IAS 8: ACCOUNTING POLICY, CHANGES IN ACCOUNTING
ETIMATES AND ERRORS
IAS 8
SCOPE (.04)
− Choice of accounting policy
− Accounting for:
o (i) Changes in accounting policy (E.g. Inventory: Avg → FIFO)
o (ii) Changes in accounting estimates (E.g. Depr/useful lives/allowance for credit losses)
o (iii) Corrections of prior period errors (E.g. theft that effected your figures)
DEFINITIONS (.05)
− Accounting policy: E.g. IAS 40 → CP model v FV model (choose) vs IAS 2 → Measure at lowest of
CO and NRV
− Change in accounting estimates: Uncertainty; revised on an annual basis (ensure reflection of the
most accurate estimate)
− Material: Will be given in a question
− Prior period error: Relates to errors that occur in the past
− Methods of treatment:
o [1] Retrospective application:
▪ Adjust comparative figures
▪ Change in accounting policy and errors
o [2] Prospective application:
▪ Apply change to current and future periods
• NOT what happened in the past, only from this period going forward
▪ Change/Update in accounting estimate (due to the fact that new info came to mind)
ACCOUNTING POLICIES (.07-.31):
− Selection and application of accounting policies:
o .07: If an IFRS specifically applies to an item, the acc policy applied will be determined by
the specific IFRS applied and relevant Guidance that was issued with the IFRS.
▪ E.g. IAS 16 for PPE → CP or rev model (thus look to the specific standard that is
applicable for the item)
o .10-.12: Not standard → IAS 8 applies
− Consistency of application:
o .13: E.g. For categories of item i.e. Raw materials @ FIFO, Fin goods @ weighted avg cost
− Changes in accounting policies:
o .14 (a) Compulsory [E.g. change to always capitalized borrowing costs in terms of the
standard] or (b) Voluntary [E.g. change the recognition of Investment instruments]
o .16 (a) [E.g. Building → admin (IAS 16) → change intention to rent out → Investment
property (IAS 40)] & (b) [E.g. First time purchase of PPE and now will apply that
accounting policy for the first time]
o Applying changes in accounting policy:
▪ .19
▪ Retrospective application (.22)
• Vs. Prospective application:
o Apply new policy to transactions occurring after the date that the
policy is changed
o Current and going forward
o If impracticable
o Limitations on retrospective application (.23-.27):
▪ .23: E.g. due to record holding
1
,IAS 1, IAS 8: EXAMPLE OF FINANCIAL STATEMENTS
Change in accounting policy:
Previously company X expensed borrowing cost through profit and loss, but a change in the accounting
policy requires that borrowing cost must be capitalised. Retrospective application.
Assume borrowing costs have already correctly been taken into account in the calculation of current tax.
The amount of borrowing costs was as follows:
2009 CY 2008 PY 2007
R R R
Borrowing cost 28 20 25
Old: Correction:
Dt Interest expenses (P/L) Dt Asset (SFP)
Ct Bank (SFP) Ct Interest expense (P/L)
CHANGE IN ACCOUTING POLICY:
1) Which line items are being effected? In both the SCI and SCE
o SCI: Interest expense/Finance cost
o SFP: Specific asset
2) What is happening with the line item? Increase or Decrease?
o Finance cost: decrease
o Asset: increase
3) What is the amounts by which the relevant items will increase or decrease?
o Finance cost: Change/movement in the year (period effect)
• 2009: 28 000 → decrease
• 2008: 20 000 → decrease
• 2007: 25 000 → decrease (should have ben capitalised against asset)
o Asset: Cumulative effect (not a period effect)
• 2009: Increase 73 000
• 2008: Increase with 45 000
• 2007: Increase asset with 25 000
4) Brackets or not in note disclosure?
o SCI: What is the effect on profit?
• Expense is decreasing, thus the profit increases (THUS NO BRACKETS)
o SFP: What is the effect on equity? E = A - L
• Asset is increasing, thus the equity will also increase (THUS NO BRACKETS)
5) Tax
o Current: No change, interest deduction in year incurred
• Accounting treatment does not affect the tax calculation
o Deferred tax
• Old policy had no effect on deferred tax
• New policy
▪ 2007 asset:
- CA: +25 000 & TB: 0 (Not deductible in future)
- TD: 25 000 taxable (liability) X 28% = 7000 Ct
▪ 2008 asset:
- CA: +45 000 & TB: 0
- TD: 45 000 taxable X 28% = 12 600 Ct
- MOVEMENT: Increase liability
▪ Dt Income tax expense (P/L) 5600
▪ Ct Deferred tax (SFP) 5600
▪ 2009 asset:
- CA: +73 000 & TB:0
- TD: 73 000 taxable X 28% = 20 440 Ct
- MOVEMENT: Increase liability
▪ Dt Income tax expense (P/L) 7840
▪ Ct Deferred tax (SFP) 7840
2
, STATEMENT OF COMPREHENSIVE INCOME OF XXX FOR THE YEAR ENDED XXX
(Above-mentioned matters have already been take correctly into account)
2009 2008
Notes
Profit before finance cost and tax 599.20 450.20
Finance cost (40) (30)
Profit before tax 2 559.20 420.20
Tax (168) (126)
Profit for the period 391.20 294.20
Other comprehensive income - -
Total comprehensive income for the period 391.20 294.20
STATEMENT OF CHANGES IN EQUITY OF XXX FOR THE YEAR ENDED XXX
Retained earnings
2009 2008
Opening balance 1 284 1 000
(before above-mentioned matters have been taken into account)
Dividends paid - (3)
NOTES TO THE FINANCIAL STATEMENTS OF XXX FOR THE YEAR ENDED XXX
1. Accounting policy
Financial statements are prepared in accordance with …. The accounting policy followed corresponds
to that of previous periods, except for the change in …, as disclosed in note 4.
2. Included in profit before tax: 2009 2008
Expenses:
• Depreciation - vehicles 80 60
- machines 40 50
4. Changes in accounting policy
Nature and reason………………..
2009 2008 1/1/2008
Effect w.r.t.
2007.
Decrease in finance cost/interest 28 20
(Increase) in tax expense (Not split to (7.8) (5.6)
current and deferred tax)
Increase in profit for the period 20.2 14.4
Effect in the SCI → Movement for the year
Profit increase: No ()
Profit decrease: ()
Increase in equity- beginning of period 32.4 18
Increase in equity- end of period 52.6 32.4
Effect on SCE
Increase in machinery 73 45 25
(Increase) in current tax liability - - -
(Increase) in deferred tax liability (20.4) (12.6) (7)
Increase in equity 52.6 32.4 18
Effect in SFP
Equity increase: No ()
Equity decrease: ()
Increase in basic earnings per share xx cent xx cent
3
ETIMATES AND ERRORS
IAS 8
SCOPE (.04)
− Choice of accounting policy
− Accounting for:
o (i) Changes in accounting policy (E.g. Inventory: Avg → FIFO)
o (ii) Changes in accounting estimates (E.g. Depr/useful lives/allowance for credit losses)
o (iii) Corrections of prior period errors (E.g. theft that effected your figures)
DEFINITIONS (.05)
− Accounting policy: E.g. IAS 40 → CP model v FV model (choose) vs IAS 2 → Measure at lowest of
CO and NRV
− Change in accounting estimates: Uncertainty; revised on an annual basis (ensure reflection of the
most accurate estimate)
− Material: Will be given in a question
− Prior period error: Relates to errors that occur in the past
− Methods of treatment:
o [1] Retrospective application:
▪ Adjust comparative figures
▪ Change in accounting policy and errors
o [2] Prospective application:
▪ Apply change to current and future periods
• NOT what happened in the past, only from this period going forward
▪ Change/Update in accounting estimate (due to the fact that new info came to mind)
ACCOUNTING POLICIES (.07-.31):
− Selection and application of accounting policies:
o .07: If an IFRS specifically applies to an item, the acc policy applied will be determined by
the specific IFRS applied and relevant Guidance that was issued with the IFRS.
▪ E.g. IAS 16 for PPE → CP or rev model (thus look to the specific standard that is
applicable for the item)
o .10-.12: Not standard → IAS 8 applies
− Consistency of application:
o .13: E.g. For categories of item i.e. Raw materials @ FIFO, Fin goods @ weighted avg cost
− Changes in accounting policies:
o .14 (a) Compulsory [E.g. change to always capitalized borrowing costs in terms of the
standard] or (b) Voluntary [E.g. change the recognition of Investment instruments]
o .16 (a) [E.g. Building → admin (IAS 16) → change intention to rent out → Investment
property (IAS 40)] & (b) [E.g. First time purchase of PPE and now will apply that
accounting policy for the first time]
o Applying changes in accounting policy:
▪ .19
▪ Retrospective application (.22)
• Vs. Prospective application:
o Apply new policy to transactions occurring after the date that the
policy is changed
o Current and going forward
o If impracticable
o Limitations on retrospective application (.23-.27):
▪ .23: E.g. due to record holding
1
,IAS 1, IAS 8: EXAMPLE OF FINANCIAL STATEMENTS
Change in accounting policy:
Previously company X expensed borrowing cost through profit and loss, but a change in the accounting
policy requires that borrowing cost must be capitalised. Retrospective application.
Assume borrowing costs have already correctly been taken into account in the calculation of current tax.
The amount of borrowing costs was as follows:
2009 CY 2008 PY 2007
R R R
Borrowing cost 28 20 25
Old: Correction:
Dt Interest expenses (P/L) Dt Asset (SFP)
Ct Bank (SFP) Ct Interest expense (P/L)
CHANGE IN ACCOUTING POLICY:
1) Which line items are being effected? In both the SCI and SCE
o SCI: Interest expense/Finance cost
o SFP: Specific asset
2) What is happening with the line item? Increase or Decrease?
o Finance cost: decrease
o Asset: increase
3) What is the amounts by which the relevant items will increase or decrease?
o Finance cost: Change/movement in the year (period effect)
• 2009: 28 000 → decrease
• 2008: 20 000 → decrease
• 2007: 25 000 → decrease (should have ben capitalised against asset)
o Asset: Cumulative effect (not a period effect)
• 2009: Increase 73 000
• 2008: Increase with 45 000
• 2007: Increase asset with 25 000
4) Brackets or not in note disclosure?
o SCI: What is the effect on profit?
• Expense is decreasing, thus the profit increases (THUS NO BRACKETS)
o SFP: What is the effect on equity? E = A - L
• Asset is increasing, thus the equity will also increase (THUS NO BRACKETS)
5) Tax
o Current: No change, interest deduction in year incurred
• Accounting treatment does not affect the tax calculation
o Deferred tax
• Old policy had no effect on deferred tax
• New policy
▪ 2007 asset:
- CA: +25 000 & TB: 0 (Not deductible in future)
- TD: 25 000 taxable (liability) X 28% = 7000 Ct
▪ 2008 asset:
- CA: +45 000 & TB: 0
- TD: 45 000 taxable X 28% = 12 600 Ct
- MOVEMENT: Increase liability
▪ Dt Income tax expense (P/L) 5600
▪ Ct Deferred tax (SFP) 5600
▪ 2009 asset:
- CA: +73 000 & TB:0
- TD: 73 000 taxable X 28% = 20 440 Ct
- MOVEMENT: Increase liability
▪ Dt Income tax expense (P/L) 7840
▪ Ct Deferred tax (SFP) 7840
2
, STATEMENT OF COMPREHENSIVE INCOME OF XXX FOR THE YEAR ENDED XXX
(Above-mentioned matters have already been take correctly into account)
2009 2008
Notes
Profit before finance cost and tax 599.20 450.20
Finance cost (40) (30)
Profit before tax 2 559.20 420.20
Tax (168) (126)
Profit for the period 391.20 294.20
Other comprehensive income - -
Total comprehensive income for the period 391.20 294.20
STATEMENT OF CHANGES IN EQUITY OF XXX FOR THE YEAR ENDED XXX
Retained earnings
2009 2008
Opening balance 1 284 1 000
(before above-mentioned matters have been taken into account)
Dividends paid - (3)
NOTES TO THE FINANCIAL STATEMENTS OF XXX FOR THE YEAR ENDED XXX
1. Accounting policy
Financial statements are prepared in accordance with …. The accounting policy followed corresponds
to that of previous periods, except for the change in …, as disclosed in note 4.
2. Included in profit before tax: 2009 2008
Expenses:
• Depreciation - vehicles 80 60
- machines 40 50
4. Changes in accounting policy
Nature and reason………………..
2009 2008 1/1/2008
Effect w.r.t.
2007.
Decrease in finance cost/interest 28 20
(Increase) in tax expense (Not split to (7.8) (5.6)
current and deferred tax)
Increase in profit for the period 20.2 14.4
Effect in the SCI → Movement for the year
Profit increase: No ()
Profit decrease: ()
Increase in equity- beginning of period 32.4 18
Increase in equity- end of period 52.6 32.4
Effect on SCE
Increase in machinery 73 45 25
(Increase) in current tax liability - - -
(Increase) in deferred tax liability (20.4) (12.6) (7)
Increase in equity 52.6 32.4 18
Effect in SFP
Equity increase: No ()
Equity decrease: ()
Increase in basic earnings per share xx cent xx cent
3
