IAS 8 - Accounting Policies, Changes in Accounting Estimates And Errors

Question 1

How do changes in accounting policy arise?

Answer 1

• if required by new standard

- because new policy is more relevant/ reliable

Question 2

True or false

It is not a change in policy if a new policy is applied to transactions different in substance to those undertaken previously or a new policy is applied to a new type of transaction.

Answer 2

True

Question 3

How should changes in ACCOUNTING POLICY be applied?

Answer 3

Changes in accounting policy should be applied retrospectively unless it is impractical to do so. This would be very rare.

Significant DISCLOSURES are required about the change in policy.

Question 4

What does applying RETROSPECTIVELY mean?

Answer 4

= change everything , pretend that the policy had always been applied.

Question 5

How should changes in accounting estimates be applied?

Answer 5

Changes in accounting estimates should be applied prospectively .

A change in estimate is not a change in policy.

It occurs if new information becomes available that was previously unknown. As a result they CANNOT be treated as an ERROR.

Question 6

What does prospective mean?

Answer 6

= apply new policy but do not restate the financial statements of prior periods.

Question 7

How should material prior period errors be corrected?

Answer 7

Corrections of material prior period errors should be accounted for retrospectively unless it is impractical to do so.

Significant disclosures are required if an error occurred.

Question 8

In accordance with the principle of consistency, an entity should apply the same accounting policy from one period to the next unless…

Answer 8

• the change is required by a standard or interpretation OR
• the change will result 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

Question 9

Common examples of changes in accounting policy

Answer 9

• changes in legislation
• a new accounting standard
• a change from measuring a class of assets at depreciated historical cost to a policy of regular revaluation
• changing from writing off to capitalising interest relating to the construction of non-current assets
• changing revenue recognition practices regarding the the sale of goods and services
• changing inventory valuation from weighted average to FIFO
• changing way items are presented in the accounts (I.e. Classifying depreciation expenses as cost of sales instead of administrative)

Question 10

Common examples of accounting estimates:

Answer 10

• bad debt
• inventory obsolescence
• provision for warranty obligations
• useful life of property, plant and equipment
• fair value of financial assets and liabilities

Question 11

Disclosures to IAS 8 - when a company has made a material change to an accounting policy in preparing current financial statements, the following disclosures are required by IAS 8:

Answer 11

• the reason for change

- the amount of the adjustment in the current period and in comparative information for prior periods