheeffectsoftheretrospectiveapplicationor
restatementarenotdeterminable

AccountingPolicy

SelectionandApplicationofAccountingPolicy

Theentityshouldconsiderthefollowingguidelinesfortheselectionandapplicationofaccountingpolicy
foralleventsandtransactions:

1)FirsttheentityshouldrefertotherelevantStandardsandInterpretationsissuedbytheIASB

2)Iftheguidelinesfortheselectionandapplicationofaccountingpolicyarenotavailableintherelated
standardsandinterpretationsissuedbyIASB,fortheparticulareventandtransaction,thenmanagement
isrequiredtouseitsownjudgmentintheselectionandapplicationofaccountingpolicyforsuchanevent
ortransaction.

However,suchapolicyshouldnotbeinconflictwiththequalitativecharacteristicsoffinancialstatements
andshouldbeincompliancewiththosequalitativecharacteristicsgivenintheIASBsframework.The
entitycanusetheguidanceavailablefromthefollowingsources:

InformationavailableinotherIFRSdealingwiththesimilarissues

Definitionofasset,liability,incomeandexpensegivenintheIASBsframework

RecognitionandmeasurementrulesgivenintheIASBsframework

Documentsofotheraccountingstandardboards

Industrypractices

Thisstandardrequiresthattheentityshouldapplytheselectedaccountingpolicyconsistentlyfromone
periodtothenextforsimilareventsandtransactions,toenabletheusersoffinancialstatementsin
evaluationofthefinancialperformanceandpositionoftheentityoverthedifferentperiods.

ChangeinAccountingPolicy
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ChangeinAccountingPolicy

Theentityshouldnotchangetheselectedaccountingpolicyforthesimilareventsandtransactions,asit
wouldaffectthecomparabilityoffinancialstatements.However,theaccountingpolicycanbechange
onlyinthefollowingcircumstance:

WhenthechangeinaccountingpolicyisrequiredbyanIFRS

Whenmanagementbelievesthatchangeinaccountingpolicywouldresultinmorerelevantand
reliableinformationbeingreflectedinfinancialstatements

AccountingfortheChangeinAccountingPolicy

Theentitywillaccountforthechangeinaccountingpolicyinthecircumstanceinwhichchangein
accountingpolicyisallowed,asfollows:

Ifthechangeinaccountingpolicyarises,whenanIFRSrequiresthensuchchangeinaccounting
policywillbeaccountedforasperthetransitionalprovisiongiveninthethatstandardi.e.the
relevantstandardwillspecifyhowtoaccountforthechangeinaccountingpolicy,eitheritwillhave
prospectiveapplicationorretrospectiveapplication.However,iftherelevantstandard,requiringthe
changeinaccountingpolicydoesnotspecifythathowtoaccountforthechangeinaccounting
policy,thensuchchangeinaccountingpolicywillhaveretrospectiveapplication

Ifthechangeinaccountingpolicyarises,whenthemanagementbelievesthatthechangein
accountingpolicywouldresultinmorerelevantandreliableinformationbeingreflectedinfinancial
statements,thensuchchangeinaccountingpolicywillalsohaveretrospectiveapplication

However,followingsituationsdonotconstitutetothechangeinaccountingpolicy:

i)Theselectionandapplicationofanewaccountingpolicyfortheeventsandtransactionswhich
haveneveroccurredinthepast,suchasfirsttimereceiptofgovernmentgrantand

ii)Theselectionandapplicationofanewaccountingpolicyfortheeventsandtransactionswhich
aredifferentinsubstancefromeventsandtransactionsoccurringbefore

Thechangeintheabovementionedcircumstances(i)and(ii)willnotbetreatedasthechangein
accountingpolicytherefore,itwillhaveprospectiveapplicationinsuchcircumstances.

Themeasurementfromcosttorevaluationmodeloftheproperty,plantandequipmentunderIAS
16andintangibleassetsunderIAS38isachangeinaccountingpolicy,butitwillbeaccountedfor
aspertherequirementsofthosestandards,ratherthanIAS8.

RetrospectiveApplication

Whentheentityisrequiredtoapplythechangeinaccountingpolicyasretrospectively,theentitywill
applytheaccountingpolicytotherelatedeventsandtransactions,suchthatnewaccountingpolicyhad
alwaysbeeninapplication.Itwillbeaccountedforasfollows:

a)Theentitywilladjusttheeffectofthechangeinaccountingpolicyretrospectivelytotheextentitis
possibletodeterminetheeffectofchangeinaccountingpolicyinrespectofthepreviousperiodsi.e.the
entityisrequiredtoapplythenewaccountingpolicyinthepreviousperiodsasfarbackaspossible.

Forthispurpose,theentitywillapplythenewaccountingpolicytothecarryingvaluesofrelatedassets
andliabilitiesasatthestartoftheearliestaccountingperiod,towhichretrospectiveapplicationis
possible,thatmaybethecurrentaccountingperiodandtheresultingadjustmentwillbemadetothe
retainedearnings,asfollows:

Iftheeffectofchangeinaccountingpolicyrelatestopreviousperiodonly,theentitywillrestatethe
balancesofrelatedassetorliabilityinthepreviousperiodandacorrespondingadjustmentinthe
openingretainedearningsofcurrentyear

Iftheeffectofchangeinaccountingpolicyrelatestoprioraccountingperiodsthantheprevious
accountingperiodthentheadjustmentwillbemadeintheopeningretainedearningsofthe
comparativeyearandtheentitywillalsorestatethebalancesofrelatedassetsorliabilities

b)Ifitisnotpossibletodeterminetheperiodspecificeffectorcumulativeeffectofchangeinaccounting
policyinrespectofthepreviousperiodsthen,theentitywillapplythenewaccountingpolicyfromthe
startoftheearliestaccountingperiodfromwhichitispracticabletodoso.
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startoftheearliestaccountingperiodfromwhichitispracticabletodoso.

Disclosures

Theentityisrequiredtodisclosethefollowingrelatedtotheaccountingpolicy:

Ifthechangeinaccountingpolicyarises,whenanIFRSrequirestheentitywilldisclose:

Thetitleofthestandard

Thedetailsofinchangeinaccountingpolicy

Thedetailsoftransitionalprovisiongiven(ifany)bythestandardtoaccountforchangein
accountingpolicy

Theeffectoftransitionalprovisionuponthefutureperiods(ifany)

Theamountofadjustmentrelatedtothecurrentyearandpriorperiodsduetothechangein
accountingpolicy

Thedetailsofthecircumstancesiftheretrospectiveapplicationsbecameimpracticableduetothe
periodspecificaffectorcumulativeeffectofthepreviousperiods

Ifthechangeinaccountingpolicyarises,whenmanagementbelievesthatchangeinaccountingpolicy
wouldresultinmorerelevantandreliableinformationbeingreflectedinfinancialstatements,theentity
willdisclosethefollowing:

Thedetailsofinchangeinaccountingpolicy

Thereasonhowthechangewillreflectthemorerelevantandreliableinformation

Theamountofadjustmentrelatedtothecurrentyearandpriorperiodsduetothechangein
accountingpolicy

Thedetailsofthecircumstancesiftheretrospectiveapplicationsbecameimpracticableduetothe
periodspecificaffectorcumulativeeffectofthepreviousperiods

Iftheentityisnotapplyingastandardwhichahsbeenissuedbutnotyeteffective,theentitywilldisclose
thefollowing:

Thetitleofthestandard

Itseffectivedatespecifiedinthatstandard

Thedatewhenentityintendstoapplysuchstandard

AccountingEstimates

Thesearethejudgmentsorassumptionstakenbytheentitybecauseofuncertaintiesattachingtothe
businesscircumstancesinordertodeterminethecarryingvalueofanassetorliabilityinthefinancial
statements.Itincludestheestimationof:

Usefullife

ResidualValue

DepreciationMethod

FairValue

NetRealizableValue

Provisions
ChangeinAccountingEstimates

Itistheadjustmentinthecarryingvalueofanassetorliabilityasaresultofreview,ofthecurrentstatus,
oftheestimatedfutureeconomicbenefitsandobligationsrelatedtotheassetandliability.
Accountingestimateschangesduetotheavailabilityofnewandadvancedinformation
ordevelopments.

AccountingforChangeinAccountingEstimate

Thestandardrequirestheentitytoaccountforthechangeinaccountingestimateprospectivelyi.e.itwill
beappliedintheyearofchangeifitaffectsthecurrentyearonly,inthecurrentandfutureyears,ifit
affectstheboth.
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affectstheboth.

Disclosures

Theentityisrequiredtodisclosethedetailsandtheeffectofchangeinaccountingestimaterelatedto
thecurrentandfutureyearsboth.

PriorPeriodError

Itisdefinedastheomissionsandmisstatementsinthefinancialstatementsofanentity,inoneormore
previousaccountingperiods,whichoccursduetofailureofuseofinformation:

Whichwasavailablewhenfinancialstatementsofsuchaccountingperiodswerepreparedor

Whichcouldbeavailableifcertainprocedurewouldhaveapplied

Thismaycomprisethenumericalmistakes,misapplicationofaccountingpolicies,ormisinterpretationsof
circumstances,andfraud.

AccountingforError

Theentitywillcorrecttheeffectoftheerrorbyretrospectiverestatementsuchaserrorhasnever
occurred,totheextentitispossibletodoso,asfollows:

Iftheerrorhasoccurredinpreviousperiod,byrestatingthebalancesinthecomparativeyear
correspondingadjustmenttotheopeningretainedearnings,ofthecurrentyear

Iftheerrorrelatestotheaccountingperiodprecedingthepreviousaccountingperiods,byrestating
thecarryingvaluesofrelatedassetorliabilityalongwithacorrespondingadjustmenttotheopening
retainedearnings,ofthecomparativeyear

Ifitisnotpossibletodeterminetheperiodspecificeffectorcumulativeeffectofanerrorinrespectofthe
previousperiodsthen,theentitywillrestatethebalancesfromthestartoftheearliestaccountingperiod
fromwhichitispracticabletodoso.

Disclosures

Theentityisrequiredtodisclosethefollowinginrespectofthepriorperioderror

Thedetailsoftheerror

Theamountofadjustmentmadeatthestartofthecurrentorcomparativeyearinrespectof
correctionoferror

Thedetailsofthecircumstancesiftheretrospectiveapplicationsbecameimpracticableduetothe
periodspecificaffectorcumulativeeffectofthepreviousperiods

WorkedExamples

Example1

ABLtdisengagedinamanufacturingbusiness.Uptoyearended31December2010theentitywas
usingfirstinfirstoutmethod(FIFO)methodforthevaluationofinventory,butinthecurrentyearended
31December2011,thedirectoroftheentityhasdecidedtousetheaveragecostingmethodasthey
believethatthiswillreflectmorerelevantvalueoftheinventoryandasaresulttheentityhasidentified
thefollowingimpactuponthevalueofinventoryduetothechangeinthevaluationmethod:

Years Inventoryincreasedby

31December09 20,000

31December10 30,000

31December11 40,000

Thestatementsofprofitorlossofthecurrentandpreviousyearbeforetheadjustmentswere:

Years 31.12.11 31.12.10

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Years 31.12.11 31.12.10

$ $

Revenue 500,000 400,000

CostofSale (200,000) (160,000)

Grossprofit 300,000 240,000

OperatingExpenses (170,000) (130,000)

Netprofit 130,000 110,000

TheretainedearningsofABltdwere$600,000at31December2009
Required:

Redraftthestatementofprofitorlossandpreparetheretainedearningscolumnofthestatementof
changesinequityforbothoftheyears31December2010and31December2011

Solution:

Asthechangeinthevaluationmethodoftheinventoryischangeinaccountingpolicy,itwillbeapplied
retrospectivelyfromtheyearofchangeasfollows:

Foreachoftheyear,thecostofsalewilldecreaseby$10,000duetoincreaseinclosingandopening
stockasfollows:

Years 31.12.11 31.12.10(restated)

$ $

Revenue 500,000 400,000

CostofSale (190,000) (150,000)

Grossprofit 310,000 250,000

OperatingExpenses (170,000) (130,000)

Netprofit 140,000 120,000

StatementofChangesinEquity
Fortheyearended31.12.11

Years RetainedEarning

Balanceasat01.01.2010 600,000

Effectofchangeinpolicy 20,000

Restatedbalanceat01.01.2010 620,000

Profitfortheyear31.12.2010 120,000

Balanceat31.12.2010 740,000

Profitfortheyear31.12.2011 140,000

Balanceat31.12.2011 880,000

Example2

ABLtdpurchasedaplantfor$160,000on1January2007,whichhasausefullifeof8years.However,
on1January2009,theentitysengineerreportedthatplanthasausefullifeofonly2years.

Required:

HowthechangeinusefullifeoftheplantwillbeaccountedforinthefinancialstatementsofABLtdfor
theyearended31December2009.
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theyearended31December2009.

Solution:

Asthechangeinusefullifeoftheplantisachangeinaccountingestimate,itwillbeappliedprospectively
fromtheyearofchangeasfollows:

StatementofProfitorLoss 31.12.09

DepreciationExpense (60,000)

StatementofFinancialPosition 31.12.09

Assets:

NoncurrentAssets:

Plant(Working) 60,000

Working:

StatementofFinancialPosition 31.12.09

Costat01.01.2007 160,000

Less:AccumulatedDepreciation
($160,0000/8yrs)2yrs (40,000)

C.Vat01.01.2009 120,000

Less:CurrentYear($120,0000/2
yrs) (60,000)

C.Vat31.12.2009 60,000

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