IAS 8

Accounting Policies, Changes in Accounting

Estimates and Errors

Objective Of IAS 8
IAS 8 Prescribes the Criteria for:
ACCOUNTING POLICIES:
Selection of accounting policies; How to Choose Accounting Policies
Changes in accounting policies & Accounting Treatment of Changes in

Accounting Policies
Disclosure of changes in accounting policies: Reporting Changes in

Accounting Policies
ACCOUNTING ESTIMATES:
Changes in accounting estimates & and Reporting Changes in Accounting

Estimates
ACCOUNTING ERRORS:
Correction of errors & Reporting the Correction of Errors

The achievement of the objective would result

in:
Enhancement of:
Relevance and reliability

of

financial

statements;

Comparability of financial statements with the

financial statements of other entities;

Characteristics of Accounting Policy

In devising an accounting policy, it should be:

Relevant;

Reliable;
Faithful;
Having economic substance;
Neutral;
Prudent;
Complete;

Characteristics of Accounting Policy

Relevant to the economic decision making needs of user;

and
Reliable in that the financial statements:
Represents faithfully the financial position, financial

performance and cash flows of the entity;

Reflect the economic substance of transactions, other events

and conditions, and not merely legal form;

Are prudent; and
Are complete in all material respects.

WHAT ARE ACCOUNTING POLICIES?

These are:
Specific principles;
Bases;
Conventions;
Rules;
Practices;
These are applied in preparing and presenting

financial statements.

Definitions
Retrospective application is applying a new accounting policy

to transactions, other events and conditions as if that policy

had always been applied.
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.
Impracticable: Applying a requirement is impracticable when

the entity cannot apply it after making every possible effort

Changes in Accounting Policy

A change in accounting policy should be made
only if:
Required by a standard or an interpretation, or
Voluntary:
The change results in the financial statements
providing reliable and more relevant information
about the effects of events or transactions on the
financial position and performance and cash flows

Changes in Accounting Policy

A change in accounting policy which is made on the adoption of a Standard

should be accounted for:

1. In accordance with the specific transitional provisions in that Standard
2. If no transitional provisions Retrospective Application (Any resulting

adjustment should be reported as an adjustment to the opening balance of

retained earnings and/or each component of equity. Comparative
information should be restated unless it is impracticable to do so.)

A voluntary change in accounting policy should be applied retrospectively

Early Application is not a voluntary change

Changes in Accounting Policy

Retrospective Application:
Adjust

the Opening balance of each affected

component of equity for the earliest prior period

presented and the other comparative amounts disclosed
for each period presented
As if the new accounting policy had always been

applied
If impracticable (Undue Cost and Effort), restate

prospectively from the earliest date practicable

Significant disclosures of changes in accounting

policies
1. The title of the standard
(If the Change is Required by a
Specific Accounting Standard or IFRS)
2.

Is made in accordance with the transactional provisions, if

applicable

3.

The nature of the change

4.

The amount of adjustment on current and each prior period

presented

5.

The amount of adjustment related to periods prior to those

presented

6.

For each financial statement line item affected;

7.

Earnings per share revised

Consistency of Accounting Policies

Consistency of Accounting Policies:
Once Selected accounting policies should be applied

consistently for similar transactions, other events and

conditions.
The exception to this where a IFRS requires or allows

categorization of items where different policies may be

applied to each category. Apply accounting policy for
each category consistently

Changes in Accounting Policy: Illustration

During 2013, Gamma Co changed its accounting policy for the

treatment of borrowing costs that are directly attributable to

the acquisition of a hydro-electric power station under
construction for use by Gamma. In previous periods, Gamma
had capitalized such costs. Gamma has now decided to treat
these costs as an expense, rather than capitalize them.
Management judges that the new policy is preferable because it
results in a more transparent treatment of finance costs and is
consistent with local industry practice, making Gammas
financial statements more comparable.

Changes in Accounting Policy: Illustration

Gamma capitalized borrowing costs incurred of $2,600 during

2012 and $5,200 during 2011. All borrowing costs incurred in

previous years in respect of the acquisition of the power
station were capitalized.
Gammas accounting records for 2013 show profit before

interest and income taxes of $30,000; interest expense of

$3,000 (which relates only to 2013); and income taxes of
$8,100.
Gamma has not yet recognized any depreciation on the power

station because it is not yet in use.

Changes in Accounting Policy: Illustration

Income Statement of Gamma during 2012 before changes in accounting
Policy:

Profit before interest and income taxes

Interest Expense
Profit before Income Taxes
Income Taxes
Net Income

$
18000
0
18000
5400
12600

2012 Opening retained earnings was $20,000 (Closing balance of 2011)

and closing retained earnings was $32,600.

Gammas tax rate was 30% for 2013, 2012 and prior periods.
Gamma had $10,000 of share capital throughout, and no other
components of equity except for retained earnings. Its shares are not
publicly traded and it does not disclose earnings per share.

Restated Income Statement of Gamma for

Year 2013 &2012 after Change in Accounting
Policy
2013
Income before Interest and Income Taxes
Less: Interest Expense
Income before Income Taxes
Less: Income Taxes
Net Income

2012

$30,000

$18,000

3,000

2,600

27,000

15,400

8,100

4,620

18,900

10,780

Statement of changes in equity after change

Share Retained
Capital Earnings
Balance as of December 31, 2011 as previously
reported

$10,000

Changes in Accounting Policy for the

Capitalization of Interest *Note 1
Balance at December 31, 2011 Restated

10,000

Profit for the year ended December 31, 2012

Restated
Balance at December 31, 2012 Restated

10,000

Profit for the year ended December 31, 2013

Balance at December 31, 2013

10,000

Total

$20,000

$30,000

(3,640)

(3,640)

16,360

26,360

10,780

10,780

27,140

37,140

18,900

18,900

46,040

56,040

Notes to the financial Statement

During 2013, Gamma changed its accounting policy for the treatment of borrowing costs
related to a hydro-electric power station under construction for use by Gamma.
Previously, Gamma capitalized such costs. They are now written off as expenses as
incurred.

Management judges that this policy provides reliable and more relevant

information because it results in a more transparent treatment of finance costs and is

consistent with local industry practice, making Gammas financial statements more
comparable. This change in accounting policy has been accounted for retrospectively, and
the comparative statements for 2012 have been restated. The effect of the change on 2012
is tabulated below. Opening retained earnings for 2012 have been reduced by $3,640,
which is the amount of the adjustment relating to period 2011.
Note 1: Impact on Net Income of 2011:
Interest Expenses (2011)
Less: Taxes
Net decrease in Net Income

$5,600
1,560
3,640

Changes in Accounting Policy

PROSPECTIVE APPLICATION:
Prospective application of a change in accounting policy

and of recognizing the effect of a change in an

accounting estimate, respectively, are:
Applying the new accounting policy to transactions, other

events and conditions occurring after the date as at which

the policy is changed; and.
Recognizing the effect of the change in the accounting

estimate in the current and future periods affected by the

change.

Changes in Accounting Policy Prospective

Application Retrospective Application is not
- Illustration
During 2013, DeltaPracticable
Co changed its
accounting policy for depreciating
property, plant and equipment, so as to apply much more fully a components
approach, whilst at the same time adopting the revaluation model.

In years before 2013, Deltas asset records were not sufficiently detailed to

apply a components approach fully.

At the end of 2012, management

commissioned an engineering survey, which provided information on the

components held and their fair values, useful lives, estimated residual values
and depreciable amounts at the beginning of 2013.

Changes in Accounting Policy Prospective

Application Retrospective Application is not
Practicable - Illustration

However, the survey did not provide a sufficient basis for reliably

estimating the cost of those components that had not previously been
accounted for separately, and the existing records before the survey did not
permit this information to be reconstructed.
Deltas management considered how to account for each of the two aspects

of the accounting change. They determined that it was not practicable to

account for the change to a fuller components approach retrospectively, or to
account for that change prospectively from any earlier date than the start of
2013.

Also, the change from a cost model to a revaluation model is

required to be accounted for prospectively.

Therefore, management

concluded that it should apply Deltas new policy prospectively from the
start of 2013.

Additional Information
Delta's Tax Rate is 30%

Property, Plant & Equipment at the end of 2012

Cost

25,000

Accumulated Depreciation

14,000

Net Book Value

11,000

Prospective Depreciation Expense for 2013 (Existing Policy)

1,500

Some Results from the Engineering Survey

Revalued Amount of Property, Plant & Equipment
Salvage Value at the end of Life
Remaining Useful Life
Depreciation Expense on Existing PP&E under new Policy

17,000
3000
7 Years
2,000

Notes to the Financial Statements: Changes in

Accounting Policy Prospective Application
From the start of 2013, Delta changed its accounting policy for depreciating

property, plant and equipment, so as to apply much more fully a components

approach, whilst at the same time adopting the revaluation model.
Management takes the view that this policy provides reliable and more
relevant information because it deals more accurately with the components
of property, plant and equipment and is based on up-to-date values. The
policy has been applied prospectively from the start of 2013 because it was
not practicable to estimate the effects of applying the policy either
retrospectively, or prospectively from any earlier date. Accordingly, the
adoption of the new policy has no effect on prior years.

Notes to the Financial Statements: Changes in

Accounting Policy Prospective Application
The effect on the current year is to
Increase the carrying amount of property, plant and

equipment at the start of the year by 6,000;

Increase the opening deferred tax provision by 1,800

(6000*0.3);
Create a revaluation reserve at the start of the year of 4,200

(6000 1800);
Increase depreciation expense by 500 (2000 1500); and
Reduce tax expense by 150 (2000 1500)*0.3.

Accounting Estimate
Accounting Estimates arise in relation to business activities because of

the uncertainties inherent within them.

Judgments are made based on the latest available reliable

information.
The use of such estimates is a necessary part of the preparation of

Financial Statements.
Some Example of Accounting Estimates:
1. A necessary Bad Debt Allowance
2. Useful Working Lives of Depreciable Assets
3. Adjustments for Obsolescence of Inventory
4. Fair market value of Financial Assets and Liabilities

CHANGE IN ACCOUNTING ESTIMATE

An adjustment of carrying amount of an asset or liability;
An adjustment of the amount of periodic consumption of an asset; that

results from:
The assessment of the present status of assets and liabilities
Expected future benefits of assets
Obligations associated with liabilities
Change in accounting estimates result from:
New information; or
New developments

Changes in Accounting Estimates are NOT corrections of errors

Accounting Treatment of Changes in

Accounting Estimates
The effect of changes accounting estimates should be

included in the determination of Net Income or Loss in:

The period of the change, if the change affects that

periods only, or
The period of the change and future periods, if

changes affects both

This suggest that the Accounting Treatment for

effect of Changes in Accounting Estimates is to be
recognized Prospectively

Changes in Accounting Estimate - Illustration

Management estimates that provision for doubtful debts is

estimated up to 5 percent of the total population of trade

debts. However, upon identifying the age of the trade
debts, it revealed that bad debts are about 6.5 percent of
total population of trade debts. Management immediately
recognizes the increase in bad debts expense in the books
of accounts.

DISCLOSURE REQUIREMENTS OF CHANGE IN

ACCOUNTING ESTIMATE
Where a change in an Accounting Estimate has a material

effect in the current period or expected to have a material

effect in the subsequent periods the following should be
disclosed:

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

PRIOR PERIOD ERRORS

Omissions from; or
Misstatements in
The financial statements for one or more prior periods arising from:

Failure to use or misuse of reliable information that was

available when financial statements for those periods were
authorized for issue;

Failure to use or misuse of reliable information that could

reasonably be expected to have been obtained and taken into

account in the preparation and presentation of those financial
statements.

Examples of prior period errors are:

Effect of mathematical mistakes
Mistakes in applying accounting policies
Oversight and misinterpretation of facts and

fraud.

Rectification Criteria
An entity shall correct material prior period errors

retrospectively in the first set of financial statements

authorized for issue after their discovery by:
Restating the comparative amounts for the prior

period(s) presented in which the error occurred; or

If the error occurred before the earliest prior

period presented, restating the opening balances of

assets, liabilities and equity for the earliest prior
period presented.

DISCLOSURE REQUIREMENTS
Nature of the prior period error
To the extent practicable, the amount of the correction:

For each financial statement line item affected; and

Revision in earnings per share (EPS)

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.

Problem: Changes in Accounting Policy

(a) All Change Co. Inc. changed its accounting policy in

2013 with respect to the valuation of inventories. Up to

2012, inventories were valued using a weighted-average
cost (WAC) method. In 2013 the method was changed to
first-in, first-out (FIFO), as it was considered to more
accurately reflect the usage and flow of inventories in the
economic cycle. The impact on inventory valuation was
determined to be
At December 31, 2011: an increase of $10,000
At December 31, 2012: an increase of $15,000
At December 31, 2013: an increase of $20,000

Problem: Changes in Accounting Policy

(b) The income statements prior to adjustment are 2013 & 2012
Revenue

$250,000

$200,000

Cost of sales

100,000

80,000

Gross profit

150,000

120,000

Administration costs

60,000

50,000

Selling and distribution costs

25,000

15,000

$65,000

$55,000

Net profit

Required

Present the change in accounting policy in the Income Statement and

the Statement of Changes in Equity in accordance with requirements

of IAS 8.