11 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Question 1

What does IAS 8 govern

Answer 1

• The selection of accounting policies
• The changes in accounting policies
• The changes in accounting estimates
• The correction of prior period errors

Question 2

What are accounting policies

Answer 2

Are the rules that underpin the systems that lead to the creation of FS
* Principles, Bases, Conventions, Rules & Practices

Question 3

What does IAS 8 require regarding accounting policies

Answer 3

IAS 8 requires the selection and application of accounting policies that comply with international accounting standards to ensure the FS provide information that is:
* Relevant
* Reliable

Question 4

What is relevant

Answer 4

• Relevant for users’ needs, i.e. decision-making
  Main user is investors

Question 5

What is reliable

Answer 5

• Faithful representation of results/financial position
• Reflect economic substance of events/transactions
• Neutral (free from bias)
• Prudent
• Materially complete

Question 6

What is materially complete

Answer 6

At month end you probably don’t have all the information so as long as the omission of likely gap from estimations doesn’t affect decision making then it is fine

Question 7

Should accounting policies change

Answer 7

No, must remain the same from year to year

Question 8

When can accounting policies change

Answer 8

If
* A change is required by IFRS (new standards)
* It will result in a more reliable and relevant presentation of events or transactions
- Showing more profit does not meet this criteria

Question 9

What are the triggers for a change

Answer 9

A change occurs if there has been a change in
* Recognition
* Presentation
* Measurement basis
Or the correction of an error

Question 10

What are changes in recognition

Answer 10

• And expense is now recognised as an asset
• IT & computers been changed from an expense to capitalising as an asset

Question 11

What are changes in presentation

Answer 11

• Changing where costs/assets/liabilities are listed
• Moving depreciation from admin to COGS

Question 12

What are changes in measurement basis

Answer 12

• Changing methods used
• Stating assets at replacement cost rather than historic cost

Question 13

How do you make changes in accounting policy

Answer 13

• Apply retrospectively – adjust opening retailed earnings in statement of changes in equity
• Restate comparative income
• If cannot be reasonably determined: adjust prospectively in the current period’s P/L

Question 14

How are changes in accounting estimates made

Answer 14

• An accounting estimate (e.g. a bad debt provision) is a method adopted by an entity to arrive at estimated amounts for the FS.
• Many figures in the FS require some estimation:
  o Judgement must be based on information available at the time
  o Estimates may need to be revised later on when further information becomes available.

Question 15

What are some examples of changes in accounting estimates

Answer 15

• For instance can base bad debt on last year but it probably wont be the same
• Changes in useful lives of non-current assets, residual values, methods of depreciation and warrantee provisions
• Depreciation is an estimate about the future where as inventory valuation under FIFO is a policy about what is the material nature of the company

Question 16

How do you make changes in accounting estimates

Answer 16

• Changes in accounting estimates to be shown in SP/L from the year of the change onwards
• Changes should be included in the income/expense classification that was originally used
• Changes that are material should be disclosed (its nature and £) in the FS notes

Question 17

What are prior period errors

Answer 17

• Omissions or misstatements in previous FS
• They may occur when there has been a failure to use information that:
• Was available at the time the FS were issued
• Could be expected to have been taken into account when preparing the FS.

Question 18

What are some examples of prior period errors

Answer 18

• Mathematical errors
• Mistakes in the application of accounting policies
• Oversights
• Fraud.

Question 19

How are prior period errors corrected

Answer 19

4 Steps to correcting prior period errors:
1. Restate opening balance of A/L/E as if error has never occurred
2. Adjust the opening balance of RE in the Statement of Changes in Equity.
3. Restate comparative figures, as if error had never occurred
4. Disclosing within the FS, a SFP at the beginning of the earliest comparative period. This means 3 SFPs with be prepared:
1. For the end of the current period
2. For the end of the previous period
3. For the beginning of the previous period.