India's Accounting Policy Changes

India's Accounting Policy Changes

• This chapter discusses the accounting policy framework in India and key concepts typically covered in introductory accounting courses.
• It focuses on accounting policies, implementation, and the process of changing accounting policies.
• This chapter covers the basics of accounting policies and emphasizes their limited relevance for exams.

Accounting Policies

• Definition: Specific principles, conventions, rules, or practices applied when creating financial statements.
• Examples:
  • Inventory valuation methods (FIFO, weighted average)
  • Measurement basis for intangible assets (cost model or revaluation model)
  • Investment accounting (cost model or fair value)

Selection and Application of Accounting Policies

• General Rule: Follow specific Ind AS standards if available for a particular transaction.
• Example: To record PPE, use Ind AS 16.
• Ind AS Framework: If no specific Ind AS is available, refer to the framework's principles, which guide the development of Ind AS.
• Ind AS Framework components:
  • Ind AS objective
  • Qualitative characteristics of financial statements
  • Assumptions and recognition criteria
• International Accounting Standards (IFRS): Can be used if no specific Ind AS or framework guidance is available.
• Fallback options: If no Ind AS, framework, or IFRS guidance exists, use:
  • Accepted industry practice: Standardized accounting practices in a particular industry.
  • Other relevant pronouncements: Guidelines from other standard-setting bodies.

Changes in Accounting Policies

• Mandatory Changes: Required when an Ind AS standard mandates a policy change.
  • Example: Changing from initial recognition of a financial asset at cost to fair value due to a change in intent, such as from holding to maturity to selling in the near future.
• Voluntary Changes: Permitted if changing the policy leads to more relevant and reliable financial statement information for users.
  • Example: Presenting PPE at fair value when it's a more relevant value indicator than historical cost.
  • Disclosure Requirement: Voluntary changes require explanation in the financial statements.

Exceptions to Changes in Accounting Policies

• Applying a policy to a transaction different in substance from previous transactions is NOT a change in accounting policy.
  • Example: Switching from a revaluation to the cost model for a building reclassified as investment property from PPE.
• Applying a new accounting policy to a transaction that didn't previously occur is NOT a change in accounting policy.
  • Example: First-time recording of a newly acquired PPE using the cost model.

Consistency in Applying Accounting Policies

• Selected accounting policies should be consistently applied unless a meaningful change warrants a different approach.
• Changes in accounting policies should be documented.

Accounting Policy Change

• Policy changes arise from Ind AS pronouncements or other regulatory bodies' instructions.
• Ind AS 109 provides guidance on changes in policies.
• Use Ind AS 8 for lacking specific Ind AS guidance.
• Ind AS 8 necessitates retrospective application of accounting policies.
• Retrospective application adjusts past periods as if the new policy was always in use to ensure consistency and comparability.
• Ind AS 8 allows prospective application if retrospective application is impossible or impractical.

Accounting Policy Change - Example

• Switching from FIFO to weighted-average cost for inventory accounting necessitates retrospective adjustments.
• Adjustments are reflected in comparative financial statements.
• Opening balances for previous years impacted by the switch are updated to reflect the new method.

Accounting Estimates

• Accounting estimates measure items in financial statements with inherent uncertainty.
• Examples:
  • Provision for bad debts
  • Warranty obligations
  • Useful life and residual value of assets
  • Depreciation methods
• Changes in estimates are accounted for prospectively from the date of the estimate change.
• Changes in estimates are not regarded as prior period error corrections.

Errors in Financial Statements

• Errors in financial statements stem from mistakes in applying accounting policies or estimates.
• Corrections are made retrospectively.
• Affected prior periods are restated.
• Opening balances for the current year are adjusted if the error impacts the statement of financial position.

Distinguishing Accounting Policy Changes from Accounting Estimates

• A policy change affecting a period is a policy change; multiple periods require estimate change treatment.

Disclosures for Changes in Accounting Policies and Estimates

• Changes in Accounting Policies:
  • Change nature
  • Current and prior period effects
  • Reasons for changes in retrospectively applied policies
• Changes in Accounting Estimates:
  • Change nature
  • Current and future period effects
  • Reasons for changes
  • If future effects aren't reasonably estimable, a statement to that effect is needed.

Errors in Financial Statements

• Error of omission: A transaction's non-recording.
• Error of misstatement: Incorrectly recording a transaction.
  • Error of commission: Amount misstatement.
  • Error of principle: Incorrect accounting treatment.
• Fraud: Deliberate misstatement/omission for gain.
• Classification error: Wrong category assignment of a transaction.

Treatment of Errors in Financial Statements

• Current year errors: Corrected in the current year's financial statements.
• Prior period errors: Corrected retrospectively.
  • Restate comparative amounts and opening balances accordingly.
• Prospective correction: Applicable if restating prior periods is impractical.
• Disclosures: Nature of error, effect on financial statements, and avoidance of prior period restating reasons.

Events After the Reporting Period

• Definition: Events between the balance sheet date and financial statement authorization.
• Purpose: To ensure users have the most relevant information available.
• Event types:
  • Adjusting: Evidence of balance sheet-date conditions.
  • Non-adjusting: Evidence of events after the balance sheet date.
• Adjusting events: Recognizing bankruptcy loss, recording refund adjustments, and incorporating asset cost determinations occurring after the balance sheet date.
• Non-adjusting events: Recording subsequent asset sales, fire losses, or investment fair value changes in future periods not affecting the current period.
• Disclosures: Adjusting events require disclosure of nature and amount, with only significant non-adjusting events warranting disclosure.

Non-Adjusting Events

• Non-adjusting events do not require adjustments in financial statements.
• Significant non-adjusting events require disclosure. This includes the event's nature and estimated financial impact, for example, a company's warehouse fire loss to inventory.

Special Cases for Non-Adjusting Events

• Changes in Net Realizable Value (NRV) of Inventory:
  • Changes in selling price after the balance sheet date requiring adjustment.
  • Damage after the balance sheet date is a non-adjusting event.
  • Damage before but NRV confirmation occurred after the balance sheet date is an adjusting event.
• Dividend Declaration:
  • Dividends declared after the balance sheet date but before financial statement approval are considered non-adjusting events.
• Going Concern:
  • If liquidation is evident post-balance sheet date, non-adjusting but needing adjustment for the liquidation basis. Assets and liabilities are valued at realizable amounts.

Liabilities

• A liability is a present obligation arising from past events requiring resource transfer.
• Characteristics: Legal (contract/legislation) or constructive (company practices/commitments).
• Recording criteria: Probable, reliable measurement.

Provisions

• A provision is a liability with uncertain amount or timing.
• Examples: Warranties, taxes, environmental remediation.

Recording Provisions

• Amount: Best estimate of settlement cost; expected value if multiple outcomes.
• Discounting: Discounted to present value using a pre-tax rate for multi-year obligations.