IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

Objective Of IAS 8 IAS 8 Prescribes the Criteria for:ACCOUNTING POLICIES:Selection of accounting policies; How to Choose Accounting PoliciesChanges in accounting policies & Accounting Treatment of Changes in Accounting PoliciesDisclosure of changes in accounting policies: Reporting Changes in Accounting PoliciesACCOUNTING ESTIMATES:Changes in accounting estimates & and Reporting Changes in Accounting EstimatesACCOUNTING ERRORS:Correction of errors & Reporting the Correction of Errors

The achievement of the objective would result in: Enhancement of:Relevance and reliability of financial statements;

Comparability of financial statements with the financial statements of other entities;

Characteristics of Accounting PolicyIn devising an accounting policy, it should be: Relevant; Reliable; Faithful; Having economic substance; Neutral; Prudent; Complete;

Characteristics of Accounting PolicyRelevant to the economic decision making needs of user; andReliable in that the financial statements:Represents 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 legal form;Are prudent; andAre complete in all material respects.

WHAT ARE ACCOUNTING POLICIES? These are:Specific principles;Bases;Conventions;Rules;Practices;These are applied in preparing and presenting financial statements.

Definitions Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. 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. Impracticable: Applying a requirement is impracticable when the entity cannot apply it after making every possible effort

Changes in Accounting PolicyA change in accounting policy should be made only if:Required by a standard or an interpretation, or

Voluntary: The change results in the financial statements providing reliable and more relevant information about the effects of events or transactions on the financial position and performance and cash flows

Changes in Accounting PolicyA change in accounting policy which is made on the adoption of a Standard should be accounted for:

In accordance with the specific transitional provisions in that StandardIf no transitional provisions Retrospective Application (Any resulting adjustment should be reported as an adjustment to the opening balance of retained earnings and/or each component of equity. Comparative information should be restated unless it is impracticable to do so.)

A voluntary change in accounting policy should be applied retrospectivelyEarly Application is not a voluntary change

Changes in Accounting PolicyRetrospective Application:Adjust the Opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each period presentedAs if the new accounting policy had always been appliedIf impracticable (Undue Cost and Effort), restate prospectively from the earliest date practicable

Significant disclosures of changes in accounting policiesThe title of the standard (If the Change is Required by a Specific Accounting Standard or IFRS)Is made in accordance with the transactional provisions, if applicableThe nature of the changeThe amount of adjustment on current and each prior period presentedThe amount of adjustment related to periods prior to those presentedFor each financial statement line item affected;Earnings per share revised

Consistency of Accounting PoliciesConsistency of Accounting Policies:Once Selected accounting policies should be applied consistently for similar transactions, other events and conditions.The exception to this where a IFRS requires or allows categorization of items where different policies may be applied to each category. Apply accounting policy for each category consistently

Changes in Accounting Policy: IllustrationDuring 2013, Gamma Co changed its accounting policy for the treatment of borrowing costs that are directly attributable to the acquisition of a hydro-electric power station under construction for use by Gamma. In previous periods, Gamma had capitalized such costs. Gamma has now decided to treat these costs as an expense, rather than capitalize them. Management judges that the new policy is preferable because it results in a more transparent treatment of finance costs and is consistent with local industry practice, making Gammas financial statements more comparable.

Changes in Accounting Policy: IllustrationGamma capitalized borrowing costs incurred of $2,600 during 2012 and $5,200 during 2011. All borrowing costs incurred in previous years in respect of the acquisition of the power station were capitalized.Gammas accounting records for 2013 show profit before interest and income taxes of $30,000; interest expense of $3,000 (which relates only to 2013); and income taxes of $8,100.Gamma has not yet recognized any depreciation on the power station because it is not yet in use.

Changes in Accounting Policy: IllustrationIncome Statement of Gamma during 2012 before changes in accounting Policy:

$Profit before interest and income taxes 18000Interest Expense 0Profit before Income Taxes 18000Income Taxes 5400Net Income 126002012 Opening retained earnings was $20,000 (Closing balance of 2011) and closing retained earnings was $32,600. Gammas tax rate was 30% for 2013, 2012 and prior periods. Gamma had $10,000 of share capital throughout, and no other components of equity except for retained earnings. Its shares are not publicly traded and it does not disclose earnings per share.

Restated Income Statement of Gamma for Year 2013 &2012 after Change in Accounting Policy

20132012Income before Interest and Income Taxes$30,000$18,000Less: Interest Expense3,0002,600Income before Income Taxes27,00015,400Less: Income Taxes8,1004,620Net Income18,90010,780

Statement of changes in equity after change

Share CapitalRetained Earnings Total Balance as of December 31, 2011 as previously reported$10,000$20,000$30,000Changes in Accounting Policy for the Capitalization of Interest *Note 1(3,640)(3,640)Balance at December 31, 2011 Restated10,00016,36026,360Profit for the year ended December 31, 2012 Restated10,78010,780Balance at December 31, 2012 Restated10,00027,14037,140Profit for the year ended December 31, 201318,90018,900Balance at December 31, 201310,00046,04056,040

Notes to the financial Statement During 2013, Gamma changed its accounting policy for the treatment of borrowing costs related to a hydro-electric power station under construction for use by Gamma. Previously, Gamma capitalized such costs. They are now written off as expenses as incurred. Management judges that this policy provides reliable and more relevant information because it results in a more transparent treatment of finance costs and is consistent with local industry practice, making Gammas financial statements more comparable. This change in accounting policy has been accounted for retrospectively, and the comparative statements for 2012 have been restated. The effect of the change on 2012 is tabulated below. Opening retained earnings for 2012 have been reduced by $3,640, which is the amount of the adjustment relating to period 2011.

Note 1: Impact on Net Income of 2011:Interest Expenses (2011)$5,600Less: Taxes 1,560Net decrease in Net Income 3,640

Changes in Accounting PolicyPROSPECTIVE APPLICATION: Prospective application of a change in accounting policy and of recognizing the effect of a change in an accounting estimate, respectively, are:Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and.Recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.

Changes in Accounting Policy Prospective Application Retrospective Application is not Practicable - IllustrationDuring 2013, Delta 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 2013, Deltas asset records were not sufficiently detailed to apply a components approach fully. At the end of 2012, 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 2013.

Changes in Accounting Policy Prospective Application Retrospective Application is not Practicable - IllustrationHowever, 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.Deltas 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 2013. 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 Deltas new policy prospectively from the start of 2013.

Additional Information

Delta's Tax Rate is 30%$Property, Plant & Equipment at the end of 2012Cost 25,000Accumulated Depreciation14,000Net Book Value11,000Prospective Depreciation Expense for 2013 (Existing Policy)1,500Some Results from the Engineering SurveyRevalued Amount of Property, Plant & Equipment17,000Salvage Value at the end of Life3000Remaining Useful Life7 YearsDepreciation Expense on Existing PP&E under new Policy2,000

Notes to the Financial Statements: Changes in Accounting Policy Prospective ApplicationFrom the start of 2013, Delta 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 2013 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.

Notes to the Financial Statements: Changes in Accounting Policy Prospective ApplicationThe effect on the current year is to Increase the carrying amount of property, plant and equipment at the start of the year by 6,000;Increase the opening deferred tax provision by 1,800 (6000*0.3);Create a revaluation reserve at the start of the year of 4,200 (6000 1800);Increase depreciation expense by 500 (2000 1500); and Reduce tax expense by 150 (2000 1500)*0.3.

Accounting EstimateAccounting Estimates arise in relation to business activities because of the uncertainties inherent within them. Judgments are made based on the latest available reliable information.The use of such estimates is a necessary part of the preparation of Financial Statements.Some Example of Accounting Estimates:A necessary Bad Debt AllowanceUseful Working Lives of Depreciable AssetsAdjustments for Obsolescence of InventoryFair market value of Financial Assets and Liabilities

CHANGE IN ACCOUNTING ESTIMATE An adjustment of carrying amount of an asset or liability;An adjustment of the amount of periodic consumption of an asset; that results from:The assessment of the present status of assets and liabilitiesExpected future benefits of assetsObligations associated with liabilitiesChange in accounting estimates result from:New information; orNew developmentsChanges in Accounting Estimates are NOT corrections of errors

Accounting Treatment of Changes in Accounting EstimatesThe effect of changes accounting estimates should be included in the determination of Net Income or Loss in: The period of the change, if the change affects that periods only, orThe period of the change and future periods, if changes affects bothThis suggest that the Accounting Treatment for effect of Changes in Accounting Estimates is to be recognized Prospectively

Changes in Accounting Estimate - IllustrationManagement estimates that provision for doubtful debts is estimated up to 5 percent of the total population of trade debts. However, upon identifying the age of the trade debts, it revealed that bad debts are about 6.5 percent of total population of trade debts. Management immediately recognizes the increase in bad debts expense in the books of accounts.

DISCLOSURE REQUIREMENTS OF CHANGE IN ACCOUNTING ESTIMATEWhere a change in an Accounting Estimate has a material effect in the current period or expected to have a material effect in the subsequent periods the following should be disclosed:

Nature and amount of a change in an accounting estimate for the current year and future period if practicable

If estimation is impracticable, disclosure of this fact

PRIOR PERIOD ERRORS Omissions from; or Misstatements inThe financial statements for one or more prior periods arising from: Failure to use or misuse of reliable information that was available when financial statements for those periods were authorized for issue; Failure to use or misuse of reliable information that could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Examples of prior period errors are:

Effect of mathematical mistakesMistakes in applying accounting policies Oversight and misinterpretation of facts and fraud.

Rectification CriteriaAn entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by: Restating the comparative amounts for the prior period(s) presented in which the error occurred; or 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.

DISCLOSURE REQUIREMENTS

Nature of the prior period errorTo the extent practicable, the amount of the correction:o For each financial statement line item affected; ando Revision in earnings per share (EPS)

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

Problem: Changes in Accounting Policy(a) All Change Co. Inc. changed its accounting policy in 2013 with respect to the valuation of inventories. Up to 2012, inventories were valued using a weighted-average cost (WAC) method. In 2013 the method was changed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and flow of inventories in the economic cycle. The impact on inventory valuation was determined to beAt December 31, 2011: an increase of $10,000At December 31, 2012: an increase of $15,000At December 31, 2013: an increase of $20,000

Problem: Changes in Accounting Policy(b) The income statements prior to adjustment are 2013 & 2012 Revenue $250,000 $200,000Cost of sales 100,000 80,000Gross profit 150,000 120,000Administration costs 60,000 50,000Selling and distribution costs 25,000 15,000Net profit $65,000 $55,000RequiredPresent the change in accounting policy in the Income Statement and the Statement of Changes in Equity in accordance with requirements of IAS 8.