IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Objective

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.

Accounting policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the IFRS and considering any relevant Implementation Guidance issued by the IASB for the IFRS.

In the absence of a standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making the judgement management shall refer to, and consider the applicability of, the following sources in descending order:

• the requirements and guidance 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.

Changes in accounting policy

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions. An entity shall change an accounting policy 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.

An entity shall account for a change in accounting policy resulting from the initial application of an IFRS in
accordance with the specific transitional provisions, if any, in that IFRS.  In general, a change in accounting policy shall be applied retrospectively, i.e. it should be applied to prior periods as though that policy had always been in place. This will require adjustment of the opening balances in the the current year's accounts as well as adjustment of comparative balances.

Changes in accounting estimate

The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. The effect of a change in an accounting estimate, shall be recognised prospectively by including it in profit or loss in:

• the period of the change, if the change affects that period only; or
• the period of the change and future periods, if the change affects both.

Prior period errors

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:

• was available when financial statements for those periods were authorised for issue; and
• 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. An entity shall correct material prior period errors retrospectively in the first set of financial statements authorised 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.

Materiality

Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken 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 a combination of both, could be the determining factor.

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