IAS 8 ACCOUNTING POLICY-PRESENTATION (1).pptx

IAS8 Accounting policy presentation

1. IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1

2. 2 It prescribes the criteria for: How to select and apply accounting policies ; How to account for the changes in accounting policies ; How to account for changes in accounting estimates ; How to correct errors made in the previous reporting periods; and How to disclose the changes. OBJECTIVE OF IAS 8

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4. 1. DEFINITION OF ACCOUNTING POLICIES Accounting policies are the specific principles, bases, guidelines, conventions, rules, practices, and similar norms applied/used by an entity in preparing and presenting financial statements [IAS 1]. Examples : Valuation of inventory using FIFO, Average Cost or other suitable basis as per IAS 2 Classification, presentation and measurement of financial assets and liabilities under categories specified under IAS 32/IFRS 9 4

5. 5 I. ACCOUNTING POLICIES

6. IAS 8 establishes the way to write accounting policy manual in dealing with an accounting issue (transaction or item). If there is applicable IFRS standard Apply specifically relevant standards (IASs, IFRSs, Interpretations). If there is no an applicable IFRS Standard use IAS 8 Hierarchy Refer to other IASB standards. (Analogize) Refer to the IASB Framework for guidance. Consider the most recent pronouncements of other standard-setting bodies, practices... 6 1. SELECTION OF ACCOUNTING POLICIES

7. 2. CHANGES IN ACCOUNTING POLICIES WHEN TO CHANGE AN ACCOUNTING POLICY? MANDATORY : When it is required by another IFRS . This will be the case when new IFRS is issued and you HAVE TO apply it mandatorily. VOLUNTARY : When new accounting policy provides better, more faithful and relevant information . In this case, you apply new accounting policy voluntarily. 7

8. EXAMPLES OF CHANGES IN ACCT POLICY A change from measuring a class of assets at depreciated historical cost to a policy of regular revaluation (fair value) Changing inventory valuation from weighted average to FIFO 8 2. CHANGES IN ACCOUNTING POLICIES

9. 9 2. CHANGES IN ACCOUNTING POLICIES EXCLUSIONS [NOT TO BE ACCOUNTED AS CHANGES] Applying an accounting policy to a new type of transaction. Applying a new accounting policy to a transaction different in substance to those undertaken previously. PPE COST METHOD PPE REVALUATION METHOD A CHANGE IN ACCT POLICY NOT A CHANGE IN ACCT POLICY IP FAIR VALUE METHOD

10. 10 ACCOUNTING TREATMENT [HOW] If a new IFRS is applied and this IFRS contains some transitional guidance , then simply follow the rules in that transition provisions. New IFRS will tell exactly how. If there’s no transitional guidance, change the accounting policy voluntarily, then apply it retrospectively as if the new policy had always been in place. 2. CHANGE IN ACCOUNTING POLICIES

11. 11 EXEMPTIONS FROM RETROSPECTIVE TREATMENT The effect of retrospective application of a change in accounting policy is immaterial . Anything that cannot affect the decisions of users of financial statements is material. Retrospective application of a change in accounting policy is impracticable , then the new accounting policy must be applied prospectively from the beginning of the earliest period feasible which may be the current period. Initial application of an IFRS where the transitional accounting method provided allow or require prospective application of a new accounting policy – follow it otherwise retrospective application. 2. CHANGES IN ACCOUNTING POLICIES

12. 12 2. CHANGES IN ACCOUNTING POLICIES DISCLOSURES Following must be disclosed in the financial statements of the accounting period in which a change in accounting policy is implemented: Title of IFRS Nature of change in accounting policy Reasons for change in accounting policy Amount of adjustments in current and prior period presented Where retrospective application is impracticable, the conditions that caused the impracticality

13. 13 II. ACCOUNTING ESTIMATES

14. 1. DEFINITION When an item of financial statements cannot be measured precisely, it can only be estimated. This is because of: Uncertainties inherent in the business; Where judgments are involved based on information that best reflects the conditions and circumstances that exist at the reporting date. By its nature, estimates are subjective and may require frequent revisions in future. 14

15. 2. CHANGES IN ESTIMATES Change in accounting estimate is a change either some amount of an asset or a liability, or pattern of its consumption in both current and future reporting periods that result from changes in the circumstances in which the estimate was based. As a result of a new information, As a result of new development, More experience If these changes result from some error, such as incorrect calculation or wrong application of accounting policies – then they are NOT changes in accounting estimates, but errors. 15

16. 3. EXAMPLES Depreciation rates and useful lives of assets Provisions for warranty repairs Impairment of non-current assets Pattern of economic benefits expected to be received from non-current assets for calculating depreciation Impairment of receivables (bad debt provisions) 16

17. 17 While accounting policy is a principle or rule, or a measurement basis , accounting estimate is the amount determined based on selected basis or some pattern of future consumption of the asset. For example: choice fair value vs. historical cost is a choice in accounting policy (remember, measurement basis), but updating some provision based on fair value change is a change in accounting estimate. DIFFERENCE BETWEEN ACCOUNTING POLICY AND ACCOUNTING ESTIMATE

18. 18 4. ACCOUNTING TREATMENT Change in accounting estimates are accounted prospectively , either: In the current reporting period (e.g. bad debt estimate); In both the current and future reporting periods, if the change affects both (for example, change in useful lives affects depreciation charges in both the current and the future reporting periods). “Prospectively” means that comparatives and equity NOT restated. Financial statements in the previous reporting periods not restated and simply adjust calculations in the current and future reporting periods.

19. 4. ACCOUNTING TREATMENT Prospective application of changes in estimates prevents frequent revisions in prior period comparative figures which might cause unnecessary complications in respect of financial statement balances. When it is hard to differentiate between a change in accounting policy and a change in accounting estimate, the change is accounted for prospectively as an estimate. 19

20. 20 the nature of the change; the effect on the current periods financial statements; and the effect in future periods if this is practicable. 5. DISCLOSURES

21. 21 CASE LIB has depreciated a machine over its expected useful life of 5 years. No residual value is expected at the end of the machine's useful life. The cost of machine was Br100,000 and annual depreciation charge was therefore Br20,000. T w o years later, the remaining useful life of the machine was estimated to be only 2 years. LIB should account for the change in estimate prospectively by allocating the net carrying amount of the asset over its remaining useful life. No adjustment is required to restate the depreciation charge in previous accounting periods.

22. 22 Depreciation Expense Accumulated Depreciation Working Year 1 20,000 20,000 (100,000/5) Year 2 20,000 40,000 (80,000/4) Year 3 30,000 70,000 (60,000/2) Year 4 30,000 100,000 (30,000/1) Depreciation expense for the machine would therefore be as follows: Although expected useful life of the machine has reduced at the end of third year, depreciation expense recorded in previous years is not affected. Instead, the depreciation expense is increased accordingly in years 3 and 4. CASE

23. 23 III. CORRECTION OF PRIOR PERIOD ERRORS

24. 24 1. DEFINITION Omissions from, and misstatements in, the entity’s FS for one or more prior periods arising from a failure to use, or misuse of, reliable information that: was available when FS for those periods were authorised for issue; and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those FS.

25. 2. TYPE OF PRIOR PERIOD ERRORS 25 Such errors include the effects of: Misapplication of accounting policies : e.g. failure to apply IAS 16 review assets’ useful lives at least at each financial year-end . Fraud : e.g. overstating sales revenue by issuing fake invoices before the reporting date Misunderstanding/ misinterpretations of facts , or failure to notice, information at the time of preparation of financial statements: e.g. not writing off a receivable who had been announced as insolvent before the authorization of financial statements Arithmetical/ mathematical mistakes Oversights: Overlook/ Omission of transactions and events from the financial statements

26. 26 3. ACCOUNTING TREATMENT Accounting Errors discovered after the reporting date but before the authorization of financial statements are adjusting events after the reporting date as per IAS 10 and must therefore be corrected in the current period prior to the issuance of financial statements.

27. 27 CASE LIB noted in 20X6 that in 20X5 it had omitted to record a depreciation expense on an asset amounting to Br.60. Its accounts, before the correction of errors, looked like this: Current Period Earliest Period 20X6 20X5 Gross profit 600 690 Distribution costs ( 60) (60) Administrative expenses ( 180) (180) Depreciation ( 60) Nil Profit from operations 300 450 Income tax ( 60) (90) Net profit 240 360 Comparative Periods

28. 28 LIB’s retained earnings for the two years before the correction of errors are: 20X6 20X5 Retained earnings c/fwd 690 450 Retained earnings b/fwd 450 90 IAS 8 states that the correction of an error that relates to prior periods should be shown as an adjustment to the opening balance of retained earnings. In the 20X6 accounts (ignoring all tax implications): Correcting Entry Retained earnings [b/fwd] 60 Accumulated depreciation 60 CASE

29. 29 i.e. this will have no impact on the current year income statement but is shown as a prior period adjustment in the statement of changes in equity: 20X6 Retained earnings b/fwd as reported previously 450 Prior period adjustment to correct error ( 60) Retained earnings, beginning, as restated 390 Net profit 240 Retained earnings c/fwd 630 CASE

30. 30 20X6 20X5 (restated) Gross profit 600 690 Distribution costs ( 60) ( 60) Administrative expenses ( 180) ( 180) Depreciation ( 60) ( 60) Profit from operations 300 390 Income tax ( 60) ( 90) Net profit 240 300 Comparative information should be restated unless it is ‘impracticable’ to do so. The statement of profit or loss will be presented thus: CASE

31. 31 The statement of changes in equity will also need comparators: 20X6 20X5 (Restated ) Retained earnings b/fwd as reported previously 450 90 Prior period adjustment to correct error ( 60) Nil Retained earnings, beginning, as restated 390 90 Net profit 240 300 Retained earnings c/fwd 630 390 CASE

32. 4. DISCLOSURES the nature of the prior period error; the amount of the correction for each period presented; the amount of the correction at the start of the earlier prior period presented; and if retrospective correction is not practicable, a description of how and when the error was corrected.  

33. 33 Previously, ABC LTD accounted for its non-current assets using the historical cost basis. In the current period, however, ABC LTD has adopted the revaluation model of IAS 16 to account for its non-current assets. ABC LTD previously had a policy of calculating depreciation on equipment using the straight line method @ 10%. However, In light of significant losses recognized on recent disposals the management has decided to depreciate equipment by using the reducing balance method @ 20% which shall more accurately reflect the wear and tear of equipment. Identify whether the following constitute a change in accounting policy, a revision in accounting estimate or a correction of prior-period error. PRACTICE QUESTIONS

34. 34 ABC LTD has a policy of valuing inventory using the FIFO method. The value of inventory brought forward in the current period (i.e. last year's closing inventory balance) has been changed because it had erroneously been valued using the LIFO method last year. ABC LTD has a past practice of recognizing sales revenue at the time of dispatch of goods to the retailers. In the current period, however, sales revenue has not been recognized by ABC LTD until the goods sold to retailers have been re-sold to the end-consumers. Management believes the new recognition rule more accurately reflects the economic substance of the sales and returns arrangement with retailers. PRACTICE QUESTIONS

35. 35 In estimating the employee benefits obligations of ABC LTD at the previous year end, the actuary failed to take into account ABC LTD's plan to discontinue operations in one of its geographic segments. Management had announced its plan three years ago. Recently, the actuary furnished revised estimates of ABC PLC's liability with respect to employee benefits of the current and prior periods taking into account the plans for discontinuation. Financial statements of this year have been amended accordingly. PRACTICE QUESTIONS

36. 36 Change in Accounting Policy: Basis of measurement of the elements of financial statements (e.g. historical cost, fair value, etc.) represent accounting policies. Any change in the basis of measurement therefore constitutes a change in accounting policy. Revision of Accounting Estimate: Change in the depreciation method merely reflects a shift in the management's expectation of the pattern of periodic consumption of equipment and therefore represents a revision in accounting estimate. Correction of Prior-Period Error: Misapplication of an accounting policy represents an accounting error. The restatement of last year's closing inventory in current period financial statements therefore represents a correction of prior-period error rather than a change in accounting policy or estimate.

37. 37 Change in Accounting Policy: Variation in rules and practices used in the preparation of financial statements represents a change in accounting policy. Correction of Prior-Period Error: Failing to consider material information while developing estimates that was already available at that time constitutes an accounting error.