EU Accounting Rule 14: Accounting Policies, Changes in Accounting Estimates and Errors PDF

Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN COMMUNITIES ACCOUNTING RULE 14 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS  EUROPEAN COMMISSION...

Ref. Ares(2017)6265676 - 20/12/2017 EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN COMMUNITIES ACCOUNTING RULE 14 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 2 of 10 INDEX 1. Objective....................................................................................................................................... 3 2. Scope............................................................................................................................................. 3 3. Definitions..................................................................................................................................... 3 4. Accounting Policies...................................................................................................................... 5 4.1 Selection and Application of Accounting Policies.............................................................. 5 4.2 Consistency of Accounting Policies.................................................................................... 5 4.3 Changes in Accounting Policies.......................................................................................... 6 4.4 Applying Changes in Accounting Policies.......................................................................... 6 4.5 Disclosures........................................................................................................................... 7 5. Changes in Accounting Estimates................................................................................................ 8 5.1 Accounting for Changes in Accounting Estimates.............................................................. 8 5.2 Disclosures........................................................................................................................... 8 6. Errors............................................................................................................................................. 9 6.1 Accounting for Errors.......................................................................................................... 9 6.2 Disclosures........................................................................................................................... 9 7. Effective date.............................................................................................................................. 10 8. Reference to other rules.............................................................................................................. 10  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 3 of 10 1. Objective The objective of this Rule is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and the corrections of errors. 2. Scope The EU, since they prepare and present financial statements under the accrual basis of accounting, shall apply this accounting rule. This rule shall be applied in selecting and applying accounting policies, and accounting for changes in accounting policies, changes in accounting estimates and corrections of prior period errors. 3. Definitions The following terms are used in this rule with the meanings specified: 1) Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. 2) A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors. 3) Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if: a) the effects of the retrospective application or retrospective restatement are not determinable; b) the retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period; or c) the retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: i. provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed; and  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 4 of 10 ii. would have been available when the financial statements for that prior period were authorised for issue from other information. 4) Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: a) was available when financial statements for those periods were authorised for issue; and b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. 5) Prospective application of a change in accounting policy and of recognising 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) recognising the effect of the change in the accounting estimate in the current and future periods affected by the change. 6) Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. 7) 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.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 5 of 10 4. Accounting Policies 4.1 Selection and Application of Accounting Policies 1) When an EU Accounting Rule (EAR) specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the rule. 2) In the absence of an EAR that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy: o That results in information that is relevant to the accountability and decision-making needs of users; o Faithfully represents the financial position, financial performance, and cash flows of the entity; o Meets the qualitative characteristics of understandability, timeliness, comparability, and verifiability and takes account of the constraints on information included in general purpose financial reports and the balance between the qualitative characteristics. 3) The qualitative characteristics are those outlined in Appendix 1 of EAR 1 Financial Statements. 4) In making the judgment management shall refer to, and consider the applicability of, the following sources in descending order: a) the requirements and guidance in EARs dealing with similar and related issues; b) the requirements in IPSAS Standards dealing with similar and related issues; and c) the definitions, recognition and measurement criteria for assets, liabilities, revenue and expenses described in the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities. 5) In making the judgement, management may also consider (a) the most recent pronouncements of other standard-setting bodies; (b) and accepted public or private sector practices, but only to the extent that these do not conflict with the sources in the last preceding paragraph. Examples of such pronouncements include pronouncements of the IASB, including IFRSs, and Interpretations issued by the IASB’s IFRS Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). 4.2 Consistency of Accounting Policies The EU shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless an EAR specifically requires or permits categorisation of items for which different policies may be appropriate. If an EAR requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 6 of 10 4.3 Changes in Accounting Policies 1) Users need to be able to compare the financial statements of the European Union over a period of time to identify trends in their balance sheet, economic outturn account and cash flow table. Therefore, the same accounting policies are normally adopted in each period. As a minimum, in case of a change in accounting policies, this information should be disclosed. Moreover, changes in accounting policies may have a significant impact on the balance sheet and economic outturn account. Consequently, specific accounting treatments and requirements must be followed to ensure comparability of the financial information where the impact of such a change is material. 2) A change in accounting policy is: − A change from one basis of accounting to another basis of accounting; or − A change in the accounting treatment, recognition or measurement of a transaction or event within a basis of accounting. 3) A change in accounting policy should be made only if: − Required by a financial regulation; or − Required by an EAR; or − If the change will result in more relevant or reliable information about the balance sheet, economic outturn account or cash flow table of the European Union. 4) The following are not changes in accounting policies: − The adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions; and − The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial. 4.4 Applying Changes in Accounting Policies 1) A change in accounting policy should be applied as follows: − an entity shall account for a change in accounting policy resulting from the initial application of an EAR in accordance with the specific transitional provisions, if any, in that rule; or − Retrospectively, unless that it is impracticable to determine either the period-specific effects or the cumulative effect of the change; or − Prospectively, when the amount of the adjustment to the opening balances cannot be reasonably determined. 2) In the case of retrospective application, any resulting adjustment should be reported as an adjustment to the opening balance of each affected component of net assets/equity for the earliest period presented. Comparative information should be restated for each prior period presented unless it is impracticable to do so. The financial statements, including the comparative information for prior periods, are presented as if the new accounting policy had always been in use. Therefore, comparative information is restated in order to reflect the new accounting policy. The amount of the adjustment relating to periods prior to those included in  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 7 of 10 the financial statements is adjusted against the opening balance of accumulated surpluses or deficits of the earliest period presented. Any other information with respect to prior periods, such as historical summaries of financial data, is also restated. 3) When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the EC and its consolidated bodies shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of net assets/equity for that period. 4) When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the EC and its consolidated bodies shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. 4.5 Disclosures When initial application of an EAR (i) has an effect on the current period or any prior period, (ii) would have such an effect except that it is impracticable to determine the amount of the adjustment, or (iii) might have an effect on future periods, the EC and its consolidated bodies shall disclose: a) the title of the EAR; b) when applicable, that the change in accounting policy is made in accordance with its transitional provisions; c) the nature of the change in accounting policy; d) when applicable, a description of the transitional provisions; e) when applicable, the transitional provisions that might have an effect on future periods; f) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected; g) the amount of the adjustment relating to periods before those presented, to the extent practicable; and h) if retrospective application required is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. When a voluntary change in accounting policy (i) has an effect on the current period or any prior period, (ii) would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or (iii) might have an effect on future periods, an entity shall disclose: a) the nature of the change in accounting policy; b) the reasons why applying the new accounting policy provides reliable and more relevant information; c) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected; d) the amount of the adjustment relating to periods before those presented, to the extent practicable; and  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 8 of 10 e) if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. 5. Changes in Accounting Estimates 5.1 Accounting for Changes in Accounting Estimates Due to the uncertainties inherent in the performance of the European Union' activities (e.g. the receipt of cost statements, information received from Member States) many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. Estimates may be required, for example, for VAT revenues, GNI revenues (see EAR 4, "Revenue from exchange transactions"), reduction in asset values, inventory obsolescence, or the percentage-of-completion of a transfer. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. The effect of a change in an accounting estimate, other than a change to which the next paragraph applies, shall be recognised prospectively by including it in surplus or deficit in: a) the period of the change, if the change affects the period only; or b) the period of the change and future periods, if the change affects both. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of net assets/equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or net assets/equity item in the period of change. Sometimes it is difficult to distinguish between a change in accounting policy and a change in an accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosure. Some examples of changes in accounting estimates are the value reduction calculated for receivables, stocks or the useful life for depreciable assets. Some examples of changes in accounting policies would be a change in the valuation method of assets from the historic cost method, or the update of an EAR. 5.2 Disclosures The nature and amount of a change in an accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods should be disclosed in the annex to the financial statements, except for the disclosure of the effect on future  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 9 of 10 periods when it is impracticable to estimate that effect. If the amount of the effect in future periods is not disclosed because estimating it is impracticable, the entity shall disclose that fact. 6. Errors 6.1 Accounting for Errors Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Potential current period errors discovered in that period are corrected before the financial statements are authorised for issue. On rare occasions, an error has such a significant effect on the financial statements of one or more prior periods that those financial statements can no longer be considered to have been reliable at the date of their issuance. A material prior period error shall be corrected retrospectively in the first set of financial statements authorised for issue after their discovery by: a) restating the comparative amounts for prior period(s) presented in which the error occurred; or b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and net assets/equity for the earliest prior period presented. A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error. When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the EU shall restate the opening balances of assets, liabilities and net assets/equity for the earliest period for which retrospective restatement is practicable (which may be the current period). When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the EU shall restate the comparative information to correct the error prospectively from the earliest date practicable. Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error. 6.2 Disclosures The EU shall disclose the following: a) the nature of the prior period error; b) for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected;  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 3 EU ACCOUNTING RULE 14: ACCOUNTING POLICIES, CHANGES Date: November 2017 IN ACCOUNTING ESTIMATES AND ERRORS Page 10 of 10 c) the amount of the correction at the beginning of the earliest prior period presented; and d) 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. Financial statements of subsequent periods need not repeat these disclosures. 7. Effective date This rule shall be effective for annual financial statements covering periods beginning on or after 1 January 2017. 8. Reference to other rules IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors EC accounting rule 1 Financial Statements