FRF7
Syllabus B. ACCOUNTING FOR TRANSACTIONS IN FINANCIAL STATEMENTS B9. Reporting financial performance

A1g / B9d. IAS 8 Changes in accounting policies and accounting estimates 4 / 12

Syllabus A1g / B9d)

A1g) Discuss the principle of comparability in accounting for changes in accounting policies.

B9d) Account for changes in accounting estimates, changes in accounting policy and correction of prior period errors

Comparatives are changed for accounting POLICY changes only

Changes in accounting estimates have no effect on the comparative

Changes in accounting policy means we must change the comparative too to ensure we keep the accounts comparable for trend analysis

Accounting Policy

Definition

“the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting the financial statements”

An entity should follow accounting standards when deciding its accounting policies

If there is no guidance in the standards, management should use the most relevant and reliable policy

Changes to Accounting Policy

These are only made if:
- •It is required by a Standard or Interpretation; or
- •It would give more relevant and reliable information

  1. Adjust the comparative amounts for the affected item

    (as if the policy had always been applied)

  2. Adjust Opening retained earnings

    (Show this in statement of changes in Equity too)

Accounting Estimates

Definition

“an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability”

Examples

•Allowances for doubtful debts;
•Inventory obsolescence;
•A change in the estimate of the useful economic life of property, plant and equipment

Changes in Accounting Estimate

  1. Simply change the current year

  2. No change to comparatives

Prior Period Errors

These are accounted for in the same way as changes in accounting policy

Accounting treatment

  1. Adjust the comparative amounts for the affected item

  2. Adjust Opening retained earnings

    (Show this in statement of changes in Equity too)