Ias 8 accounting policies changes in accounting estimates

04/07/23 N R GOVINDARAJAN CHARTERED ACCOUNTANT FCA,AICWA,CISA, DISA

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IAS 8 ACCOUNTING POLICIES CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

N R GOVINDARAJAN

CHARTERED ACCOUNTANT

FCA, AICWA,CISA, DISA (ICAI)


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OVERVIEW

• Objectives

• Key concepts

• Accounting policies – Selection and Application

• Changes in accounting policies

• Changes in accounting estimates

• Errors


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Objectives

• Prescribes rules for:

• Selecting and changing accounting policies and accounting treatment and disclosures

• Changes in accounting estimates

• Correction of errors


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Key concepts

• Accounting policies:

• Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements

• Same in Indian GAAP


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Key concepts

• Changes in accounting estimates:• Adjustments to an asset or liability’s carrying

amount• Amount of periodic consumption of an asset that

result from the assessment of the present status of and expected future benefits and obligations associated with assets and liabilities

• Changes are due to new information, developments and are not correction of errors


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Key concepts

• Eg: useful life of assets, bad debts, inventory obsolescence,

• Indian GAAP similar to IFRS except for change in method of depreciation which is considered as a change in an accounting policy rather than a change in an accounting estimate


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Key concepts

• Prior Period Errors:• Omissions from and misstatements in

financial statements in one or more periods

• Arises from a failure to use or a misuse of reliable information

• Such information was available when prior period FS was authorised or

• Could have been reasonably obtained


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Key concepts

• Instances of Errors include:

• Mathematical mistakes

• Mistakes in applying accounting policies

• Oversights or misinterpretation of facts

• Frauds


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Accounting policies – Selection and Application

• Where transactions or events are covered specifically by IFRSs it is governed by them

• If not, use of entity’s judgement that results in relevant and reliable information

• The other standards can be followed, if it is consistent with IFRSs

• Consistent application is required


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Changes in accounting policies• Allowed only if:• Change is required by an IFRS• Change results in FS providing reliable and more

relevant information• The following does not amount to change:• Selection of accounting policy to a transaction

that does not occur previously or not material or• Transaction substantially different from previous

one• More or less similar in Indian GAAP except the

change can also be by change in statute


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Changes in accounting policies – Accounting treatment

• On account of application of new or revised IFRS :

• As per transitional provisions of that particular IFRS

• Otherwise as per IAS 8 giving retrospective application

• Same treatment if policy is changed voluntarily• Retrospective application means adjustment of

opening balance of each affected component of equity for earliest prior period presented


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Changes in accounting policies – Accounting treatment

• Comparative amounts disclosed for each prior period presented as if the new policy had always been applied

• If it becomes impracticable to give retrospective application

• Prospective application or Retrospective application since when practicable.


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Impracticable?

• When an enterprise cannot apply a requirement after making every reasonable effort

• Situations where it (s):• 1. Effects of retrospective application or

retrospective restatement not determinable• 2. Requires assumption about what

management’s intention would have been during that period

• 3. Requires significant estimates of amounts and it is impossible to distinguish objectively information about the estimates


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Changes in accounting estimates- Accounting treatment

• Accounting of estimates is beset with lots of uncertainties

• When circumstances change we need to make changes to estimates

• We need to prospectively account for changes in accounting estimates

• Case study 2&3


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Errors – Accounting Treatment

• Corrected in the first FS authorised for issue after the discovery

• Restate the comparative amounts for the prior period in which the error occurred

• If the error occurred before that period restate the opening balances of assets, liabilities, equity for the earliest prior period presented


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Errors – Accounting Treatment

• If it is impracticable to give retrospective effect:

• Prospective application or retrospective application since when practicable

• Case study 5

• Solution to Case study 5


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Particulars Indian GAAP IFRS

Change in accounting policy

No elaborate guidance. Effect in P&L account

Detailed guidance.Retrospective effect needs to be given by adjusting retained earnings

Change in the method of depreciaton

Change in accounting policy

Change in accounting estimate

Proposed Dividend

Provision required

Provision Prohibited


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Particulars Indian GAAP

IFRS

Prior Period item

Only P & L items

Covers items of P&L and B/S

Prior period items effect

Only in CY with disclosures

Retrospective effect wherever practicable


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AS 5 VS ED AS 5

• AS 5 VS ED AS 5


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Ias 8 accounting policies changes in accounting estimates

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