International accounting standard 8
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Transcript of International accounting standard 8
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International Accounting
Standard (IAS-8)
Accounting Policies, Changes in
Accounting Estimates and Errors
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Objective Of IAS 8
it prescribes the criteria for:
O selection of accounting policies;
O changes in accounting policies;
O accounting treatment;
O disclosure of changes in accounting policies;
O changes in accounting estimates; And O correction of errors;
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The achievement of the objective
would result in: enhancement of:
O relevance and reliability of financial
statements;
O comparability of financial statements
with the financial statements of other
entities;
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Definitions
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WHAT ARE ACCOUNTING
POLICIES? These are:
Specific principles;
Bases;
Conventions;
Rules;
Practices; These are applied in preparing and presenting
financial statements.
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ACCOUNTING ESTIMATES
is an adjustment of the carrying amount of
an asset or liability, or related expense,
resulting from reassessing the expectedfuture benefits and obligations associated
with that asset or liability.
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Materiality
a) Omissions or misstatements of items are
material if they could, by their size or
nature, individually or collectively,influence the economic decisions of users
taken on the basis of the financial
statements.
b) Depends on the size and nature of the
omission or misstatement.
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Prior Period errors
are omissions from, and misstatements in, an
entity's financial statements for one or more
prior periods arising from a failure to use, ormisuse of, reliable information
a) that was available when financial statements
for those periods were authorized for issue;
b) and could reasonably be expected to have
been obtained and taken into account in
preparing those statements.
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Prior Period errors
Such errors result from
a) mathematical mistakes;
b) mistakes in applying accounting policies;
c) oversights or
d) misinterpretations of facts; ande) fraud.
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RETROSPECTIVE APPLICATION
Retrospective application is applying a newaccounting policy to transactions, other events
and conditions as if that policy had always been
applied i.e. effect of change in accounting policy
recording previous period is to be calculated.
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RETROSPECTIVE RESTATEMENT
Retrospective restatement is correcting therecognition, measurement and disclosure of
amounts of elements of financial statementsas if a prior period error had neveroccurred.
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IMPRACTICABLE
Applying a requirement is impracticable
when the entity cannot apply it after makingevery possible effort.
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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 totransactions, other events and conditions
occurring after the date as at which the policy is
changed; and.
Recognizing the effect of the change in theaccounting estimate in the current and future
periods affected by the change.
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ACCCOUNTING POLICIESSelection and Application of
Accounting Policy
If an IFRS specifically addresses a
transaction, other event or condition, anentity shall apply this IFRS.
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ACCCOUNTING POLICIES
Selection and Application of
accounting policy In devising an accounting policy, it should be:
relevant;
reliable;
faithful;
havingeconomic substance;
neutral; free from bias prudent;
complete;
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ACCCOUNTING POLICIES
Selection and Application of accounting
policy
If this IFRS does not specifically address a transaction,
other event or condition, an entitys management shall
use its judgement in developing and applying anaccounting policy that results in information that is:
a) Relevant to the economic decision making needs of
user; andb) Reliable
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ACCCOUNTING POLICIES
Selection and Applicationof accounting policy
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
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ACCCOUNTING POLICIES
Selection and Application of accounting
policy
CONSISTENCY OF Accounting Policies
o An entity shall select and apply its accounting
policies consistently for similar transactions, otherevents and conditions, unless a standard or IFRS
specifically requires or permits categorisation of
items for which different policies may be
appropriate.
o If an IFRS requires or permits such categorisation,
an appropriate accounting policy shall be selected
and applied consistently to each category.
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Changes in Accounting
Policies An entity shall change an accounting policy
only if the change:
(a) is required by changes to this IFRS, or
(b) results in the financial statements
providing reliable and more relevant
information about the effects oftransactions, other events or conditions on
the entitys financial position, financial
performance or cash flows.
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What are not change in accounting
policies?The following are not change in accounting policies:
a) The application of an accounting policy for
transactions, other events or conditions thatdiffer in substance from those previously
occurring; and
b) The application of a new accounting policy for
transactions, other events or conditions that didnot occur previously or were immaterial.
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Accounting treatment of change in
accounting policy
When a change in accounting
policy is applied
retrospectively, the entity shall
adjust the opening balances of
each affected component ofequity for the earliest prior
period presented and the other
comparative amounts disclosed
for each prior period presented
as if the new accounting policy
had always been applied.
When it is impracticable to
determine the cumulative effect,
at the beginning of the current
period, of applying a new
accounting policy to all priorperiods, the entity shall adjust
the comparative information to
apply the new accounting policy
prospectively from the earliest
date practicable.
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DISCLOSURE REQUIREMENTS OFCHANGE IN ACCOUNTING POLICY
Title of the standard or interpretation
Transitional provision if applicable
Nature of change
Description of transitional provision
For the current period and each prior period
presented, to the extent practicable, the amount of
adjustment:
o For each financial statement line item affected;
o Earnings per sharerevised
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WHAT IS A 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;
liabilities that results from:
The assessment of the present status of assets andliabilities
Expected future benefits of assets
Obligations associated with liabilities
Change in accounting estimates result from:
New information; or
New developments
Are NOT corrections of errors;
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REASON FOR ESTIMATION
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;
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Where estimation is required?
Estimates may be required of:
Bad debts;
Inventory obsolescence; Fair value of financial assets or financial
liabilities;
The useful lives of, or expected pattern of
consumption of the future economic benefitsembodied in, depreciable assets; and
Warranty obligation etc
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When change in accounting estimate
becomes necessary
If changes occur in the circumstances
on which the estimate was based; or As a result of a new information; or
More experience
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Recognition criteria of change in
accounting estimate Adjusting the carrying amount of the related asset, liability
or equity item in the period of change recognizes a changein an accounting estimate.
Example: Management estimates that provision for doubtful debts is
estimated up to 5 percent of the total population of tradedebts. However, upon identifying the age of the tradedebts, it revealed that bad debts are about 6.5 percent oftotal population of trade debts. Management immediatelyrecognizes the increase in bad debts expense in the booksof accounts.
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DISCLOSURE REQUIREMENTS OFCHANGE IN ACCOUNTING ESTIMATE
Nature and amount of a change
in an accounting estimate for thecurrent year and future period if
practicable;
If estimation is impracticable,disclosure of this fact;
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ERRORS
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WHAT ARE PRIOR PERIOD ERRORS?
Omissions from; or
Misstatements in
The financial statements for one or moreprior periods arising from:
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WHAT ARE PRIOR PERIOD ERRORS?Continued.
Failure to use or misuse of reliable
information that was available when financial
statements for those periods were authorized forissue;
Failure to use or misuse of reliable
information that could reasonably be expected to
have been obtained and taken into account in thepreparation and presentation of those financial
statements.
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Examples of prior period errors are:
Effect of mathematical mistakes
Mistakes in applying accounting policies
Oversight and misinterpretation of facts and
fraud.
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Rectification Criteria
An entity shall correct material prior perioderrors retrospectively in the first set of financialstatements authorized for issue after theirdiscovery by:
Restating the comparative amounts for theprior period(s) presented in which the erroroccurred; or
If the error occurred before the earliest
prior period presented, restating the openingbalances of assets, liabilities and equity for theearliest prior period presented.
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LIMITATION ON RETROSPECTIVERESTATEMENT
Limitation on periodspecific effect
When it is impracticable todetermine the period specificeffects of an error on
comparative information forone or more prior periodspresented, the entity shallrestate the opening balances ofassets, liabilities and equity forthe earliest period for which
retrospective restatement ispracticable (which may be thecurrent period).
Limitation oncumulative effect
When it is impracticable to
determine the cumulative effect,
at the beginning of the current
period, of an error on all prior
periods, the entity shall restate
the comparative information to
correct the error prospectively
form the earliest date
practicable.
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DISCLOSURE REQUIREMENTS
Nature of the prior period error
To the extent practicable, the amount of the
correction:
o For each financial statement line item affected; and
o 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.