Key Definitions (IAS 8.5) Accounting Policies

ACCOUNTING POLICIES
Overview
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.
The 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 retrospectively accounted for, whereas changes in accounting
estimates are generally accounted for on a prospective basis.
Summary of IAS 8
Key definitions [IAS 8.5]
Accounting policies
are the specific principles, bases, conventions, rules and practices applied
by an entity in preparing and presenting financial statements.
A change in accounting estimate
is an adjustment of the carrying amount of an asset or liability, or
related expense, resulting from reassessing the expected future benefits
and obligations associated with that asset or liability.
International Financial Reporting Standards
are standards and interpretations adopted by the International
Accounting Standards Board (IASB). They comprise:
International Financial Reporting Standards (IFRSs)
International Accounting Standards (IASs)
Interpretations developed by the International Financial
Reporting Interpretations Committee (IFRIC) or the former
Standing Interpretations Committee (SIC) and approved by the
IASB.
Materiality.
Omissions or misstatements of items are material if they could, by their
size or nature, individually or collectively; influence the economic
decisions of users taken on the basis of the financial statements.
Prior period errors

are omissions from, and misstatements in, an entity's financial
statements for one or more prior periods arising from a failure to use, or
misuse of, reliable information that was available and could reasonably
be expected to have been obtained and taken into account in preparing
those statements. Such errors result from mathematical mistakes,
mistakes in applying accounting policies, oversights or misinterpretations
of facts, and fraud.
Selection and application of accounting policies
When a Standard or an Interpretation specifically applies to a transaction,
other event or condition, the accounting policy or policies applied to that
item must be determined by applying the Standard or Interpretation and
considering any relevant Implementation Guidance issued by the IASB for
the Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to
a transaction, other event or condition, management must use its judgment
in developing and applying an accounting policy that results in information
that is relevant and reliable. [IAS 8.10]. In making that judgment,
management must refer to, and consider the applicability of, the following
sources in descending order:
the requirements and guidance in IASB standards and
interpretations dealing with similar and related issues; and

The definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework. [IAS
8.11]
Management may also consider the most recent pronouncements of other

standard-setting bodies that use a similar conceptual framework to develop
accounting standards, other accounting literature and accepted industry
practices, to the extent that these do not conflict with the sources in
paragraph 11. [IAS 8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless a Standard or an
Interpretation specifically requires or permits categorization of items for

which different policies may be appropriate. If a Standard or an
Interpretation requires or permits such categorization, an appropriate
accounting policy shall be selected and applied consistently to each category.
[IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
is required by a standard or interpretation; 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. [IAS 8.14]
Note that changes in accounting policies do not include applying an
accounting policy to a kind of transaction or event that did not occur
previously or were immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or
interpretation, the change is accounted for as required by that new
pronouncement or, if the new pronouncement does not include specific
transition provisions, then the change in accounting policy is applied
retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each
affected component of equity for the earliest prior period presented and the
other comparative amounts disclosed for each prior period presented as if
the new accounting policy had always been applied. [IAS 8.22]
However, if it is impracticable to determine either the period-specific
effects or the cumulative effect of the change for one or more prior
periods presented, the entity shall apply the new accounting policy to
the carrying amounts of assets and liabilities as at the beginning of
the earliest period for which retrospective application is practicable,
which may be the current period, and shall make a corresponding
adjustment to the opening balance of each affected component of
equity for that period. [IAS 8.24]
Also, if 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 entity shall adjust the comparative information to
apply the new accounting policy prospectively from the earliest date
practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new
standard or interpretation include: [IAS 8.28]
the title of the standard or interpretation causing the change
the nature of the change in accounting policy
a description of the transitional provisions, including those that might
have an effect on future periods

for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:

for each financial statement line item affected, and
for basic and diluted earnings per share (only if the entity is
applying IAS 33)

the amount of the adjustment relating to periods before those
presented, to the extent practicable

if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these

disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS
8.29]
the nature of the change in accounting policy
the reasons why applying the new accounting policy provides reliable
and more relevant information

for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:

applying IAS 33)

the amount of the adjustment relating to periods before those
presented, to the extent practicable

if retrospective application is impracticable, an explanation and
description of how the change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these

disclosures.
If an entity has not applied a new standard or interpretation that has been
issued but is not yet effective, the entity must disclose that fact and any and
known or reasonably estimable information relevant to assessing the
possible impact that the new pronouncement will have in the year it is
applied. [IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognized
prospectively by including it in profit or loss in: [IAS 8.36]
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.
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 is
recognized by adjusting the carrying amount of the related asset, liability, or
equity item in the period of the change. [IAS 8.37]
Disclosures relating to changes in accounting estimates
Disclose:
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
if the amount of the effect in future periods is not disclosed because
estimating it is impracticable, an entity shall disclose that fact. [IAS
8.39-40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior
period errors retrospectively in the first set of financial statements
authorised for issue after their discovery by: [IAS 8.42]
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.
However, if it is impracticable to determine the period-specific effects of an

error on comparative information for one or more prior periods presented,
the entity must restate the opening balances of assets, liabilities, and equity
for the earliest period for which retrospective restatement is practicable
(which may be the current period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the
beginning of the current period, of an error on all prior periods, the entity
must restate the comparative information to correct the error prospectively
from the earliest date practicable. [IAS 8.45]
Disclosures relating to prior period errors
Disclosures relating to prior period errors include: [IAS 8.49]
the nature of the prior period error
for each prior period presented, to the extent practicable, the amount
of the correction:
applying IAS 33)

the amount of the correction at the beginning of the earliest prior
period presented
if retrospective restatement is impracticable, an explanation and
description of how the error has been corrected.

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ACCOUNTING POLICIES

Prior period errors

interpretations dealing with similar and related issues; and

Management may also consider the most recent pronouncements of other

Interpretation specifically requires or permits categorization of items for

have an effect on future periods

practicable, the amount of the adjustment:

applying IAS 33)

presented, to the extent practicable

Financial statements of subsequent periods need not repeat these

and more relevant information

practicable, the amount of the adjustment:

applying IAS 33)

presented, to the extent practicable

Financial statements of subsequent periods need not repeat these

an effect in the current period or is expected to have an effect in

if the error occurred before the earliest prior period presented,

However, if it is impracticable to determine the period-specific effects of an

applying IAS 33)

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