Finance & Accounting

A detailed guide on IAS 8: Accounting policies and changes

The goal of this Accounting Standard, i.e., IAS 8 is to regulate the criteria for choosing and revising accounting policies, as well as the accounting treatment and presentation of the changes made in accounting policies, modifications in accounting estimates, and any corrections of prior period errors.

Purpose of IAS 8

The purpose of the Standard is to improve the relevance and dependability of an entity’s financial statements, as well as their comparability over the period of time and with the financial statements of other businesses.

The tax impacts of rectifying the prior period errors and making retrospective adjustments to reflect the changes in accounting policies should be accounted for, presented, and disclosed according to IAS 12 on Income Taxes.

This Standard is to be applied by an entity for annual periods beginning on or after January 1, 2005.

Relevant definitions

Accounting policies are the unique principles, foundations, conventions, regulations, and practices that a company uses in creating and presenting its financial statements.

A change in an accounting estimate refers to an adjustment in the carrying value of an asset or liability of the entity that has resulted from reassessment of the current status of expected benefits and expected obligations of the future linked with the asset or liability.

Prior period errors are any type of omissions or misstatements found in the financial statements of a business concern in relation to one or more prior periods. These omissions or misstatements result from a failure to use reliable information or from the misuse of reliable information that was accessible at the time the financial statements for that particular period were prepared & issued; and thus, could have been fairly expected to be taken into account in the preparation and presentation of such financial statements^[1].

Material omissions or misstatements are related to items that potentially have a significant impact, either individually or collectively, on the economic decisions that users make based on the financial statements.

The extent and character of the omission or misstatement, as considered in the context of the business, determine its materiality. The item’s size or nature, or a mix of both, might be the deciding factor for materiality.

In a retrospective application, a new accounting policy is applied to events, other business affairs, and conditions as if it had always been implemented.

Selection and application

According to IAS 8, when an IFRS relates to a transaction, occurrence, or condition in a specified way, then the accounting policy is determined by applying that particular IFRS. In other words, when an IFRS applies explicitly to a transaction, other occurrences, or circumstance, the accounting policy or policies that apply to that item must be determined by applying the relevant IFRS and by taking into account any Implementation Guidance provided by the IASB for that IFRS.

Where there is no Standard or an interpretation that specifically relates to a transaction, other occurrences, or situation, the management of the company must exercise its discretion in designing and implementing an accounting policy that produces relevant and reliable information. In reaching its decision, the management of the company shall refer to and assess the relevance of the following sources, listed in descending order:

• the IFRS rules, requirements, and recommendations that deal with comparable and related situations; and
• the definitions, criteria of recognition, and principles of measurement for assets, liabilities, earnings, and expenditures in the Framework

Consistency in accounting policies

IAS 8 states that unless an IFRS clearly mandates or authorizes categorization of things for which alternative policies may be applicable, a company shall select and implement its accounting policies consistently for similar transactions, other occurrences, and situations. If an IFRS requires or allows for such categorization, then a suitable accounting policy must be chosen and it should be consistently applied to each such category.

Changes in policies

A corporation may change its accounting policy only when the same is needed by an IFRS or when the change results in the financial statements of the company to depict more accurate and reliable information in relation to the effects of transactions, other occurrences, or conditions on the corporation’s financial position, financial results, and cash flows.

A change in accounting policy originating from the initial adoption of an IFRS must be accounted for in line with the specific transitional provisions, if there is any, in that IFRS. Where a company changes an accounting policy during the initial implementation of an IFRS that does not comprise specified transitional provisions for that change, or where the company modifies an accounting policy voluntarily, the change has to be applied retrospectively.

IAS 8 further clarifies that a change in accounting policy, on the other hand, must be applied retrospectively unless it is impossible to ascertain either the period-specific or cumulative impacts of the change.

Disclosures concerning the changes in accounting policies that are caused by a new standard are as follows:

• the name of the standard or interpretation that has caused the change
• the nature of the accounting policy’s change
• a summary of the transitional provisions, including those that may have an impact on future periods
• for the present period and for every prior period reported, the amount of the adjustment implemented for every financial statement line item which is impacted, and also for basic and diluted EPS (only when the company is following IAS 33), to the extent it is practicable
• if the retrospective adjustment is not practicable, then an explanation & description as to how the change has been applied in accounting policies

Disclosures concerning the voluntary changes in accounting policies are as follows:

• the nature of the accounting policy’s change
• the reasons as to why the new accounting policy delivers more reliable and pertinent information
• for the present period and for every prior period reported, the amount of the adjustment implemented for every financial statement line item which is impacted, and also for basic and diluted EPS (only when the company is following IAS 33), to the extent it is practicable
• if the retrospective adjustment is not practicable, then an explanation & description as to how the change has been applied in accounting policies

Change in estimates

The use of reasonable estimates is an important aspect of financial statement preparation and does not jeopardize their accuracy. Changes in accounting estimations are the result of fresh information or new developments and are not, therefore, corrections of errors.

According to IAS 8, the impact of a change in an accounting estimate must be recorded prospectively and should be included in profit or loss in the period in question, i.e.,

• the period of such change, where the change solely impacts that period only, or
• where the change affects both, the period of such change, as well as future periods, must be considered.

Disclosures concerning the changes in estimates are as follows:

• the kind and magnitude of a change in an accounting estimate that affects the current period or is projected to affect the future periods
• if the amount of the effect of such change in future periods is not revealed because predicting it is impracticable, the entity must report that information.

Prior period errors

Prior period errors include the consequences of arithmetical errors, errors in the application of accounting principles by the company, inadequacies or misinterpretations of facts in the books, and fraud.

Unless it is impractical to assess either the period-specific or cumulative effect of the prior period error or mistake, a business concern must fix major prior period errors retrospectively in the first set of financial statements approved for release following their discovery.

The errors must be corrected by restating the comparable figures for the earlier period or periods reported in which the error occurred. Or else, if the error or mistake happened before the most previous prior period presented, then it must be corrected by restating the beginning balances of assets, liabilities, & equity for the most recent prior period presented.

Disclosures concerning the prior period errors are as follows:

• the nature of the inaccuracy in the previous period
• for every prior period reported, the amount of the correction implemented for every financial statement line item which is impacted, and also for basic and diluted EPS (only when the company is following IAS 33), to the extent it is practicable
• the amount of correction done at the start of the most recent prior period presented
• if retrospective correction is not practicable, then an explanation & description as to how the mistake has been corrected

Conclusion

This Indian Accounting Standard (IAS 8) must be followed when choosing and implementing accounting policies, as well as when accounting for any changes made in accounting policies, changes in accounting estimations, and corrections of the prior-period errors.

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