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What is accounting?
IAS-8 Accounting is the system of:
- Recording and summarizing business and financial transactions; and
Accounting policies, - Analyzing, verifying and reporting the results
change in accounting
Business and financial transactions
estimates & errors (Economic event)

Record the event

(Recognition & measurement)

Report the event

(Presentation/disclosure)

Overview What is the event in IAS 8?

1. Objective & Definitions

2. Accounting policies
3. Changes in accounting estimates
• Change in accounting policy
4. Errors
• Change in accounting estimate
• Prior period error

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Accounting policies Errors

The specific principles, bases, conventions, rules and Omissions and misstatements for one or more prior
practices applied by an entity in preparing and presenting periods arising from failure to use or misure of reliable
financial statements. information

oMeasurement
o Fraud
oRecognition
o Omission
oPresentation/ Disclosure
o Misstatement

Example 1
Accounting estimates
An adjustment of carrying amount of an asset or liability, Q. Account Ltd ( A/c policy and A/c estimate)
or related expense, resulting from reassessing the expected
1. Q. Account Ltd charged interest expenses incurred
future benefits and obligations associated with the asset or
from the construction of tangible non-current asset to
liability
the income statement before but now it capitalizes the
interest as an addition to the cost of tangible non-
oUseful life
current asset as IAS 23 – Borrowing costs
oReceivable
oWarranty provision… Change in A/C policy:
Change the recognition basis
That results from the from new information or new
developments and, accordingly, are not corrections of errors

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Example 1 Example 1

Q. Account Ltd ( A/c policy and A/c estimate) Q. Account Ltd ( A/c policy and A/c estimate)
2. Q. Account Ltd depreciates the machine using the 4. Q. Account Ltd has previously measured inventory at
reducing balance basis method at 30% but now it weighted average cost but now it uses FIFO method
uses the new depreciation method over 10 years

Change in A/C estimate: Change in A/C policy

Change the recognition basis Change the measurement basis

Example 1
OBJECTIVE OF IAS 8
Q. Account Ltd ( A/c policy and A/c estimate)
• The goal of this standard is to prescribe the criteria
3. Q. Account Ltd shows overhead expenses within cost for selecting and changing accounting policies, as
of sale before but now it shows under administrative well as the accounting treatment and to disclose
expensive information about changes in accounting policies,
changes in accounting estimates and correction of
errors. The Standard seeks to enhance the relevance
and reliability of financial statements of an entity, as
Change in A/C policy well as comparability with the financial statements
Change the presentation basis issued by it in previous years, and with those
developed by others.

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IAS 8 2. Change in accounting Policies

Determine A/c policy
• Objective with reference to the
• Concepts: IFRS
•Faithful representation
•Comparability Other IFRS
• Principles: Selection
A/C
•Change in A/c policy: Retrospective policy
Framework
•Change in A/c estimate: Prospective Management
uses Other standards
•Prior period error: Retrospective judgement
• Rules:
A/c literature
•Impracticable
•Disclosures Other industry
practice

2. Change in accounting Policies Selection

If a standard or interpretation deals with a transaction, use the
Accounting policies standard or interpretation
If no standard or interpretation on a transaction, management
judgment should be applied. The following sources should be
referred to, to make the judgment:
1. Requirements and guidance other
Rules & conventions standards/interpretations dealing with similar
issues
2. Definitions, recognition criteria in the
Framework
3. May use other standard setters standards
Selection Changes Be that use similar conceptual framework and/or
consistent
may consult other industry practice/
accounting literature that is not in conflict
with standards/interpretations

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Consistent 2.Change in accounting policy

These items are not considered changes in

Select an accounting accounting policies:
policy and apply • The application of an accounting policy
To ensure
consistently for for transactions, other events, or conditions
comparability
similar items that differs in substance from those
previously occurring
• The application of a new accounting
policy for transactions, other events, or
conditions, that did not occur previously or
were immaterial

2. Change in accounting policy 2. Change in accounting policy

Principle

Standard/interpretation
If a change in policy results from the
requires it
application of an international standard, the
change is accounted for in accordance with the
transitional provisions (if any) provided in
that standard.

Change will provide Otherwise, the change is accounted for

retrospectively i.e. comparative figures are
more relevant and
adjusted and are presented as if the new policy
reliable information had always been applied.

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Retrospective application
Example 2
• During 20X6, Entity A changed its accounting policy in relation to
 When a change in accounting policy is applied the treatment of borrowing costs that are directly attributable to
retrospectively, the entity shall adjust the opening balance the acquisition of a new power plant.
of each affected component of equity for the earliest prior • Previously such costs were capitalised.
period presented and the other comparative amounts • Entity A has now decided to treat these costs as an expense.
disclosed for each prior period presented as if the new • During 20X5 Collins had incurred borrowing costs of CU2,600
accounting policy had always been applied. and CU5,200 in periods before 20X5. All of these costs had been
capitalised.
• No depreciation has been recognised on the power plant as it is not
yet in use.
• In 20X5 Entity A reported profit before interest & tax of
CU18,000 and income taxes of CU5,400.
How would this change in accounting policy be
accounted for under IAS 8?

Accounting for a change in accounting policy Disclosure

Retrospective application • for changes caused by the initial application of an international

standard:
– the title of the standard and a description of any transitional
Comparatives Current provisions in that standard
Adjust opening • for voluntary changes in accounting policies:
balance of each – the reasons for making the change
affected Adjust
• for all changes in accounting policies
component of comparative
amounts of – the nature of the change
equity for earliest
preview period – adjustments made in the current period and in each prior period
period presented
presented presented

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2. Change in Accounting Policies 3. Change in accounting Estimates

Accounting policies
Estimates may need revision if:
Specific principles, bases,
conventions, rules & (i) Change in the circumstances on which the estimate was
Detailed disclosures
practices applied in based
preparing financial required depending
statements on whether required (ii) New information
change or voluntary (iii) More experience
change
Change in Accounting policies
Change in Correction an
Only if required by new
standard or interpretation; Impact - Retrospective A/c estimate error
or application
provides more reliable &
relevant information
[IAS8.14]

3. Change in accounting Estimates 3. Change in accounting Estimates

Principle

Comparatives Current

Adjust prospectively

Recognise the change prospectively in profit or loss in:

 Period of change, if only affects that period or
 Period of change and future periods (if applicable)

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Prospective application Example 3

• The Company shall not adjust the opening retained earnings or

• Prospective application of a change in accounting policy
prior period presented numbers
and of recognising the effect of a change in an
accounting estimate, respectively, are:
• The Change will be accounted for in the current year (being year
(a) applying the new accounting policy to transactions, of change)
other events and conditions occurring after the date as at
which the policy is changed; and • The carrying value of the closing inventories shall be adjusted to
(b) recognising the effect of the change in the accounting reflect the new basis of estimating allowances and difference
estimate in the current and future periods affected by the shall go in a current year consumption
change.
• The Company needs to disclose the effect of change in the notes

Example 3 Example 4
Giant LTD has an asset which was purchased for $ 80.000
• During 2010, Entity A changed its accounting on 1/1/2005 when its useful life was estimated to be 10
estimate in relation to the recognition of obsolete years with residual value of $ 10.000. A straight line
inventories. depreciation policy was selected. On 1/1/2011 the Director
• Company earlier used to provide for 50% of reviewed the useful life of the asset and found that it had a
inventories aged over 2 years and 100% aged over 3 remaining life of 8 years.
years. Required: Calculate the net book value of the asset at
• The Company now estimates that its inventories 31/12/2011
would be provided for as 15% aged over 1 year, 35%
aged over 2 years and 75% aged over 3 years
How would this change in accounting estimate be
accounted for under IAS 8?

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Disclosure 4. Prior period Errors Principle

Comparatives Current
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;

• 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.

4. Prior period Errors Example 5

• During 2013, JJK Ltd discovered certain items that has been include
in inventory at 31/12/2012 at a value of $ 2,5 m but they had been in
Errors can arise from: fact sold before the year end.
- Recognition, measurement, • The income statement of JJK for 2012 & 2013 are follows:
presentation or disclosure 2013 2012
-Material errors could possibly only Sale 52.100 48.300
be detected in subsequent periods Cost of sale (35.500) (30.200)
Gross profit 18.600 18.100
Tax expense (4.600) (4.300)
Potential current period error is corrected before financial Profit after tax 14.000 18.000
statements are authorised for issue
The retained earning at 1/1/2012 was $ 11.2 m
Required: Show the 2013 income statement with comparative
figure and the retained earning for each year

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Disclosures
 Nature of the prior period error
 For each prior period presented, if practicable,
disclosure the correction
– For each line item affected
– For EPS
 Amount of correction at the beginning of earliest
period presented
 If retrospective application is impracticable,
explain and describe how the error was corrected

4. Change in accounting Estimates

Accounting estimates
Judgments made by Disclose nature & amount
management e.g. bad debts, of change in accounting
inventory obsolescence, estimate that has had an
warranty obligations, useful effect on current or future
life of PPE periods

Includes change of
Change in Accounting estimates depreciation method
Changes based on new
information or more experience Impact - Prospective application
Does not relate to prior periods

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