Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
International Accounting Standards 8
Accounting Policies, Changes in Accounting Estimates
and Errors

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INTRODUCTION

International Accounting Standard 8 Accounting Policies,

Changes in Accounting Estimates and Errors (IAS 8)
replaces IAS 8 Net Profit or Loss for the Period,
Fundamental Errors and Changes in Accounting Policies
(revised in 1993) and should be applied for annual periods
beginning on or after 1 January 2005. Earlier application
is encouraged. The Standard also replaces the following
Interpretations:

• SIC-2 Consistency—Capitalisation of Borrowing

• SIC-18 Consistency—Alternative Methods.

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OBJECTIVE

📍 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.

📍 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.

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SCOPE

This Standard shall be applied in selecting and

applying accounting policies, and accounting
for changes in accounting policies, changes in
accounting estimates and corrections of prior
period errors.

The tax effects of corrections of prior period errors and

of retrospective adjustments made to apply changes in
accounting policies are accounted for and disclosed in
accordance with IAS 12 Income Taxes.
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DEFINITIONS

The following terms are used in this Standard with the meanings
specified:

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 a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the
present status of, and expected future benefits and obligations
associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and,
accordingly, are not corrections of errors.

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DEFINITIONS

International Financial Reporting Standards (IFRSs) are Standards and

Interpretations adopted by the International Accounting Standards
Board (IASB). They comprise:
(a) International Financial Reporting Standards;
(b) International Accounting Standards; and
(c) Interpretations developed by the International
Financial Reporting Interpretations Committee (IFRIC) or the
former Standing Interpretations Committee (SIC)

Material Omissions or misstatements of items are material if they

could, individually or collectively, influence the economic
decisions that users make 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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DEFINITIONS

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:
(a) was available when financial statements for those
periods were authorised for issue; and
(b) 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.

Retrospective application is applying a new accounting policy to

transactions, other events and conditions as if that policy had
always been applied.
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DEFINITIONS
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 reasonable effort to do so. For a particular prior period, it is
impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement
are not determinable;
(b) the retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to distinguish objectively
information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s)
as at which those amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for
that prior period were authorised for issue
from other information.

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DEFINITIONS

Prospective application of a change in accounting policy and of

recognising the effect of a change in an accounting estimate,
respectively, are:
(a) applying the new accounting policy to transactions,
other events and conditions occurring after the date as at which the
policy is changed; and
(b) recognising the effect of the change in the accounting
estimate in the current and future periods affected by the change.

📝 The Framework for the Preparation and Presentation of Financial

Statements states that ‘users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study
the information with reasonable diligence.’

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ACCOUNTING POLICIES
Selection and Application of Accounting Policies

📍 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.

IFRSs are accompanied by guidance to assist entities in applying their

requirements. All such guidance states whether it is an integral part of IFRSs.
Guidance that is an integral part of the IFRSs is mandatory. Guidance that is
not an integral part of the IFRSs does not contain requirements for financial
statements.

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ACCOUNTING POLICIES
Selection and Application of Accounting Policies

📍 In the absence of an IFRS 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:
(a) relevant to the economic decision-making needs of
users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position,
financial performance and cash flows of the entity;
(ii) reflect the economic substance of transactions,
other events and conditions, and not merely the legal form;
(iii) are neutral, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
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ACCOUNTING POLICIES
Selection and Application of Accounting Policies

📍 1 In making the judgement, management shall refer to, and

consider the applicability of, the following sources in descending
order:
(a) the requirements in IFRSs dealing with similar and
related issues; and
(b) the definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in the
Framework.

📝 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
1.
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ACCOUNTING POLICIES
Consistency of accounting policies

An entity shall select and apply its accounting

policies consistently for similar transactions,
other events and conditions, unless an IFRS
specifically requires or permits categorisation of
items for which different policies may be
appropriate. If an IFRS requires or permits such
categorisation, an appropriate accounting policy
shall be selected and applied consistently to each
category.

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ACCOUNTING POLICIES
Changes in accounting policies

📍 2 An entity shall change an accounting policy only if the

change:
(a) is required by an IFRS; or
(b) 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.

Users of financial statements need to be able to compare the financial statements of

an entity over time to identify trends in its financial position, financial performance
and cash flows. Therefore, the same accounting policies are applied within each
period and from one period to the next unless a change in accounting policy meets
one of the criteria in paragraph 2.

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ACCOUNTING POLICIES
Changes in accounting policies

📍 The following are not changes in accounting policies:

(a) the application of an accounting policy for
transactions, other events or conditions that differ in substance
from those previously occurring; and
(b) the application of a new accounting policy for
transactions, other events or conditions that did not occur
previously or were immaterial.

📍 The initial application of a policy to revalue assets in

accordance with IAS 16 Property, Plant and Equipment or IAS 38
Intangible Assets is a change in an accounting policy to be dealt
with as a revaluation in accordance with IAS 16 or IAS 38, rather
than in accordance with this Standard.

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ACCOUNTING POLICIES
Applying changes in accounting policies

(a) 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; and
(b) when an entity changes an accounting policy upon
initial application of an IFRS that does not include
specific transitional provisions applying to that change,
or changes an accounting policy voluntarily, it shall
apply the change retrospectively.

📝 For the purpose of this Standard, early application of an IFRS is not a voluntary
change in accounting policy.

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ACCOUNTING POLICIES
Applying changes in accounting policies

Retrospective Application
When a change in accounting policy is applied
retrospectively, the entity shall adjust 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.

Limit on Retrospective Application

When retrospective application is required, a change in
accounting policy shall be applied retrospectively except to the
extent that it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.

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ACCOUNTING POLICIES
Disclosure

📍 When initial application of an IFRS has an effect on the

current period or any prior period, would have such an effect
except that it is impracticable to determine the amount of the
adjustment, or might have an effect on future periods, an
entity shall disclose:
(a) the title of the IFRS;
(b) when applicable, that the change in accounting
policy is made in accordance with its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional
provisions;
(e) when applicable, the transitional provisions that
might have an effect on future periods;
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ACCOUNTING POLICIES
Disclosure

(f) for the current period and each prior period

presented, to the extent practicable, the amount of the
adjustment:
(i) for each financial statement line item
affected; and
(ii) if IAS 33 Earnings per Share applies to the
entity, for basic and diluted earnings per share;
(g) the amount of the adjustment relating to periods
before those presented, to the extent practicable; and
(h) if retrospective application required is impracticable
for a particular prior period, or for periods before those
presented, the circumstances that led to the existence of that
condition and a description of how and from when the change in
accounting policy has been applied.

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ACCOUNTING POLICIES
Disclosure

📍 When a voluntary change in accounting policy has an effect on

the current period or any prior period, would have an effect on
that period except that it is impracticable to determine the
amount of the adjustment, or might have an effect on future
periods, an entity shall disclose:
(a) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy
provides reliable and more relevant information;
(c) for the current period and each prior period
presented, to the extent practicable, the amount of the
adjustment:
(i) for each financial statement line item
affected; and
(ii) if IAS 33 applies to the entity, for basic and
diluted earnings per share;
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ACCOUNTING POLICIES
Disclosure

(d) the amount of the adjustment relating to periods

before those presented, to the extent practicable; and
(e) if retrospective application is impracticable for a
particular prior period, or for periods before those presented,
the circumstances that led to the existence of that condition and
a description of how and from when the change in accounting
policy has been applied.

📍 When an entity has not applied a new IFRS that has been
issued but is not yet effective, the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant
to assessing the possible impact that application of the new IFRS
will have on the entity’s financial statements in the period of
initial application.
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CHANGES IN ACCOUNTING ESTIMATES

Estimation involves judgements based on the latest

available, reliable information. For example, estimates
may be required of:
(a) bad debts;
(b) inventory obsolescence;
(c) the fair value of financial assets or financial
liabilities;
(d) the useful lives of, or expected pattern of
consumption of the future economic benefits embodied
in, depreciable assets; and
(e) warranty obligations.
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CHANGES IN ACCOUNTING ESTIMATES

📍 The effect of a change in an accounting estimate, shall

be recognised prospectively by including it in profit or loss
in:
(a) the period of the change, if the change affects
that period only; or
(b) the period of the change and future periods, if
the change affects both.

📍 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 shall be recognised by adjusting the
carrying amount of the related asset, liability or equity
item in the period of the change.

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CHANGES IN ACCOUNTING ESTIMATES
Disclosure

📍 An entity shall 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,
except for the disclosure of the effect on future
periods when it is impracticable to estimate that
effect.

📍 If the amount of the effect in future periods is

not disclosed because estimating it is
impracticable, an entity shall disclose that fact.
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ERRORS

Errors can arise in respect of the recognition,

measurement, presentation or disclosure of
elements of financial statements. Financial
statements do not comply with IFRSs if they contain
either material errors or immaterial errors made
intentionally to achieve a particular presentation of
an entity’s financial position, financial performance
or cash flows. Potential current period errors
discovered in that period are corrected before the
financial statements are authorised for issue.

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ERRORS

📍 An entity shall correct material prior period errors

retrospectively in the first set of financial statements
authorised for issue after their discovery by:
(a) restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
(b) 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.

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ERRORS
Limitations on retrospective restatement

A prior period error shall be corrected by retrospective restatement except to

the extent that it is impracticable to determine either the period-specific
effects or the cumulative effect of the error.

When it is impracticable to determine the period-specific effects of an error

on comparative information for one or more prior periods presented, the
entity shall 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).

When it is impracticable to determine the cumulative effect, at the beginning

of the current period, of an error on all prior periods, the entity shall restate
the comparative information to correct the error prospectively from the
earliest date practicable.

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ERRORS
Disclosure of prior period errors

📍 An entity shall disclose the following:

(a) the nature of the prior period error;
(b) for each prior period presented, to the extent
practicable, the amount of the correction:
(i) for each financial statement line item affected;
and
(ii) if IAS 33 applies to the entity, for basic and
diluted earnings per share;
(c) the amount of the correction at the beginning of the
earliest prior period presented; and
(d) 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.
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SUMMARY

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 End of IAS 8
Please see complementary test bank for
conceptual questions.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:
• IASCF
• Hernani, Christopher (summary)
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