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A Zack

The selection of accounting policy and estimation techniques is intended to aid comparability
and consistency in financial statements. Entities should follow the requirements of IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors, when selecting or
changing accounting policies, changing estimation techniques, and correcting errors.

An entity should determine the accounting policy to be applied to an item with direct
reference to IFRS but accounting policies need not be applied if the effect of applying them
would be immaterial. IAS 8 also notes that it is inappropriate to make or leave uncorrected
immaterial departures from IFRS to achieve a particular position. Where IFRS does not
specifically apply to a transaction, judgement should be used in developing or applying an
accounting policy, which results in financial information which is relevant to the decision-
making and assessment needs of users. In making that judgement, entities must refer to
guidance in IFRS, which deals with similar issues and then subsequently to definitions, and
criteria in the Framework.

Additionally, entities can refer to recent pronouncements of other standard setters who use
similar conceptual frameworks. Entities should select and apply their accounting policies
consistently for similar transactions. If IFRS specifically permits different accounting policies
for categories of similar items, an entity should apply an appropriate policy for each of the
categories in question and apply these accounting policies consistently for each category.
For example, for different classes of property, plant and equipment, some may be carried at
fair value and some at historical cost.

(ii) A change in accounting policy should only be made if the change is required by IFRS, or
it will result in the financial statements providing reliable and more relevant financial
information. Significant changes in accounting policy other than those specified by IFRS
should be relatively rare. IFRS specifies the accounting policies for a high percentage of the
typical transactions which are faced by entities. There are therefore limited opportunities for
an entity to choose an accounting policy, as opposed to a basis for estimating figures which
will satisfy such a policy.

IAS 8 states that the introduction of an accounting policy to account for transactions where
circumstances have changed is not a change in accounting policy. Similarly, an accounting
policy for transactions which did not occur previously or which were immaterial is not a
change in accounting policy and therefore would be applied prospectively.

For example, where an entity changes the use of a property from an administration building
to a residential space and therefore an investment property, this would result in a different
treatment of revaluation gains and losses. However, this is not a change in accounting policy
and so no restatement of comparative amounts should be made.

A change in accounting policy is applied retrospectively unless there are transitional

arrangements in place. Transitional provisions are often included in new or revised
standards and may not require full retrospective application. Sometimes it is difficult to
achieve comparability of prior periods with the current period where, for example, data might
not have been collected in the prior periods to allow retrospective application. Restating
comparative information for prior periods often requires complex and detailed estimation.
This, in itself, does not prevent reliable adjustments.

When making estimates for prior periods, the basis of estimation should reflect the
circumstances which existed at the time and it becomes increasingly difficult to define those
circumstances with the passage of time. Estimates and circumstances might be influenced
by knowledge of events and circumstances which have arisen since the prior period.

Tom Clendon
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IAS 8 does not permit the use of hindsight when applying a new accounting policy, either in
making assumptions about what management’s intentions would have been in a prior period
or in estimating amounts to be recognised, measured or disclosed in a prior period. When it
is impracticable to determine the effect of a change in accounting policy on comparative
information, the entity is required to apply the new accounting policy to the carrying amounts
of the assets and liabilities as at the beginning of the earliest period for which retrospective
application is practicable. This could actually be the current period but the entity should
attempt to apply the policy from the earliest date possible.

(iii) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires prior
period errors to be amended retrospectively by restating the comparatives as if the error had
never occurred. Hence, the impact of any prior period errors is shown through retained
earnings rather than being included in the current period’s profit or loss. Managers could use
this treatment for prior period errors as a method for manipulating current period earnings.
Restatements due to errors and irregularities can be considered to indicate poor earnings
quality, and to threaten investor confidence, particularly if they occur frequently. Thus, it
might appear that the factors associated with earnings corrections could be linked to
earnings management.

Arguments against the approach in IAS 8 are:

– that the standard allows inappropriate use of hindsight;
– that the treatment renders errors less prominent to users; and
– that it allows amounts to be debited or credited to retained profits without ever being
included in a current period profit or loss.

Managers have considerable discretion regarding the degree of attention drawn to such
changes. The information content and prominence to users of disclosures regarding prior
period errors are issues of significance, with potential economic and earnings quality
implications. Expenses could be moved backward into a prior period, with the result that
managers are given a possible alternative strategy with which to manage earnings. It is
possible to misclassify liabilities, for example, as non-current rather than current, or even
simply miscalculate reported earnings per share. Under IAS 8, the prior period error can then
be amended the following year, with no lingering effects on the statement of financial
position as a result of the manipulation.

(b) IAS Borrowing Costs states that such costs which are directly attributable to the
acquisition, construction or production of a qualifying asset form part of the cost of that asset
and, therefore, should be capitalised. Other borrowing costs are recognised as an expense.
Thus the change in accounting policy actually only brings Zack in line with IFRS, so that this
is an accounting error which will require a prior period adjustment rather than a change in
accounting policy. In applying the new accounting policy, Zack has identified that there is
another asset where there is a material impact if borrowing costs should have been
capitalised during the construction period. This contract was completed during 2012. Thus,
the financial statements for the year ended 30 November 2012 should be restated to apply
the new policy to this asset. The effects of the restatement are as follows: at 30 November
2012, the carrying amount of property, plant and equipment is restated upwards by $2
million less depreciation for the period and this would result in an increase in profit or loss for
the period of the same amount.

Disclosures relating to prior period errors include: the nature of the prior period error for each
prior period presented, to the extent practicable; the amount of the correction for each
financial statement line item affected; and for basic and diluted earnings per share, the
amount of the correction at the beginning of the earliest prior period presented. The
disclosure would include the nature of the prior period error.

Tom Clendon
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The line items in the statement of profit or loss and other comprehensive income would also
change. For the current period, Zack would disclose the impact of the prior period error of $3
million. It can be assumed that, because the asset is under construction, there will be no
depreciation on the asset. The change in the depreciation method is not a change in an
accounting policy but a change in an accounting estimate. For changes in accounting
estimates, Zack should disclose the nature and the amount of the change which affects the
current period or which it is expected to have in future periods. It should be noted that IAS 8
does permit an exception where it is impracticable to estimate the effect on future periods.
Where the effect on future periods is not disclosed because it is impracticable, that fact
should be disclosed. The revision results in an increase in depreciation for 2013 of $6m and
the disclosure of an estimated increase for 2014 of $8m.

The systems error has resulted in a prior period error. In order to correct this error, Zack
should restate the prior year information for the year ended 30 November 2012 for the $2m
in the statement of profit or loss and other comprehensive income. Additionally, the trade
creditors figure in the statement of financial position is overstated by $2 million and should
be restated. The movement in reserves note will also require restating. This is not a change
in an accounting estimate.

Tom Clendon