IAS 8 Accounting Policies Changes in Accounting Estimates and Errors (December 2003)

Introduction
IAS 8 is concerned with three separate aspects of performance, all of which affect the income statement and the measurement of profit. It replaces former IAS 8 (1993) and SIC 2 and 18

Objective
The objective of IAS 8 is to prescribe the criteria for selecting and changing accounting policies together with the disclosure and accounting treatment of changes in accounting policies, accounting estimates and corrections of errors. It is also to enhance the relevance and reliability of financial statements and their comparability.

Scope
IAS 8 should 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.

Key Definitions
Accounting Policies The specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements Change in Accounting estimate An adjustment to the carrying amount of an asset/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. They are not errors. Caused by new information or developments. Prior Period Errors Omissions or misstatements for one or more prior periods due to a failure to use or misuse of reliable information that: (a) was available when financial statements for those periods were authorised; and (b) could have reasonably be obtained and taken into account when preparing and presenting those financial statements. Includes mathematical mistakes, mistakes in applying policies, oversights and fraud.

Accounting policies
Selection and Application of Accounting policies Should apply the appropriate standard if it applies specifically to a transaction. In the absence of an IFRS/IAS/SIC management must use their 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 (c) reliable as it purports faithfully the financial statements, reflects their substance, is neutral, prudent and complete in all material respects. Management must consider the IFRSs etc first and then the Framework in deciding the most appropriate policies. They are also encouraged to look to other standard setters having the same framework, accounting literature and accepted industry practice in making their choice.

Consistency of Accounting policies Must adopt consistent accounting policies for similar transactions unless an IFRS/IAS requires a more specific policy to be adopted. Changes in Accounting Policies Can only change an accounting policy if: (a) required by an IFRS or IAS; or (b) it results in financial statements providing more reliable and relevant information about the effects of transactions on the entitys financial position, performance or cash flows. The following are not changes in accounting policies: (a) the application of accounting policies for transactions that differ in substance from those previously undertaken; and (b) the application of a new policy that did not occur previously or were immaterial. Applying changes in accounting policy On first application of a standard the change must be applied retrospectively unless specific transitional arrangements in the IFRS/IAS apply. Opening reserves should be adjusted for the earliest prior period presented as if new policy had always applied (retrospective application). If impracticable to apply retrospective application to prior period the entity should apply the new policy to the carrying amounts of assets and liabilities as at the start of the earliest period for which retrospective application is practicable. That may be the current period. Disclosure An entity should disclose the following (unless it is impracticable to determine the amount of the adjustment) on a change of accounting policy: (a) (b) (c) (d) (e) (f) (g) (h) the title of the standard or SIC; that the change in policy is made in accordance with any transitional provisions (if applicable). The nature of the change in accounting policy A description of the transitional provisions, if applicable The transitional provisions if have an effect on future periods, if applicable For current and prior periods, the amount of the adjustment for each item effected as well as impact on EPS. For periods prior to those presented, the impact, if practicable If retrospective application impracticable, the circumstances causing that condition and how change in policy has been applied.

When a voluntary change in policy affects the current or any prior period but it is impracticable to determine its amount an entity should disclose: (a) (b) (c) (d) (e) the nature of the change in accounting policy the reasons why applying the new policy provides more reliable and relevant information for the current and each prior period, to extent practicable, the amount of the adjustment for each line item effected as well as impact on EPS. For periods prior to those presented, the impact, if practicable If retrospective application is impracticable, the circumstances causing that condition and how change in policy has been applied.

When an entity has not applied a new IFRS or SIC that is published but not effective, the entity should disclose that fact and estimatethe possible impact that its application will have on its financial statements.

Changes in Accounting Estimates

Many items in financial statements cannot be measured with precision but must be estimated. These involve judgements based on latest available information. Examples where this would be applied include bad debts, inventory obsolescence, useful lives, warranty obligations etc. Estimates need to be revised if circumstances change as a result of new information or experience. A change in measurement base is a change in policy. If difficult to distinguish between a policy and a estimate change, the change should be treated as a change in estimate. A change in estimate is charged prospectively in income in current and future years. Any related asset/liability should equally be adjusted in the period of change. Disclosure The nature and amount of a change in accounting estimate and its effect on both current and future periods should be disclosed unless the amount is impracticable to estimate. If the amount of the effect on future years is not disclosed, due to impracticality, that fact must be disclosed.

Errors
Material prior period errors should be corrected retrospectively as soon as discovered by: (a) restating the comparatives for the prior periods presented; or (b) if the error occurred before the earliest period presented, by adjusting the opening balances of assets, liabilities and equity for the earliest period presented. Limitations on Retrospective Restatement An error should be corrected retrospectively unless impracticable. If that is the case the entity must restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable. If impracticable to determine the cumulative impact for all prior periods the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable. The correction of prior period errors are not included in arriving at the profit or loss for the year. Disclosure of Prior period Errors The following should be disclosed: (a) the nature of the prior period error (b) for each prior period presented, to the extent practicable, the amount of the correction for each line item affected and for EPS. (c) The amount of the correction at start of the earliest period presented (d) If retrospective application impracticable, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. This is only required in the year of discovery. It is not required in future years.