Accounting Policies, Estimates and Errors · Accounting Policies, Estimates and Errors 2017 Adebayo Olumuyiwa, FRM, FICA, ACA, ACTI, CIMA Adv. Dip. MA, Dip. IFR (ACCA), BSc. (Hons),

Accounting Policies, Estimates and Errors 2017

Adebayo Olumuyiwa, FRM, FICA, ACA, ACTI, CIMA Adv. Dip. MA, Dip. IFR (ACCA), BSc. (Hons), HND Page 1

IAS 8 – ACCOUNTING POLICIES, ESTIMATES AND ERRORS

IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors.

1The Standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information. Changes in accounting policies and corrections of errors are generally accounted for retrospectively, whereas changes in accounting estimates are generally accounted for on a prospective basis.

IAS 1 Presentation of Financial Statements sets out the disclosure requirements for accounting policies (excluding changes in accounting policies); IAS 8 deals with the accounting and disclosure requirements regarding changes in accounting policies, changes in accounting estimates and the correction of errors. 2Objective: The objective of this Standard 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 corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities. Key Terms:

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 an 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 corrections of errors”.

3. International Financial Reporting Standards (IFRSs) are “Standards and Interpretations adopted by the International Accounting Standards Board (IASB). They comprise:

(a)International Financial Reporting Standards; (b)International Accounting Standards; (c)IFRIC Interpretations; and (d)SIC Interpretations”.

IFRSs are accompanied by guidance to assist entities applying their requirements. All such guidance states whether it is an integral part of IFRSs. Guidance that is an integral part of IFRSs is mandatory; guidance that is not an integral part of IFRSs does not contain requirements for financial statements.

1 An excerpt from Deloitte iGAAP 2016, published by

2 An excerpt from Green Book (2016 Edition) of IFRS Foundation on standards issued by International Accounting

Standard Board (IASB).



4. Omissions or misstatements are material if “they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or both, could be the determining factor”.

5. Prior period errors are “omissions from, and misstatements in, the entity’s financial statements for one or more prior periods resulting 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 misinterpretation of facts, and fraud”.

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”.

8. 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”.

9. 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 accounting policy retrospectively or 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

ii. Would have been available when the financial statements for that prior period were authorised for issue from other information”.

For some types of estimates (e.g. a fair value measurement that uses significant unobservable inputs), it is impracticable to distinguish these types of information. When retrospective application or retrospective restatement would require making a significant estimate for which it is impossible to distinguish these two types of information, it is impracticable to apply the new accounting policy or correct the prior period error retrospectively.



ACCOUNTING POLICIES Selection of accounting policies

1. Specific IFRS applies When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item are determined by applying the IFRS.

It is not necessary to apply these policies if the effect of applying them is immaterial. But this does not mean that immaterial departures from IFRSs can be made, or left uncorrected, in order to achieve a particular presentation of an entity's financial position, performance or cash flows.

2. No specific IFRS applies If there is no IFRS that specifically applies to the transaction, event or condition under consideration, judgement is required by management in developing and applying an accounting policy that results in information that is:

relevant to the economic decision-making needs of users; and reliable, in that the financial statements: represent 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 the

legal form; are neutral (i.e. free from bias); are prudent; and are complete in all material respects.

In practical terms, in forming a judgement about a suitable accounting policy, management should refer to, and consider the applicability of, the following sources in descending order:

requirements in IFRSs dealing with similar and related issues; and the definitions, recognition criteria and measurement concepts for assets, liabilities, income and

expenses in the Conceptual Framework.

The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, accounting literature and accepted industry practices may also be considered, provided that they do not conflict with the above sources.

Practical Scenario 1: Selection of accounting policy for combinations of entities under common control – requirement to restate comparative information

Entities Sussy and Shisha are two subsidiaries of parent company Pally. Following a decision by Pally to reorganise the legal structure of the group, Sussy acquires Shisha (i.e. Pally now holds an indirect interest in Shisha in place of the direct interest it held before the reorganisation). The acquisition of Shisha by Sussy is considered a combination of entities under common control and, under IFRS 3 Business Combinations, is excluded from the scope of that Standard.

This is the first time that Sussy has entered into a transaction of this nature and, therefore, it is required to develop a new accounting policy. In the absence of specific IFRS literature on the topic, Sussy has applied the requirements of IAS 8 and, in its consolidated financial statements, has chosen to account for the transaction at Shisha's carrying amounts at the date of the transaction (i.e. as a pooling of interests).

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Is Sussy obliged to restate the comparative periods in its consolidated financial statements as if Sussy had acquired Shisha at the beginning of the earliest period presented?

i. It is unlikely that Sussy will restate the comparative periods in its consolidated financial statements. Even if Sussy has developed its accounting policy by reference to a pronouncement of another standard-setting body that requires restatement of comparatives when the pooling-of-interests method is applied, Sussy is not bound to apply all of the requirements of that pronouncement.

ii. However, the decision-usefulness of the restated comparative information should be considered by management when developing its accounting policy and, if the failure to restate comparative information would be detrimental to the users of the financial statements, restatement should be considered.

iii. In addition, Sussy should consider local regulatory requirements that may require (or prohibit) restatement of comparative periods for such transactions.

3. Accounting policies to be applied consistently3

Accounting policies should be applied consistently for similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If this is the case, an appropriate accounting policy should be selected and applied consistently to each category. Changes in accounting policies

1. Circumstances in which a change in accounting policy is permitted An accounting policy can be changed only if the change:

is required by an IFRS; or results in the financial statements providing reliable and more relevant information about the

effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows.

Technical Note:

It is important that changes in accounting policies are only made if at least one of the criteria specified are met; otherwise comparability over time within the financial statements may be lost.

One consequence of the requirements of IAS 8 is that if a policy is changed in one year, it is unlikely to be justifiable to change it back to the original policy in a subsequent year. Similarly, it would be difficult to justify the adoption of a policy when it is known that the policy will be changed again in a subsequent year because of a new Standard or an Interpretation in issue but not yet effective at the date of the first change.

3 An entity shall select and apply its accounting policies consistently for similar transactions, other events and

conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. [For example, classes of property, plant and equipment, intangible assets and financial assets] If an IFRS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.




Practical Scenario 2: Voluntary change in accounting policy for investment property

Arsenal Plc has applied IFRSs for a number of years. Prior to its 2015 reporting period, Arsenal’s accounting policy was to account for all of its investment property using the cost model, as permitted by IAS 40 Investment Property. Most of the other participants in Arsenal's business sector apply the alternative model permitted under IAS 40 (i.e. the fair value model). In 2015, because of this prevalence, Arsenal decides to change its accounting policy for all investment property to the fair value model on the basis that this model will provide reliable and more relevant information for the users of its financial statements.

Because this is a voluntary change in accounting policy rather than first-time application of the Standard, the transition provisions in IAS 40 do not apply. Consequently, the new accounting policy should be applied retrospectively for all Arsenal's investment property, except to the extent that retrospective application is impracticable. (In this scenario, retrospective application will typically be possible because the necessary fair value information in respect of prior periods will have been obtained {based on IFRS 13} and disclosed in accordance with IAS 40), other than in the exceptional cases described in IAS 40..

Technical Note4: The exception from retrospective application in IAS 8 applies only to assets within the scope of IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets and, accordingly, is not available for investment property.)

2. Application of new accounting policy following a change in circumstances It should be noted that the application of an accounting policy to a transaction, other event or condition that differs in substance from those previously occurring in an entity does not qualify as a change in accounting policy. Equally, the application of a new accounting policy to a transaction, event or condition that had not previously occurred in an entity (or was previously immaterial) does not qualify as a change in accounting policy.

Practical Scenario 3: Change in use of property

GEJ owns an office building that in previous reporting periods has been classified as property, plant and equipment and accounted for under IAS 16 using the cost model. During the current reporting period, GEJ has vacated the property and it has been leased to a third party. GEJ’s accounting policy for investment property under IAS 40 is to use the fair value model.

Is the change in the accounting treatment for the office building from the cost model under IAS 16 to the fair value model under IAS 40 a change in accounting policy?

i. It is unlikely that it is a change in Accounting Policy. ii. The change in accounting treatment has arisen because of a change in circumstances rather

than a change in accounting policy. GEJ ‘s policy for each type of property remains unchanged but the office building in question is accounted for as an investment property from the date of change of use. No retrospective restatement should be made in these circumstances.

4 The initial application of a policy to revalue assets in accordance with IAS 16 Property, Plant and Equipment or IAS

38 Intangible Assets is a change in an accounting policy to be dealt with as a revaluation in accordance with IAS 16



3. Application of a new IFRS in advance of its effective date An entity may early adopt and apply a new IFRS prior to its effective date, provided the standard permits early adoption, and the transition provision(s) of such early adoption as expressly spelt-out in the standard applies.

Practical Scenario 4: Application of a new IFRS in advance of its effective date

FARA’s reporting period ended on 31 December 2015 and it has applied IFRSs for several years. On 24 January 2016, a new Standard is issued by the IASB which is effective for annual periods beginning on or after 1 January 2017, with earlier application permitted. FARA Plc will not issue its 2015 financial statements until 1 March 2016.

Is FARA Plc permitted to apply this new Standard issued after the reporting period, but prior to the issue of financial statements, in its 2015 financial statements?

i. It is likely that the company is permitted to apply the new standard. ii. This is because the new Standard allows for application in advance of its effective date; FARA

has the option to apply the new Standard for periods in respect of which financial statements have not yet been issued (or authorised for issue). If the new Standard did not allow for application in advance of its effective date, early application would not be permitted.

iii. FARA may not adopt exposure drafts or other guidance that has not been issued in its final form by the date of issue of its financial statements if this would conflict with the requirements of IFRSs in effect at the reporting date.

iv. Early application of an IFRS is not a voluntary change in accounting policy. Therefore, any specific transition provisions in the new Standard should be applied for FARA's 2015 financial statements. If the new Standard does not include any specific transition provisions relating to the change in accounting policy, the change should be applied retrospectively.

v. If the entity decides not to apply the Standard in advance of its effective date, the requirements of IAS 8.

Technical Note: When an entity has not applied a new IFRS that has been issued but is not t effective, the entity shall disclose:

(a) This fact; and (b) 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.

4. Initial application of a policy to revalue assets in accordance with IAS 16 or IAS 38 The initial application of a policy to revalue assets in accordance with IAS 16 or IAS 38 is a change in accounting policy to be dealt with as a revaluation in accordance with those Standards rather than in accordance with IAS 8. IAS 8 also states that its requirements in paragraphs 19 to 31 (Applying Changes in Accounting Policies and its Disclosure Requirements) do not apply to such changes in accounting policy.

Applying changes in accounting policies i. When an entity initially applies an IFRS, the change is accounted for in accordance with the

specific transition provisions of that IFRS. If the IFRS does not contain transition provisions, the



change is applied retrospectively. Early application of a Standard does not constitute a voluntary change in accounting policy.

ii. If an entity changes an accounting policy voluntarily, the change is applied retrospectively. iii. In the absence of an IFRS that applies to a specific transaction, other event or condition, the

pronouncements of standard-setters using a similar conceptual framework may be considered in selecting an appropriate accounting policy. If, following an amendment of such a pronouncement, an entity chooses to change an accounting policy; this change is accounted for, and disclosed, as a voluntary change in accounting policy in accordance with IAS 8.

Technical Note: In other words, the entity may not apply any transition provisions in the pronouncement of the other standard-setter. Retrospective application

1. Retrospective application – general Except when the impracticability exception discussed applies, if retrospective application of an accounting policy is required by the criteria, it is accounted for as follows:

a) The opening balance of each affected component of equity for the earliest prior period presented is adjusted as if the new accounting policy had always been applied; and

b) The other comparative amounts disclosed for each prior period presented are adjusted as if the new accounting policy had always been applied.

The implication of the aforementioned is that, “an entity applies a new accounting policy retrospectively to comparative information for prior periods as far back as is practicable”.

Technical Note: i. The amount of the resulting adjustment relating to periods before those presented in the

financial statements is made to the opening balance of each affected component of equity of the earliest period presented. Usually the adjustment is made to retained earnings. However, the adjustment may be made to another component of equity (e.g. to comply with an IFRS). Any other information about prior periods, such as historical summaries of financial data, is also adjusted as far back as practicable.

ii. When it is impracticable to restate the earlier periods of any historical summaries in the financial statements, this should be made clear and the affected periods identified.

iii. Entities are required to present an additional statement of financial position, as at the beginning of the preceding period, when a new accounting policy is applied retrospectively and the retrospective application has a material effect on the statement of financial position at the beginning of the preceding period.

2. Limitations on retrospective application

When retrospective application of a change in accounting policy is required by IAS 8, the change is applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change.

The impracticability exemption applies both to voluntary changes in accounting policies and to those made in accordance with the transition provisions in a new or revised IFRS.




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 new accounting policy is applied to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable. This may be the current period. Corresponding adjustments are made to the opening balance of each affected component of equity for that period.

When a new policy is applied retrospectively, it is applied to comparative periods as far back as is practicable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statements of financial position for that period.

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 comparative information is adjusted to apply the new accounting policy prospectively from the earliest date practicable. That is to say, the new policy is applied prospectively from the start of the earliest period practicable. The portion of the cumulative adjustment to assets, liabilities and equity arising before that date is therefore disregarded. Changing an accounting policy is permitted even if it is impracticable to apply the policy prospectively for any prior period.

Practical Scenario 5: Prospective application of a change in accounting policy

when retrospective application is not practicable During 2016, Gamma Co changed its accounting policy for depreciating property, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model. In years before 2016, Gamma's asset records were not sufficiently detailed to apply a components approach fully. At the end of 2015, management commissioned an engineering survey, which provided information on the components held and their fair values, useful lives, estimated residual values and depreciable amounts at the beginning of 2016. However, the survey did not provide a sufficient basis for reliably estimating the cost of those components that had not previously been accounted for separately, and the existing records before the survey did not permit this information to be reconstructed. Gamma's management considered how to account for each of the two aspects of the accounting change. They determined that it was not practicable to account for the change to a fuller components approach retrospectively, or to account for that change prospectively from any earlier date than the start of 2016. Also, the change from a cost model to a revaluation model is required to be accounted for prospectively. Therefore, management concluded that it should apply Gamma's new policy prospectively from the start of 2016.

Additional information: Gamma's tax rate is 30 per cent Property, plant and equipment at the end of 2015:

N’million

Cost 25,000

Depreciation (14,000)

Carrying amount 11,000

Prospective depreciation expense for 2016 (old basis)

1,500

Some results of the engineering survey:

Valuation 17,000

Estimated residual value 3,000

Average remaining asset life (years)

7

Depreciation expense on existing property, plant and equipment for 2016 (new basis) 2,000



Extract from the notes

From the start of 2016, Gamma changed its accounting policy for depreciating property, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model.

Management takes the view that this policy provides reliable and more relevant information because it deals more accurately with the components of property, plant and equipment and is based on up-to-date values. The policy has been applied prospectively from the start of 2016 because it was not practicable to estimate the effects of applying the policy either retrospectively or prospectively from any earlier date.

Accordingly, the adoption of the new policy has no effect on prior years. The effect on the current year is to increase the carrying amount of property, plant and equipment at the start of the year by N6million increase the opening deferred tax provision by N1.8 million; create a revaluation surplus at the start of the year of N4.2 million; increase depreciation expense by N500,000; and reduce tax expense by N150,000.

3. Tax effects of retrospective adjustments

IAS 8 states that the tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with IAS 12 Income Taxes.

Accounting for the current and deferred tax effects of a transaction or other event should be consistent with the accounting for the transaction or event itself.

Technical Note: Therefore, if an adjustment is recognised against opening retained earnings, the tax effect should also be recognised against opening retained earnings. Disclosure

1. Initial application of an IFRS The requirements in this section apply on the initial application of an IFRS. They do not apply on first-time adoption of IFRSs, when the disclosure requirements in IFRS 1 (First-Time Adoption of IFRS) apply instead. However, the disclosures detailed below are required when an entity applies a new Standard in advance of its effective date.

If the initial application of an IFRS has an effect on the current period or any prior period; or would have such an effect except that it is impracticable to determine the amount of any adjustment; or may have an effect on future periods, the following should be disclosed:

i. The title of the IFRS; ii. When applicable, that the change in accounting policy is made in accordance with its transition

provisions; iii. The nature of the change in accounting policy; iv. When applicable, a description of the transition provisions; v. When applicable, the transition provisions that might have an effect on future periods; and

vi. For the current period and each prior period presented, to the extent practicable, the amount of the adjustment:

a. for each financial statement line item affected; and b. if IAS 33 Earning per Share applies to the entity, for basic and diluted earnings per share;




vii. the amount of the adjustment relating to periods before those presented, to the extent practicable; and

viii. 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.

Technical Note: Financial statements of subsequent periods need not repeat these disclosures.

2. Voluntary change in accounting policy Early application of a new IFRS is not a voluntary change in accounting policy for the purposes of IAS 8. When a voluntary change in accounting policy; has an effect on the current period or any prior period; or would have such an effect except that it is impracticable to determine the amount of any adjustment; or may have an effect on future periods, the following should be disclosed:

i. the nature of the change in accounting policy; ii. the reasons why applying the new accounting policy provides reliable and more relevant

information; and iii. for the current period and each prior period presented, to the extent practicable, the amount of

the adjustment: a. for each financial statement line item affected; and b. if IAS 33 applies to the entity, for basic and diluted earnings per share;

iv. the amount of the adjustment relating to periods before those presented, to the extent practicable; and

v. 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.

Technical Note: Financial statements of subsequent periods need not repeat these disclosures.

3. IFRSs in issue but not yet effective When an entity has not applied a new Standard or Interpretation that has been issued but is not yet effective, the following should be disclosed by the entity:

i. This fact; and ii. 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.

In complying with the general requirement of IAS 8 regarding this disclosure requirement, an entity should consider disclosing:

i. The title of the new IFRS; ii. The nature of the impending change or changes in accounting policy;

iii. The date by which application of the IFRS is required; iv. The date as at which it plans to apply the IFRS initially; and v. either:

a) a discussion of the impact that initial application of the IFRS is expected to have on the entity's financial statements; or

b) if that impact is not known or reasonably estimable, a statement to that effect.



CHANGES IN ACCOUNTING ESTIMATES

Identification of accounting estimates

Accounting estimates arise from inherent uncertainties in business activities which mean that many items in financial statements cannot be measured with precision but can only be estimated. Estimates are formed using judgements based on the latest available, reliable information. Common examples of estimates in the financial statements include:

Allowances for bad debts; Allowances for inventory obsolescence; The fair value of financial assets or financial liabilities; The useful lives of, or the expected pattern of consumption of the future economic benefits

embodied in, depreciable assets; and Warranty obligations.

The use of reasonable estimates is essential in the preparation of financial statements. A revision of an estimate may be required if the circumstances on which the estimate was based change, or if new information or experience is gained. The revision of an estimate does not relate to prior periods and is not equivalent to the correction of an error.

It should be noted that a change in the measurement basis applied to an item in the financial statements constitutes a change in accounting policy, not a change in accounting estimate. In circumstances when it is difficult to distinguish between a change in an accounting policy and a change in an accounting estimate, the change is treated as a change in an accounting estimate. Recognition of changes in accounting estimates

The effect of a change in an accounting estimate is recognised prospectively by including it in profit or loss in:

The period of the change, if the change affects that period only (e.g. revision of a bad debts estimate); or

The period of the change and future periods, if the change affects both (e.g. revision of the estimated useful economic life of a depreciable asset).

Practical Scenario 6: Change in estimate of a provision for a lawsuit Should a change in the estimate of the outcome of a pending lawsuit be recognised in profit or loss in the year of the change?

i. It is likely that the change in estimate will be charged to profit or loss. ii. Even though the original estimate of the outcome may have been made several years

previously, and the case may continue for a number of years, a change in the estimate of the outcome should be recognised in profit or loss in the period (year) of the change.

Technical Note: i. However, to the extent that a change in an accounting estimate gives rise to changes in assets

and liabilities, or relates to an item of equity, it should be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.






ii. In other words, a change in accounting estimate need not be reported in profit or loss when it is appropriately reflected in the carrying amount of other assets or liabilities, or taken directly to equity, in accordance with the requirements of other IFRSs

iii. When a change in an accounting estimate is recognised in profit or loss, the change should be recognised in the same line item as the underlying item, except when an IFRS requires a different treatment. For example, if the best estimate of a provision for a legal claim is reduced, the credit in profit or loss should be included within the same expense heading as the original expense was recognised. This ensures that the cumulative expense recognised under that heading is correct

iv. The disclosure requirements of IAS 8 should be complied with. In addition, if the change in accounting estimate causes a material distortion in a particular expense heading, additional disclosure may be required in accordance with IAS 1 Presentation of Financial Statements

Disclosure

i. An entity discloses the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods.

ii. The disclosure of the effect on future periods is not required when it is impracticable to estimate that effect.

iii. If the amount of the effect in future periods is not disclosed because estimating it is impracticable, the entity should disclose this fact.

ERRORS

Material errors

Financial statements do not comply with IFRSs if they contain either: material errors; or immaterial errors made intentionally in order to achieve a particular presentation of an entity's financial position, financial performance or cash flows.

Errors can occur in respect of the recognition, measurement, presentation or disclosure of elements of the financial statements.

Technical Note: i. Errors are distinguished from changes in accounting estimates because accounting estimates, by

their very nature, are items that may need to be revised 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.

ii. Although, in principle, the distinction between errors and corrections of estimates is clear, it may sometimes be difficult in practice to establish what information was available, or should have been available, at the time when an estimate was made

Correction of errors

If a current period error is discovered before the financial statements are authorised for issue, it is corrected in the current period. However, if a material error remains undetected until a subsequent period, the prior period error is corrected retrospectively in the first set of financial statements authorised for issue after its discovery.

Except when it is impracticable to do so (see below), material prior period errors are corrected by: a. Restating the comparative amounts for the 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 equity for the earliest prior period presented.

Technical Note:

i. The correction of the prior period error is excluded from profit or loss in the period of discovery (i.e. in the current period).

ii. IAS 8 does not differentiate between fundamental errors and other material prior period errors; the IASB concluded that the definition of ‘fundamental errors’ in the previous version of the Standard was difficult to interpret consistently because the main feature of the definition (that the error causes the financial statements of one of more prior periods no longer to be considered to have been reliable) was also a feature of all material prior period errors

iii. IAS 8 refers to the correction of material prior period errors by retrospective restatement but does not say that only material errors may be corrected in this way. It is silent on the correction of immaterial errors which is consistent with the fact that IFRSs do not apply to immaterial items. Nevertheless, the explicit reference to ‘material’ in IAS 8 suggests that only material errors should be corrected in this way. This is the way in which the requirement is normally interpreted.

Other Key Considerations on restatement of financial statements for corrections of prior-period errors

1. A prior period error is corrected by retrospective restatement, except to the extent that it is impracticable to determine either:

a. The period-specific effects; or b. The cumulative effect of the error.

2. If it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the opening balances of assets, liabilities and equity are restated for the earliest period for which retrospective restatement is practicable. This may be the current period.

3. If it is impracticable to determine the cumulative effect on all prior periods of a prior period error at the beginning of the current period, the comparative information is restated to correct the error prospectively from the earliest date practicable. The entity therefore disregards the portion of the cumulative restatement of assets, liabilities and equity arising before that date.

4. Any information presented about prior periods, including any historical summaries of financial data, is restated as far back as practicable.

Technical Note: When it is impracticable to restate the earlier periods of any historical summaries in the financial statements, this should be made clear and the affected periods identified.

Disclosure of prior period errors

When a material prior period error is corrected in accordance with IAS 8, the following should be disclosed:

i. The nature of the prior period error; and ii. For each prior period presented, to the extent practicable, the amount of the correction:

for each financial statement line item affected; and if IAS 33 Earning per Share applies to the entity, for basic and diluted earnings per share;




iii. The amount of the correction at the beginning of the earliest prior period presented; and iv. 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.

Technical Note: Financial statements of subsequent periods need not repeat these disclosures. Entities are required to present an additional statement of financial position, as at the beginning

of the preceding period, when an error is corrected by retrospective restatement and the retrospective restatement has a material effect on the statement of financial position at the beginning of the preceding period.

IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE APPLICATION AND RETROSPECTIVE RESTATEMENT Obstacles faced in retrospective application and restatement

1. Meaning of ‘impracticable’ The term ‘impracticable’ is defined as thus:

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:

i. The effects of the retrospective application or retrospective restatement are not determinable; ii. The retrospective application or retrospective restatement requires assumptions about what

management’s intent would have been in that period; or iii. The retrospective application or retrospective restatement requires significant estimates of

amounts and it is impossible to distinguish objectively information about those estimates that: a) provides evidence of circumstances that existed on the date(s) as at which those

amounts are to be recognised, measured or disclosed; and b) would have been available when the financial statements for that prior period were

authorised for issue from other information.

2. It may be impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period. This may be the case because data was not collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy, or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.

Technical Note: Restatement is not impracticable just because of the cost or effort involved. When revising IAS 8 in 2003, the IASB considered replacing the exemption from retrospective application or restatements on the basis of ‘impracticability’ with one based on ‘undue cost or effort’. However, based on comments received on the exposure draft, the IASB decided that an exemption based on management's assessment of undue cost or effort was too subjective to be applied consistently by different entities. The IASB decided that balancing costs and benefits was a task for the Board when it sets accounting requirements rather than for entities when they apply those requirements. Therefore, although the Standard does not explicitly state that undue cost or effort alone does not render restatement impracticable, this is the clear intention of the Board and is consistent with the definition in the Standard.






3. Estimates It is often necessary to make estimates in applying an accounting policy to elements of financial statements recognised or disclosed in respect of transactions, other events or conditions.

Estimation is inherently subjective, and estimates may be developed after the reporting period. Further, developing estimates is potentially more difficult when retrospectively applying an accounting policy or making a retrospective restatement to correct a prior period error, because of the longer period of time that may have passed since the affected transaction, other event or condition occurred. However, the objective of estimates relating to prior periods remains the same as for estimates made in the current period, i.e. for the estimate to reflect the circumstances that existed when the transaction, other event or condition occurred. [IAS 8:51]

Technical Note: Nevertheless, IAS 8 notes that the fact that significant estimates are frequently required when amending comparative information presented for prior periods does not prevent reliable adjustment or correction of the comparative information. Use of hindsight

5Hindsight should not be used when applying a new accounting policy to, or correcting amounts for, a prior period, either in making assumptions about what management's intentions would have been in a prior period or estimating the amounts recognised, measured or disclosed in a prior period.

IAS 8 cites the example of an entity's calculation of its liability for employees' accumulated sick leave in accordance with IAS 19 Employee Benefits. When correcting a prior period error in relation to this calculation, the entity disregards information about an unusually severe influenza season during the next period that became available after the financial statements for the prior period were authorised for issue. PRACTICE AND EXAMINABLE QUESTIONS

Question 1 You are the CFO of Oliver, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Oliver for the year ended 31 March 2016. Based on this review she has prepared a series of queries relating to those statements:

a) Query One

‘During a break-out session I heard someone talking about accounting policies and accounting estimates. He said that when there’s a change of these items sometimes the change is made retrospectively and sometimes it’s made prospectively. Please explain the difference between an accounting policy and an accounting estimate and give me an example of each. Please also explain the difference between retrospective and prospective adjustments and how this applies to accounting policies and accounting estimates.’

5 Hindsight means understanding of a situation or event only after it has happened or developed. It is also

considered, the recognition of the realities, possibilities, or requirements of a situation, event, decision etc., after its occurrence.




b) Query Two ‘During the second session, I eavesdropped a discussion of two executives of multinational companies exchanging remarks and concerns on the treatment of changes in the basis of depreciation (including the method of depreciation) of assets, but I was not sure of the position and conclusion reached by them. I will be glad if you could advise me as deemed appropriate on the requisite treatment(s) in accordance with the relevant provision of IFRS. Your specific guidance and reference(s) will be appreciated’.

Required: Provide answers to the two questions raised by the managing director. Your answers should refer to relevant provisions of International Financial Reporting Standards. Question 2 The introduction of a new accounting standard can have significant impact on an entity by changing the way in which financial statements show particular transactions or events. In many ways, the impact of a new accounting standard requires the same detailed considerations as is required when an entity first moves from local Generally Accepted Accounting Practice to International Financial Reporting Standards (IFRS). A new or significantly changed accounting standard often provides the key focus for examination of the financial statements of listed companies by national enforcers who issue common enforcement priorities. These priorities are often highlighted because of significant changes to accounting practices as a result of new or changed standards or because of the challenges faced by entities as a result of the current economic environment. Recent priorities have included recognition and measurement of deferred tax assets and impairment of financial and non-financial assets.

Required: a) Discuss the key practical considerations, and financial statements’ implications which an

entity should consider when implementing a move to a new IFRS. b) Discuss briefly the reasons why regulators might focus on the impairment of non-financial

assets and deferred tax assets in a period of slow economic growth, setting out the key areas which entities should focus on when accounting for these elements.

Question 3 Pally is a listed company specialising in the distribution and sale of photographic products and services. Pally’s statement of financial position included an intangible asset which was a portfolio of customers acquired from a similar business which had gone into liquidation. Pally changed its assessment of the useful life of this intangible asset from ‘finite’ to ‘indefinite’. Pally felt that it could not predict the length of life of the intangible asset, stating that it was impossible to foresee the length of life of this intangible due to a number of factors such as technological evolution, and changing consumer behaviour. Pally has a significant network of retail branches. In its financial statements, Pally changed the determination of a cash generating unit (CGU) for impairment testing purposes at the level of each major product line, rather than at each individual branch. The determination of CGUs was based on the fact that each of its individual branches did not operate on a standalone basis as some income, such as volume rebates, and costs were dependent on the nature of the product line rather than on individual branches. Pally considered that cash inflows and outflows for individual branches did not provide an accurate assessment of the actual cash generated by those branches. Pally, however, has daily sales information and monthly statements of profit or loss produced for each individual branch and this information is used to make decisions about continuing to operate individual branches.



Required: Discuss whether the changes to accounting practice suggested by Pally are acceptable under International Financial Reporting Standards. Question 4 During 2016 Lolly Plc discovered that certain items had been included in inventory at 30 June 2015, valued at N8.4m, which had in fact been sold before the year end. The following figures for 2015 (as reported) and 2016 (draft) are available.

2015 2016 (draft) N'000 N '000

Sales 94,800 134,400 Cost of sales (59,140) (100,600) Gross Profit 35,660 33,800 Operating expenses (10,000) (11,000) Profit before taxes 25,660 22,800 Income taxes (7,760) (6,800) Profit for the year 17,900 16,000 Reserves at 1 April 2014 were N26m. The cost of sales for 2016 includes the N8.4m error in opening inventory. The income tax rate was 30% for 2015 and 2016. (Note: Ignore effect of Deferred Taxes) Required Show the statement of profit or loss and other comprehensive income for 2016, with the 2015 comparative, and retained earnings. Question 5

a) Describe the circumstances in which an entity may change its accounting policies and how a change should be applied.

The terms under which PadiPadi sells its holiday-trip are that a 40% deposit is required on booking and the balance of the holiday must be paid at least five weeks before the travel date. In previous years PadiPadi has recognised revenue (and profit) from the sale of its holidays at the date the holiday is actually taken. From the beginning of November 2014, PadiPadi has made it a condition of booking that all customers must have holiday cancellation insurance and as a result it is unlikely that the outstanding balance of any holidays will be unpaid due to cancellation. In preparing its financial statements to 31 October 2015, the directors are proposing to change to recognising revenue (and related estimated costs) at the date when a booking is made. The directors also feel that this change will help to negate the adverse effect of comparison with last year's results (year ended 31 October 2014) which were better than the current year's. Required

b) Comment on whether PadiPadi's proposal to change the timing of its recognition of its revenue is acceptable and whether this would be a change of accounting policy.

Documents

Accounting Policies, Estimates and Errors · Accounting Policies, Estimates and Errors 2017 Adebayo Olumuyiwa, FRM, FICA, ACA, ACTI, CIMA Adv. Dip. MA, Dip. IFR (ACCA), BSc. (Hons),