Questions and Answers
The initial application of a new accounting policy for transactions is considered a change in accounting policy.
True
The objective of IAS 8 is to enhance the relevance and reliability of an entity's financial statements and the __________ of those financial statements.
comparability
What does retrospective application mean in the context of IAS 8?
Applying a new accounting policy to transactions as if that policy has always been applied.
What is defined as a prior period error?
Signup and view all the answers
What amendment was made to IAS 8 in October 2018?
Signup and view all the answers
What is often necessary when applying an accounting policy to financial statements?
Signup and view all the answers
Estimates related to prior periods are different from those made in the current period.
Signup and view all the answers
What should not be used when applying a new accounting policy retrospectively?
Signup and view all the answers
When did the standard state it should be applied for annual periods?
Signup and view all the answers
The amendments made by IFRS 9 Financial Instruments allow for retrospective application without any cost.
Signup and view all the answers
Which of the following amendments relate to the concept of material?
Signup and view all the answers
What does a rate regulator do?
Signup and view all the answers
The amendments to References to the Conceptual Framework in IFRS Standards should be applied for annual periods beginning on or after ___ .
Signup and view all the answers
Match the following amendments with their respective actions:
Signup and view all the answers
What should an entity do when it is impracticable to determine the period-specific effects of changing an accounting policy?
Signup and view all the answers
When can retrospective application to a prior period be considered practicable?
Signup and view all the answers
Retrospective application of a new accounting policy can only be done if it is practicable to determine the cumulative effect.
Signup and view all the answers
What must an entity disclose when initial application of an IFRS has an effect on any period?
Signup and view all the answers
An accounting policy may require items in financial statements to be measured in a way that involves __________ uncertainty.
Signup and view all the answers
Why might an entity need to change an accounting estimate?
Signup and view all the answers
A change in an accounting estimate always relates to prior periods.
Signup and view all the answers
What effect does a change in an accounting estimate have in the current period?
Signup and view all the answers
What must an entity disclose regarding a prior period error?
Signup and view all the answers
The correction of a prior period error is included in profit or loss for the period in which the error is discovered.
Signup and view all the answers
When should entities restate prior period errors?
Signup and view all the answers
What is one reason it might be impracticable to adjust comparative information for prior periods?
Signup and view all the answers
Study Notes
IAS 8 Overview
- IAS 8, titled "Accounting Policies, Changes in Accounting Estimates and Errors," was adopted in April 2001 and revised in December 2003.
- It replaced prior standards, emphasizing enhanced reporting standards for financial statements over time and cross-entity comparability.
Objectives and Scope
- Aims to define the criteria for selecting and changing accounting policies, and to outline the treatment and disclosure of changes in estimates and errors.
- Applies to all entities in selecting and applying accounting policies, and handling changes and errors.
Key Definitions
- Accounting Policies: Specific principles and practices used in preparing financial statements.
- Accounting Estimates: Monetary amounts in financial statements subject to measurement uncertainty.
- Prior Period Errors: Omissions or misstatements from earlier financial statements due to flawed information usage.
Accounting Policies Selection and Application
- Must apply IFRS if specifically applicable; otherwise, management must use judgment for developing policies that maintain relevance and reliability.
- Consistent application of accounting policies is necessary for similar transactions unless IFRS allows for categorization.
Changes in Accounting Policies
- Changes are allowed only if mandated by IFRS or provide more reliable and relevant information.
- Retrospective application is required when a policy change is made unless impracticable; changes must not create immaterial departures.
Accounting Estimates and Retrospective Application
- Changes due to initial application of IFRS followed by retrospective changes, adjusting opening equity balances for affected periods.
- Retrospective application may be limited if determining period-specific effects is impractical.
Errors and Disclosures
- Significant focus on correcting prior period errors in financial reporting; errors must be disclosed and justified.
- Emphasis on ensuring corrections adhere to taxation guidelines outlined in IAS 12.
Amendments and Updates
- IAS 8 has undergone several amendments, including those in October 2018 clarifying the definition of "material," and February 2021 introducing a definition for "accounting estimates."
- Other IFRS updates have included minor consequential amendments to IAS 8 regarding fair value, financial instruments, and references to the conceptual framework.
Impracticability in Application
- Impracticability arises when an entity cannot apply a requirement after making reasonable efforts, often leading to prospective application instead of retrospective.
Practical Considerations
- Prospective application is used when retrospective application is impractical.
- Encourages reporting practices that aim to enhance the reliability and comparability of financial statements across time and entities.### New Accounting Policy Application
- When retrospective application of a new accounting policy is impracticable, the policy must be applied prospectively from the earliest practicable period.
- Cumulative adjustments to assets, liabilities, and equity prior to the earliest applicable date are disregarded.
- Changes in accounting policies are allowed even if retrospectively infeasible, adhering to specified guidance.
Disclosure Requirements for Initial Application of IFRS
- Disclosures are required if initial IFRS application affects current or prior periods or may affect future periods.
- Necessary disclosures include:
- Title of the IFRS.
- Confirmation of compliance with transitional provisions.
- Nature of the accounting policy change.
- Description of transitional provisions and effects on future periods.
- Adjustments for current and prior periods, where practicable, including line items affected and earnings per share.
Voluntary Change in Accounting Policy
- Similar disclosure requirements apply to voluntary changes affecting current or prior periods.
- Must include reasons for better information, along with amounts of adjustments for affected financial statement line items.
Non-Application of New IFRS
- Entities must disclose if they have not applied issued IFRS that is not yet effective.
- Required disclosures include the IFRS title, nature of changes, effective date requirement, anticipated application date, and potential impact on financial statements.
Accounting Estimates and Measurement Uncertainty
- Accounting policies may necessitate measuring items with inherent uncertainty, leading to the development of accounting estimates.
- Examples include allowances for expected credit losses, net realizable value of inventory, fair value measurements, depreciation, and warranty provisions.
- Reasonable estimates play a vital role in preparing reliable financial statements.
Changes in Accounting Estimates
- Changes can occur due to shifts in underlying circumstances or new information.
- Unlike errors, changes in estimates do not apply to prior periods and do not correct past errors.
- Recognized prospectively in profit or loss for the current and future periods.
Disclosure of Changes in Accounting Estimates
- Entities must disclose the nature and amount of changes affecting the current period or expected future effects, excluding impracticable estimates.
Errors in Financial Statements
- Errors can arise in recognition, measurement, presentation, or disclosure and include both material and immaterial errors.
- Material prior period errors must be corrected retrospectively in the first financial statements issued after discovery.
Limitations on Retrospective Restatement
- Retrospective corrections are required unless impracticable to determine the period-specific or cumulative effects.
- In cases of impracticality, corrective actions may be restated prospectively from the earliest practicable date.
Disclosures for Prior Period Errors
- Entities should disclose the nature of the prior period error and the amounts related to affected line items in financial statements, including opening balances.
Impracticability in Retrospective Applications
- It may be impracticable to adjust comparative information due to lack of data or difficult estimations over time.
- Estimates used for prior periods must reflect circumstances existing at the time of transactions, avoiding hindsight.
Effective Date
- The standard applies to annual periods starting on or after January 1, 2005, with early application encouraged.
- Adaptations due to IFRS amendments must be applied in conjunction with the specified standards.### Application of Amendments
- Entities must apply amendments to paragraphs 6 and 11(b) retrospectively, unless impractical or excessively costly.
- If retrospective application is impractical, amendments must align with paragraphs 23–28, interpreting references to 'impracticable' as 'involves undue cost or effort.'
Regulatory Account Balances
- If IFRS 14 Regulatory Deferral Accounts is not adopted, refer to definitions and criteria from the Framework rather than the Conceptual Framework for regulatory account balances.
- Regulatory account balance is defined as expenses (or income) not recognized as assets/liabilities but included by rate regulators in pricing assessments.
- Rate regulators are statutory bodies authorized to set binding rates, which may include third-party entities or the entity’s governing board.
Definition of Material
- In October 2018, amendments to IAS 1 and IAS 8 were made to establish the definition of material.
- These amendments are to be applied prospectively starting from annual periods beginning on or after 1 January 2020, with early applications permitted.
Definition of Accounting Estimates
- February 2021 saw new amendments to IAS 8, introducing the definition of accounting estimates.
- These amendments apply to annual reporting periods starting on or after 1 January 2023, permitting earlier application.
- Entities must apply amendments for accounting policy changes and accounting estimates from the start of the applicable reporting period.
Withdrawal of Previous Standards
- IAS 8 supersedes the previous IAS 8 that focused on net profit or loss for the period, fundamental errors, and changes in accounting policies, which was revised in 1993.
- Also supersedes SIC interpretations: SIC-2 on capitalisation of borrowing costs and SIC-18 on alternative methods.
Approval of IAS 8 and Amendments
- IAS 8, revised in December 2003, received approval from the International Accounting Standards Board, including notable members chaired by Sir David Tweedie.
- Amendments to the definition of material were also approved by the Board members including Hans Hoogervorst as chairman in October 2018.
- The definition of accounting estimates, amended in February 2021, was approved by 12 out of 13 Board members, with Hans Hoogervorst as chairman.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge on IAS 8, which covers accounting policies, changes in accounting estimates, and the treatment of fundamental errors. Learn about the key concepts and significant updates made by the International Accounting Standards Board since its adoption. This quiz will deepen your understanding of net profit reporting and error management in accounting.
