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2
I. ACCOUNTING POLICIES

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• Accounting policies are specific principles, bases,

conventions, rules and practices applied by an entity in
preparing and presenting financial statements
(paragraph 5 of IAS 8).
• Accounting policies are designed to provide information
capable of making a difference in the decisions made by
users (ie relevant) that can be faithfully represented—
complete, neutral and free from error—etc (see
paragraphs 8 and 10 of IAS 8)

4
 WHEN
TO
REPORT?

ACOUNTING
WHERE POLICIES WHAT
TO TO
REPORT? USEFULNESS REPORT?
FOR DECISION
MAKING

HOW
TO
REPORT?
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IAS 8 HIERARCHY
IAS 8 establishes the hierarchy that firms must follow when dealing
with an accounting issue (transaction or item). The IFRS
ACCOUNTING POLICY HIERARCHY is:
1. Apply specifically relevant standards (IASs, IFRSs,
Interpretations).
2. Refer to other IASB standards.
3. Refer to the IASB Framework for guidance.
4. Consider the most recent pronouncements of other standard-
setting bodies.
5. Refer the literatures
6
 CHANGES IN ACCOUNTING
POLICIES
 WHEN TO CHANGE AN ACCOUNTING POLICY?
 MANDATORY: When it is required by another IFRS. This will be the
case when new IFRS is issued and you HAVE TO apply it mandatorily.
 VOLUNTARY: When new accounting policy provides better, more
faithful and relevant information. In this case, you apply new
accounting policy voluntarily.

 It is highly unlikely that a change from the fair value model to the

cost model will result in a more relevant presentation (paragraph 31 of IAS

40)

7
 CHANGES IN ACCOUNTING POLICIES

EXAMPLES OF CHANGES IN ACCT POLICY

−A change from measuring a class of assets at depreciated

historical cost to a policy of regular revaluation (fair value)
−Changing from writing off to capitalizing interest relating to
the construction of noncurrent assets
−Changing inventory valuation from weighted average to
FIFO
−Changing the way in which an item is presented in the
accounts, i.e. classifying depreciation expenses as cost of
sales instead of administrative
8
 CHANGES IN ACCOUNTING POLICIES

 EXCLUSIONS [NOT TO BE ACCOUNTED AS

CHANGES]
Adoption of a new policy in recognition of events that have
occurred for the first time or that were previously immaterial is
not an accounting change.

−Example
PPE
REVALUATION
A CHANGE IN ACCT POLICY METHOD
PPE
COST
METHOD NOT A CHANGE IN ACCT IP
POLICY FAIR VALUE
METHOD

9
CHANGE IN ACCOUNTING POLICIES
ACCOUNTING TREATMENT [HOW]
Three approaches for reporting changes:
1)Currently.
2)Retrospectively.
3)Prospectively (in the future).
IASB requires use of the retrospective approach.

Rationale - Users can then better compare results from one

period to the next.

 If a new IFRS is applied and this IFRS contains some transitional guidance,
then simply follow the rules in that transition provisions. New IFRS will tell
exactly how.
10
Retrospective Accounting Change Approach

Company reporting the change

1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting
policy.

2) Adjusts the carrying amounts of assets and liabilities as

of the beginning of the first year presented. Also makes
an offsetting adjustment to the opening balance of
retained earnings or other appropriate component of
equity or net assets as of the beginning of the first year
presented.
CHANGES IN ACCOUNTING POLICIES
EXEMPTIONS FROM RETROSPECTIVE
TREATMENT
− The effect of retrospective application of a change in accounting policy
is immaterial.
− Retrospective application of a change in accounting policy is
impracticable, then the new accounting policy must be applied
prospectively from the beginning of the earliest period feasible which
may be the current period.
− Initial application of an IFRS/first time adoption where the
transitional accounting method provided allow or require prospective
application of a new accounting policy– follow it otherwise 12
CHANGES IN ACCOUNTING POLICY

Impracticability
Companies should not use retrospective application if one of the
following conditions exists:
1. Company cannot determine the effects of the retrospective
application.
2. Retrospective application requires assumptions about
management’s intent in a prior period.
3. Retrospective application requires significant estimates that
the company cannot develop.

If any of the above conditions exists, the company prospectively applies

the new accounting principle.
i
c 14 14
y
Assume Entities A and B are identical in all respects.
e
•x On 1/1/20x1 both buy identical land for $100.
a – A reports the land (investment property) at its fair value of $150 at
31/12/20x3; $160 at 31/12/20x4; and $190 at 31/12/20x5.
m
• In 20x5 B changes from cost model to fair value model.
p
Which
l of the following ‘fixes’ in B’s 20x5 financial statements
best enables potential investors to decide whether to invest in A
e
or B?
:
B reports additional income of (choose 1 of):
1) $30 (20x5) and $10 (restated 20x4);
t
2) $30 (20x5) and $60 (restated 20x4); or
h
3) $90 (20x5) and nil (20x4).
e
 CHANGES IN ACCOUNTING
POLICIES
DISCLOSURES
Following must be disclosed in the financial statements of the
accounting period in which a change in accounting policy is
implemented:
−Title of IFRS
−Nature of change in accounting policy
−Reasons for change in accounting policy
−Amount of adjustments in current and prior period presented
−Where retrospective application is impracticable, the conditions
that caused the impracticality
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II. ACCOUNTING ESTIMATES

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Concept (Estimates)
When an item of financial statements cannot be measured
precisely, it can only be estimated. This is because of:
 Uncertainties inherent in the business;

 Where judgments are involved based on information that

best reflects the conditions and circumstances that exist at
the reporting date. By its nature, estimates are subjective
and may require frequent revisions in future.

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CHANGES IN ESTIMATES
•Change in accounting estimate is a change either some
amount of an asset or a liability, or pattern of its consumption
in both current and future reporting periods that result from
changes in the circumstances in which the estimate was
based.
As a result of a new information, As a result of new
development, More experience

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EXAMPLES
− Depreciation rates and useful lives of assets
− Provisions for warranty repairs
− Impairment of non-current assets
− Pattern of economic benefits expected to be received
from non-current assets for calculating depreciation
− Impairment of receivables (bad debt provisions)

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ACCOUNTING TREATMENT
Change in accounting estimates are accounted
prospectively, either:

1. In the current reporting period (e.g. bad debt estimate);

2. In both the current and future reporting periods, if the
change affects both (for example, change in useful lives
affects depreciation charges in both the current and the
future reporting periods).
“Prospectively” means that comparatives and equity NOT
restated. Financial statements in the previous reporting
periods not restated and simply adjust calculations in the
current and future reporting periods.
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ACCOUNTING TREATMENT
 When it is hard to differentiate between a change in
accounting policy and a change in accounting estimate,
the change is accounted for prospectively as an estimate.

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Example
− ABC LTD has depreciated a machine over its expected useful
life of 5 years. No residual value is expected at the end of the
machine's useful life. The cost of machine was Br100,000 and
annual depreciation charge was therefore Br20,000.
− During year three, the remaining useful life of the machine
was estimated to be only 1 years.
− ABC LTD should account for the change in estimate
prospectively by allocating the net carrying amount of the
asset over its remaining useful life. No adjustment is required
to restate the depreciation charge in previous accounting
periods.

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Example
Depreciation expense for the machine would therefore be as
follows:
Accumulate
Depreciation
d Working
Expense
Depreciation
Year 1 20,000 20,000 (100,000/5)
Year 2 20,000 40,000 (80,000/4)
Year 3 30,000 70,000 (60,000/2)
Year 4 30,000 100,000 (30,000/1)
Although expected useful life of the machine has reduced at the
end of third year, depreciation expense recorded in previous years
is not affected. Instead, the depreciation expense is increased
accordingly in years 3 and 4.
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D
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a. the nature of the change;

b. the effect on the current periods financial
statements; and
c. the effect in future periods if this is
practicable.

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III. CORRECTION OF PRIOR
PERIOD ERRORS

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h
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•c Errors can arise in respect of the recognition,

measurements, presentation or disclosure of
oelements of financial statements.
•nFinancial statements do not comply with IFRS if
c they contain either:
– material errors (errors that could affect a user’s
e decision made on the basis of the financial info); or
p – immaterial errors made intentionally to achieve a
particular presentation of an entity’s financial position,
t financial performance or cash flows.
(paragraph 41 of IAS 8).
ACCOUNTING ERRORS

Types of Accounting Errors:

1. A change from an accounting principle that is not generally
accepted to an accounting policy that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. Failure to accrue or defer certain expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.

LO 6
ACCOUNTING TREATMENT

 Accounting Errors discovered after the reporting date but before

the authorization of financial statements are adjusting events after
the reporting date as per IAS 10 and must therefore be corrected
in the current period prior to the issuance of financial statements.
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• Correction of an error—retrospective restatement

• Change in accounting policy—retrospective
application
• Change in accounting estimate—prospective
application
• Change in classification arising from change in use
—transfer
• Change in classification arising from change of
circumstance—transfer
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Summary of Changes and Errors
IAS 8 hierarchy and SME
hierarchy
 G
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• For guidance on setting accounting policies when

accounting is not explicitly specified for a
phenomena see:
– paragraphs 10 to 12 of IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors (sometimes
called the ‘IAS 8 hierarchy’)
– paragraphs 12 to 15 of IPSAS 3 Accounting Policies,
Changes in Accounting Estimates and Errors (sometimes
called the ‘IPSAS 3 hierarchy’)
– paragraphs 10.4 to 10.6 of the IFRS for SMEs
(sometimes called the ‘SME hierarchy’)
© Michael JC Wells
 E
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• Objective: provide relevant financial information that

can be faithfully represented:
– if possible, by analogy to the accounting specified for a
similar and related issue in that suite of Standards;
– failing which, by reference to the concepts in the relevant
Framework.
– In parallel:
• IFRS and IPSAS 3 allow analogy to the most recent
pronouncements in other Standards that are based on a similar
Conceptual Framework (eg US GAAP) provided they do not
conflict with…
• the IFRS for SMEs allows analogy to only (full) IFRS
© Michael JC Wells
 E
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• How in accordance with the IFRS would an entity

account for?
1) platinum it holds as a store of wealth
2) Lucy paintings which it holds as a store of wealth
3) a business combination under common control
4) a grant it receives from a philanthropist
• Would your answer for any of the items above be
different if the entity prepares its financial
statements in accordance with the IFRS for SMEs?

© Michael JC Wells
Events after the reporting
period (IAS 10 and Section 32 of
the IFRS for SMEs)
Ty
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• Those events, favourable and unfavourable, that occur

between the end of the reporting period and the date
when the FSs are authorised for issue.
39
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– adjusting events―those that provide evidence of

conditions that existed at the end of the reporting
period
• adjust the amounts recognised in financial statements
– non-adjusting events―those that are indicative of
conditions that arose after the end of the reporting
period
• do not adjust the amounts recognised in its financial
statements; disclose the nature of the event and its
financial effect
D
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• The management of an entity completes draft financial

statements for the year to 31 December 20X1 on 28 February
20X2. On 18 March 20X2, the board of directors reviews and
approves the financial statements. The entity announces its
profit and selected other financial information on 1 March
20X2. The financial statements are made available to
shareholders and others on 1 April 20X2. The shareholders
approve the financial statements at their annual meeting on
15 May 20X2 and the approved financial statements are then
filed with a regulatory body on 17 May 20X2.
• What is Date of Authorization for issue?

41
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• On 15 March 2016 when the entity’s financial statements

were authorised for issue, the spot exchange rate =
ETB22:$1.
• At 31 December 2015 the spot exchange rate = ETB21:$1.
At what amount must the entity (functional currency = ETB)
measured its $100 million unhedged non‑current liability in
its 31 December 2015 statement of financial position?
Choose one of:
1) ETB2,100 million (non-adjusting event)
2) ETB2,200 million (adjusting event)
 Eve
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1. Entity A was sued in 01. On Dec 31, 01, it is not clear

whether the probability of conviction in the ongoing trial
is more than 50%. Shortly after Dec 31, 01, A is convicted.
2. Entity B holds a receivable which is measured at
amortized cost according to IFRS 9. Shortly after the
reporting period, the debtor files for bankruptcy.
3. In Jan 02, part of the manufacturing facilities and
inventories of entity D is destroyed by a flood. The
damages are not covered by insurance. However, D’s
management expects that it will be possible to continue
the business activities.
4. an entity declares dividends after the reporting period
Related party disclosures
(IAS 24 and Section 33 of the IFRS
for SMEs)
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• Notes to the financial statements include

disclosures necessary to draw attention to the
possibility that an entity’s financial position
and performance have been affected by the
existence of related parties and by
transactions and outstanding balances with
such parties.
– assess the substance of the relationship and not
merely its legal form.
 Example
• In 01, construction company B builds a luxury villa
for its CFO. The price paid by the CFO is:
– (a) equivalent to the price that would have been paid in
an arm’s length transaction,
– (b) equivalent to the costs of conversion incurred by B
for building the luxury villa.
• Required
• Assess whether the construction of the luxury villa
for B’s CFO has to be disclosed in the notes to B’s
financial statements as at Dec 31, 01.
 Solution

• B’s CFO is a related party of B (IAS 24.9(a)(iii)).

Therefore, the construction of the luxury villa
has to be disclosed in B’s notes. This applies
irrespective of whether the price paid by the
CFO represents arm’s length terms (IAS 24.23).
 Example
• Entity E sells 40% of its products to its major
customer, entity C.
• Version (a): C does not belong to E’s group.
• Version (b): C holds 35% of the shares of E and
exercises significant influence over E.
• Required
• Assess whether C is a related party in E’s
financial statements.
 Solution

• A customer with whom an entity transacts a

significant volume of business is not a related party
simply by virtue of the resulting economic
dependence (IAS 24.11d). Thus, C is not a related
party in version (a).
• In version (b), C exercises significant influence over
E. This means that E is an associate of C. Therefore,
C is a related party of E (IAS 24.9(b)(ii) and 24.IE7).
Example
Solution
Thank You for Your Attention !

Question or Comment ?

The
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