IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Preliminary

International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8 revised in December 2003) replaces IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005.

This standard also replaces SIC-2 Consistency-Capitalization of Borrowing Costs and SIC-18 Consistency-Alternative Methods.

The main changes of IAS 8 (December 2003 revised) from the previous version are described below :

Selection of accounting policies. The requirements for the selection and application of accounting policies in IAS 1 Presentation of Financial Statements (as issued in 1997) have been transferred to the Standard.

Materiality. The Standard defines material omissions or misstatements. It stipulates that :

1. The accounting policies in IFRSs need not be applied when the effect of applying them is immaterial. This complements the statement in IAS 1 that disclosures required by IFRSs need not be made if the information is immaterial;

2. Financial statements do not comply with IFRSs if they contain material errors;

3. Material prior period errors are to be corrected retrospectively in the first set of financial statements authorized for issue after their discovery.

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.

Voluntary changes in accounting policies and corrections of prior period errors. The standard requires retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It removes the allowed alternative in the previous version of IAS 8 i.e. (a) to include in profit or loss for the current period the adjustment resulting from changing an accounting policy or the amount of a correction of a prior period error; and (b) to present unchanged comparative information from financial statements of prior periods.

As a result of the removal of the allowed alternative, comparative information for prior periods is presented as if new accounting policies had always been applied and prior period errors had never occurred.

Impracticability. The standard retains the “impracticability” criterion for exemption from changing comparative information when changes in accounting policies are applied retrospectively and prior period errors are corrected. The standard now includes a definition of “impracticable” and guidance on its interpretation.

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

The Standard also states that when it is impracticable to determine the cumulative effect, at the beginning of the current period, of : (a) applying a new accounting policy to all prior periods, or (b) an error on all prior periods, the entity changes the comparative information as if the new accounting policy had been applied, or the error had been corrected, prospectively from the earliest date practicable.

Prospective application of a change in accounting policy and of recognizing the effect of a change in an accounting estimate, respectively, are : (a) applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and (b) recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.

Fundamental errors. The Standard eliminates the concept of a fundamental error and thus the distinction between fundamental errors and other material errors. The Standard defines prior period errors.

Disclosures. The Standard now requires, rather than encourages, disclosure of an impending change in accounting policy when an entity has yet to implement a new IFRS that has been issued but not yet come into effect. In addition, it requires disclosure of known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application.

The Standard requires more detailed disclosure of the amounts of adjustments resulting from changing accounting policies or correcting prior period errors. It requires those disclosures to be made for each financial statement line item affected and, if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share.

Source of this article : IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.