CACN040/CACC080/CACB080 - SLIDES

IAS 8: Accounting policies, changes

in accounting estimates and errors

− Read IAS 8: ‘Accounting policies, changes in accounting

estimates and errors’ in your prescribed textbook – ‘IFRS
Standards Part A2’.
− Attend the online lecture on Black Board Collaborate on IAS 8.
− Study IAS 8: ‘Accounting policies, changes in accounting
estimates and errors’ in your prescribed textbook – ‘IFRS
Standards Part A2’ and work through all implementation
guidance in IFRS Standards Part B.
− Understand the new concepts that are explained in the
standard.
− Do the tutorial question and attend the online tutorial.
− Do questions in the question bank.
− Write the concept test in order to evaluate your understanding of
the work.
− CONSULT! CONSULT! CONSULT!

→ Define accounting policies and discuss the selection of an

accounting policy in the absence of an IFRS Standard.
→ Identify circumstances under which an entity is allowed to
change an accounting policy.
→ Prepare the journal entries to account for a change in
accounting policy and present proper disclosure of the
effect of that change.
→ Explain what is implied by a change in accounting
estimate and how the change is accounted for. Calculate
the effect of a change in estimate correctly and present
proper disclosure for changes in estimates.

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→ Identify errors. Prepare the journal entries to account for

the correction of a prior period error, and present proper
disclosure of an error of this nature and its effect.
→ Identify circumstances in which the opening balance of
retained earnings may be adjusted, record these
adjustments and disclose the effect of these adjustments
on opening retained earnings that were previously
reported.
→ Apply additional disclosures in specific circumstances and
know what additional disclosure requirements apply to
material items.

Overview of the topic

− IAS8 consist of 4 important concepts

Selection of Change in
Change in
accounting accounting Errors
estimate
policy policy

− For each of the above concepts you need to be able to:

» Identify them
» Prepare the necessary calculations
» Prepare the journal entries to account for them in the
accounting records
» Disclose them in the financial statements

Accounting policy
The term accounting policy refers to the principles or conventions
applied in preparing the financial statements of an entity.
The entity must select and apply an accounting policy that is
appropriate to a transaction as is required by the specific IFRS
Standard that addresses that specific group of transactions.
Accounting policies should be applied consistently for similar
transactions and from one reporting period to the next.
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Selection of accounting policy

use the accounting policy prescribed by the

General rule
specific IFRS Standard.

In the absence of an IFRS Standard dealing with a specific matter,

management must use their judgement to develop a policy that
results in information that is relevant and faithfully represented.

Selection of accounting policy

In making these judgements, consider the following in descending
order:
• The requirements and guidance in IFRS Standards dealing with
similar/related issues, and
• Definitions, recognition criteria and measurement concepts per
the Conceptual Framework
• Consider recent pronouncements of other standard-setting
bodies.

Selection of accounting policy

Disclosure of selected accounting policies:
• Significant accounting policies
→ The measurement bases used in preparing the financial
statements
→ Accounting policies used that are relevant to an
understanding of the financial statements
• Significant judgements that management has made in applying
accounting standards
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Selection of accounting policy

Disclosure of selected accounting policies:
• Information about the assumptions made concerning the future
as well as other major sources of estimation uncertainty at the
end of the reporting period that have a significant risk in causing
material adjustments to the carrying amount of assets and
liabilities within the next financial year.

Change in accounting policy

A change in accounting policy is only allowed if it:
• Is required by an IFRS Standard or an interpretation of an IFRS
Standard; or
• Results in a more relevant and reliable presentation of the
transaction or item in the financial statements.

Change in accounting policy

The following are not considered to be a change in accounting
policy
• Application of an accounting policy for transactions that differ in
substance from those that occurred previously.
• The application of a new accounting policy for a transaction that
did not occur previously or was immaterial.
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Change in accounting policy

Two types of changes exist:
Voluntary change
• Change should be accounted for retrospectively

Change is required by an IFRS Standard or interpretation of a

IRFS Standard
• Change should be accounted for in accordance with the
transitional provisions of that specific IFRS Standard
• If no transitional provisions are supplied, the change should
be accounted for retrospectively

Change in accounting policy

Retrospective application
• The effect of the change in accounting policy should be applied as
if the new policy has always been in use.
• Comparative amounts should be restated.
• The effect of the change in accounting policy should be applied to
the openingThebalance of retained
entity cannot earnings after
apply a requirement for the earliest prior
period presented
makinginevery
the financial
reasonablestatements.
effort to do so.

If it is impracticable to determine the effect of the change on prior

periods, then retrospective application is not required and the change
will be applied prospectively from the earliest date feasible.

Change in accounting policy

It is impractical to apply a change in accounting policy
retrospectively if:
• The effects of the retrospective application/restatement are not
determinable;
• The retrospective application/restatement requires assumptions
about what management’s intent would have been in that
period; or
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Change in accounting policy

It is impractical to apply a change in accounting policy
retrospectively if:
• The retrospective application/restatement requires significant
estimates of amounts and it is impossible to distinguish
objectively information about those estimates that:
→ Provides evidence of circumstances that existed on the date
as at which those amounts are to be recognised; and
→ Would have been available when the financial statement for
that prior period were authorised for issue.

Change in accounting policy

Disclosure when a change is required:
• The title of the IFRS
• When applicable, that the change in accounting policy is made
in accordance with its transitional provisions
• The nature of the change in accounting policy
• When applicable, a description of the transitional provisions
• When applicable, the transitional provisions that might have an
effect on future periods

Change in accounting policy

Disclosure when a change is required:
• For the current period and each prior period presented, to the
extent practicable, the amount of the adjustment for each line
item affected
• The amount of the adjustment relating to periods before those
presented, to the extent practicable; and
• If retrospective application 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 change in
accounting policy has been applied.
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Change in accounting policy

Disclosure when a change is voluntary:
• The nature of the change in accounting policy
• The reasons why applying the new accounting policy provides
reliable and more relevant information
• For the current period and each prior period presented, to the
extent practicable, the amount of the adjustment for each
financial line item affected.
• The amount of the adjustment relating to periods before those
presented, to the extent practicable

Change in accounting policy

Disclosure when a change is voluntary:
• If retrospective application 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 change in
accounting policy has been applied.

Change in accounting policy

Disclosure when an entity has not applied a new IFRS that has
been issued but is not yet effective:
• This fact; and
• 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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Example 1
Ignore any tax implications in this example:
A company has always recognised its investment property using
the cost model. A property was acquired on 1 January 2019 at a
cost of R2 000 000, of which R500 000 was attributable to the
land. After the current year’s depreciation was recorded, the
details of the property were as shown below:
31 Dec 2021 31 Dec 2020 31 Dec 2019
Land @ cost 500 000 500 000 500 000
Building @ cost 1 500 000 1 500 000 1 500 000
Accumulated depreciation (75 000) (50 000) (25 000)
Carrying amount 1 925 000 1 950 000 1 957 000

Example 1
At the acquisition date (1 January 2019), the useful life of the
building was estimated at 20 years and the residual value at
R1 000 000.
The useful life and residual value of the building were confirmed
at each reporting date.
The market value (the fair value) of the property was determined
by an independent valuator as follows:
• At 31 December 2019: R2 200 000
• At 31 December 2020: R2 600 000
• At 31 December 2021: R2 900 000

Example 1
On 31 December 2021, the company decided to change the way
in which it accounts for its investment properties from the cost
model to the fair value model as they felt that it would lead to
more relevant and reliable information in the financial statements.
The following balances appeared on the trial balance:
Required:
a) Prepare the journal entry to account for the effect of the
change in accounting policy on 31 December 2021.
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Example 1
Required:
b) Prepare an extract from the statement of profit or loss and
other comprehensive income for the year ending
31 December 2021 which reflects the correct line items to be
included after the change in accounting policy.
c) Prepare an extract from the statement of financial position as
at 31 December 2021 which reflects the correct line items to
be included after the change in accounting policy.

Example 1
Required:
d) Prepare the following disclosures in the notes to the financial
statements for the year ending 31 December 2021.
• Investment property
• Change in accounting policy

Example 1_Solution
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Accounting estimate
As professional judgement is often used in the drafting of financial
statements, it is possible that the exercise of judgement may prove
to have been incorrect at a later date.
This does not imply that an error was made as the preparer of the
financial statements merely used the information available at the
date of the estimate with reasonable care, in order to come to a
conclusion that was proved over time to be incorrect!

An accounting estimate is a technique to measure those items in

accounting that have no accurate way of quantification and are therefor
estimated on the basis of judgement and knowledge derived from past
experience.

Accounting estimate
Accounting estimates involve management’s judgement of
ESTIMATES

expected future benefits and obligations relating to assets and

liabilities based on information that best reflects the conditions
and circumstances that exists at the reporting date.

By its nature, estimates are subjective and may require frequent

revisions in future.

Estimates must be revised when new information becomes

available that indicates a change in the circumstances upon
which the estimates were formed.

Change in accounting estimate: Definition

A CHANGE IN ACCOUNTING ESTIMATE is an

adjustment of either:
• The carrying amount of an asset or a liability; or
• The amount of the periodic consumption of an asset.
Examples relating to the Examples of adjustment to the CA of an
periodic consumption of asset/liability are:
an asset: → Change in the estimates involved in
→ Change in residual determining the recoverable amount of
value an asset
→ Change in useful life → Change in the estimates involved in
→ Change in the determining the balance of a provision.
depreciation/ → An adjustment in the current year for the

1 2
amortisation method over- or under-provided taxation of
the previous year
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Recording of changes in accounting

estimates

Changes in accounting estimates must be

accounted for prospectively in the financial
statements.
in other words, the effects of the change must be
incorporated in the period in which the estimate is revised
Therefore, carrying amounts of assets and
liabilities as well as any associated expense and
gains are adjusted in the period of the change in
estimate.

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Recording of changes in accounting

estimates

Two methods: Reallocation method

No adjustment is made in the current year
for the effect of the change in prior year (e.g.
The opening CA of the asset calculated in
accordance with the previous estimate is
simply reallocated over the remaining revised
estimated useful life
Cumulative catch-up method
The adjustment made in the current year
actually includes the effect of the change in
prior years.
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Disclosure of changes in accounting

estimates
Where a change in estimate has a material effect
on the profit or loss for the current years; or on the
profit or loss for future periods, the following needs
to be disclosed:
− The nature of the change
− The amount of the change; and
− The effect on future periods (if practicable to
estimate) – or else a statement that the future
effect is impracticable to estimate.
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Errors
Financial statements does not comply with IFRS 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.
Current year errors Prior period errors
Errors discovered in the current period (and Errors discovered in the current
relating to the current period) are corrected period that happened in past
before the AFS are authorized for issue and periods which will require special
therefore do not require special treatment or treatment, depending on the
disclosure. materiality thereof.

Prior period error: Definition

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 was
available when the financial statements for those
periods were authorised for issue.
Such errors include the effect of:
− Mathematical mistakes
− Mistakes in applying accounting policies
− Oversight or misinterpretations of facts
− Fraud

Prior period error: Definition

Immaterial Prior period omissions/misstatements
omissions/ of items are material if they could,
misstatements individually or collectively, influence
occurring in a prior the economic decisions of users taken
period only on the basis of the financial
discovered in the statements.
current year
Covered by IAS 8
Not covered by
IAS 8 Material prior period errors should be
corrected retrospectively in the first
Adjust in the set of financial statements authorized
current year for issue after discovery of the error.
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Material prior period error

By the retrospective restatement or correction of an error,
an entity corrects the recognition, measurement and
disclosure of amounts of the relevant element of the
financial statements as if the prior period error had never
occurred.
Retrospective correction of a material error involves:
− Restating the comparative amounts for the prior
period(s) presented in which the error occurred; or
− 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.

Disclosure of material prior period errors

Disclosure in respect of the correction of prior period
errors will only be presented in the year in which the
correction is made, and not in subsequent periods.
The following information regarding the correction of
errors should be disclosed in the financial statements:
− The nature of the prior period error.
− For each prior period presented, the amount of the
correction for each line item affected.
− The amount of the correction at the beginning of the
earliest period presented (i.e. the cumulative
correction against the opening balance of retained
earnings.

Example 2
Apple Limited is a small company involved in tree-felling. During
an annual review by a local firm of auditors, it was discovered
that a vehicle used to remove tree trunks from properties did not
appear in the financial records. Upon investigation, it was found
that this vehicle, which had been purchased on 2 January 2013
for R500 000 had been expensed as a rental expense. To make
matters worse, this expense had been claimed (and allowed) as
a tax deduction when submitting the 2013 tax assessment. The
tax authorities will be reopening this assessment and
recalculating the tax owed for the 2013 tax year of assessment.
The vehicle has a useful life of ten years with no residual value and
a suitable method of depreciation is the straight-line method.
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Example 2
No entries relating to this vehicle have yet been made in the
current year’s accounting records.
Profit before tax was reported at R350 000 in 2014 and at R250 000
in 2013.
Tax related information:
• The corporate tax rate is 30% and this has remained unchanged
for the past 10 years.
• The cost of the vehicle is allowed as a deduction over 4 years,
apportioned for part of a year.
• There were no temporary differences or items of exempt income
or non-deductible expenses other than those that may be
evident from the information above.

Example 2
The draft trial balance of Apple Limited at 31 December 2015 and
2016 are shown below:
2016 2015
Share capital (2 700 000) (2 700 000)
Retained earnings/ loss (at beginning of year) (121 000) 159 000
Accounts payable (110 000) (190 000)
Current tax payable (145 000) (116 000)
Profit before tax (500 000) (400 000)
Taxation expense 150 000 120 000
Vehicles (at carrying value) 3 000 000 3 250 000
Accounts receivable 360 000 310 000
Bank 66 000 (433 000)

Example 2
Required:
a) Calculate the deferred tax effects using the balance sheet
approach.
b) Show the calculation of current income tax in 2016 and the
cumulative effect on the years 2013, 2014 and 2015 prior to
discovering the error and show the recalculation of the current
income tax for these periods after discovering the error.
c) Prepare the journal entries to be processed in 2016 to correct
this error.
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Example 2
Required:
d) Prepare Apple Ltd’s statement of comprehensive income, its
retained earnings column for inclusion in the statement of
changes in equity and its statement of financial position for the
year ended 31 December 2016
e) Prepare the correction of error note to the financial statements at
31 December 2016.

Example 2_Solution
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