Revise lecture 6

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 Accounting concepts and policies
The main issues covered by IAS 8 are:

1. Selection of accounting policies

2. Changes in accounting policies
3. Changes in accounting estimates
4. Correction of prior period errors

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Accounting concepts and policies
Selection of accounting policies

IAS 8 requires an entity to select and apply

appropriate accounting policies complying
with International Financial Reporting
Standards (IFRSs) and interpretations to
ensure that the financial statements provide
information that is:

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 Accounting concepts and policies
Selection of accounting policies

• Relevant to the decision-making needs of users

• Reliable in that way:
– Represent faithfully the results of financial position of
the entity
– Reflect the economic substance of events and
transactions and not merely the legal form
– Are neutral, i.e. free from bias
– Are prudent
– Are complete in all material respects

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 Accounting concepts and policies
2. Changing accounting policies

• The general rule is that accounting policies are

normally kept the same from period to period to
ensure comparability of financial statements over
time.
• IAS 8 requires accounting policies to be charged
only if the change:
– Is required by IFRSs or
– Will result in a reliable and more relevant
presentation of events or transactions

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 Accounting concepts and policies
A change in accounting policy occurs if there
has been a change in:
1. Recognition, e.g. an expense is now
recognised rather than an asset
2. Presentation, e.g. depreciation is now
included in cost of sales rather than
administrative expenses, or
3. Measurement basis, e.g. stating assets at
replacement cost rather than historical cost
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 Accounting concepts and policies
Changes in accounting estimates
The requirement of IAS 8 are:

• The effects of a change in accounting estimate

should be included in the income statement in
the period of the change and, if subsequent
periods are affected, in those subsequent periods
• If the effect of the change is material, its nature
and amount must be disclosed.

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 Accounting concepts and policies
Changes in accounting estimates
Examples of changes in accounting estimates are
changes in :
• The useful lives of non-current assets
• The residual values of non-current assets
• The method of depreciating non-current assets
• Warranty provisions, based upon more up-to-
date information about claims frequency

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 Question
• Which of the following is a change in
accounting policy as opposed to change in
estimation technique?
1. An entity has previously charged interest
incurred in connection with the construction
of tangible non-current assets to the income
statement. Following the IAS32, it now
capitalises this interest.

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 Question
2. An entity has previously depreciated vehicles
using the reducing balance method at 40% pa.
It now uses the straight line method over a
period of five years

3. An entity has previously shown certain

overheads within cost of sales. It now shows
those overheads within administrative
expenses

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 Question
4. An entity has previously measured inventory at
weighted average cost. It now measures
inventory using the first in first out (FIFO) method
For each of the items, ask whether this involves a
change to:
1. Recognition
2. Presentation
3. Measurement
If the answer to any of these is yes, the change
is a change in accounting policy

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 Answer
• 1. This is a change in recognition and
presentation. Therefore this is a change in
accounting policy
• 2. The answer to all 3 question is no. This is
only a change in estimation technique
• 3. This is a change in presentation and
therefore a change in accounting policy
• 4. This is a change in measurement basis and
therefore a change in accounting policy
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 Prior period errors
Prior period errors are omissions form, and
misstatements in, the financial statements for
one or more prior periods arising from failure
to use information that
• Was available when the FS for those periods
were authorised for issue and
• Could reasonably be expected to have been
taken into account in preparing those FS

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 Prior period errors
• Such errors include mathematical mistakes,
mistakes in applying accounting polices,
oversights and fraud

• Current period errors that are discovered in

that period should be corrected before the
financial statements are authorised for issue

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 Prior period errors
Correction of prior period errors
Prior period errors are dealt with by:

Restating the opening balance of assets,

liabilities and equity as if the error had never
occurred and presenting the necessary
adjustment to the opening balance of retained
earnings in the statement of changes in equity

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 Prior period errors
Correction of prior period errors
• Disclosing within the accounts a statement of
financial position at the beginning of the earliest
comparative period.
• In effect this means that three statements of
financial position will be presented within a set of
financial statements:
1. At the end of the current year
2. At the end of the previous year
3. At the beginning of the pervious year

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 Prior period errors
• Q: During 2001 a company discovered that
certain items had been included in inventory
at 31 December 2000 at a value of Rs2.5
million but they had in fact been sold before
the year end.
• The orginal figures reported for the year
ended 31 December 2000 and the figures the
current year 2001 are given below:

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 Prior period errors
2001 2000
• Sales 52100 48300
• Cost of sales (33500) (30200)
________ ________
• Gross profit 18600 18100
• Tax (4600) (4300)
________ _______
• Net profit 14000 13800

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 Prior period errors
• The cost of goods sold in 2001 includes the
Rs2.5 million error in opening inventory. The
retained earnings at 1st Jan 2000 were
Rs11.2million. (Assume that the adjustment
will have no effect on the tax charge)
Show the 2001 income statement with
comparative figures and the retained
earnings for each year.

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Answer

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Answer

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