Deloitte-Roger Nasr

IAS 8IAS 8

Accounting Policies, Accounting Policies, Changes in Changes in Accounting Estimates Accounting Estimates and Errorsand Errors

Presented by – Presented by – Roger Nasr, DeloitteRoger Nasr, Deloitte

Deloitte-Roger Nasr

Structure of the StandardStructure of the Standard

ObjectiveObjective Scope Scope DefinitionsDefinitions Accounting policiesAccounting policies changes in accounting estimateschanges in accounting estimates ErrorsErrors

IAS 8

Deloitte-Roger Nasr

ObjectiveObjective

To prescribe the criteria for selecting and To prescribe the criteria for selecting and changing accounting policies and the changing accounting policies and the accounting treatment of changes in accounting treatment of changes in accounting policies, accounting estimates accounting policies, accounting estimates and errors...and errors...

… … To enhance comparability over time To enhance comparability over time and with other entitiesand with other entities

IAS 8

Deloitte-Roger Nasr

Scope Scope

IAS 8 applies IAS 8 applies Selecting and applying accounting policiesSelecting and applying accounting policies Accounting for changes in accounting policiesAccounting for changes in accounting policies Accounting for changes in accounting Accounting for changes in accounting

estimatesestimates Correction of Prior period errorsCorrection of Prior period errors

IAS 8

Deloitte-Roger Nasr

Accounting PoliciesAccounting Policies Selection of Accounting Policies Selection of Accounting Policies

(hierarchy)(hierarchy)1. Standard and mandatory appendices1. Standard and mandatory appendices2. Interpretations2. Interpretations3. Non-mandatory appendices3. Non-mandatory appendices4. Implementation guidance4. Implementation guidance5. Framework5. Framework6. Pronouncements by other standard6. Pronouncements by other standard

setters with similar frameworksetters with similar framework

IAS 8

Deloitte-Roger Nasr

Accounting PoliciesAccounting Policies

In the absence of a standard or interpretationIn the absence of a standard or interpretation Use judgment in developing and applying an Use judgment in developing and applying an

accounting policy that result in information that is accounting policy that result in information that is • RelevantRelevant• ReliableReliable

Faithful representationFaithful representation Substance over formSubstance over form NeutralNeutral PrudentPrudent completecomplete

Deloitte-Roger Nasr

Accounting PoliciesAccounting Policies

Consistency of Accounting PoliciesConsistency of Accounting Policies Select and apply accounting policies Select and apply accounting policies

consistently for similar transactionsconsistently for similar transactions If categorization is permitted or requiredIf categorization is permitted or required

Apply accounting policy for each category consistentlyApply accounting policy for each category consistently

Deloitte-Roger Nasr

Changes in accounting Changes in accounting policiespolicies

A change in accounting policy should be A change in accounting policy should be made only if made only if required by a standard or an interpretation required by a standard or an interpretation The change results in the financial statements The change results in the financial statements

providing reliable and more relevant providing reliable and more relevant information about the effects of events or information about the effects of events or transactions on the financial position and transactions on the financial position and performance and cash flowsperformance and cash flows

IAS 8

Deloitte-Roger Nasr

Changes in accounting Changes in accounting policiespolicies

A change in accounting policy which is made on A change in accounting policy which is made on the adoption of a Standard should be accounted the adoption of a Standard should be accounted for for in accordance with the specific transitional provisions in accordance with the specific transitional provisions

in that Standardin that Standard if no transitional provisions if no transitional provisions retrospective applicationretrospective application

A voluntary change in accounting policy should A voluntary change in accounting policy should be applied retrospectivelybe applied retrospectively Early Application is not a voluntary changeEarly Application is not a voluntary change

IAS 8

Deloitte-Roger Nasr

Changes in Accounting PoliciesChanges in Accounting Policies

Retrospective ApplicationRetrospective Application Adjust the Opening balance of each affected Adjust the Opening balance of each affected

component of equity for the earliest prior component of equity for the earliest prior period presented and the other comparative period presented and the other comparative amounts disclosed for each period presentedamounts disclosed for each period presented

As if the new accounting policy had always As if the new accounting policy had always been appliedbeen applied

If impracticable (undue cost and effort), If impracticable (undue cost and effort), restate prospectively from the earliest date restate prospectively from the earliest date practicablepracticable

Deloitte-Roger Nasr

Significant disclosures of changes Significant disclosures of changes in accounting policiesin accounting policies

The title of the standardThe title of the standard Is made in accordance with the Is made in accordance with the

transactional provisions, if applicabletransactional provisions, if applicable The nature of the changeThe nature of the change The amount of adjustment on current and The amount of adjustment on current and

each prior period presentedeach prior period presented The amount of adjustment related to The amount of adjustment related to

periods prior to those presentedperiods prior to those presented

Deloitte-Roger Nasr

ErrorsErrors

Errors are items or events of such significance Errors are items or events of such significance that the F/S of one or more periods can no that the F/S of one or more periods can no longer be considered to have been reliable at longer be considered to have been reliable at the date of their issuethe date of their issue

Disclosure requiredDisclosure required the nature of the error, amount of correction...the nature of the error, amount of correction...

IAS 8

Deloitte-Roger Nasr

ErrorsErrors

Errors should be corrected retrospectively Errors should be corrected retrospectively in the 1in the 1stst set of F/S authorised for issue set of F/S authorised for issue after their discoveryafter their discovery Restating the comparative amounts for the Restating the comparative amounts for the

prior periods presentedprior periods presented Restate the opening balances of Assets, Restate the opening balances of Assets,

Liabilities and equity for the earliest period Liabilities and equity for the earliest period presented if error occurred prior to the presented if error occurred prior to the comparative periods presentedcomparative periods presented

Deloitte-Roger Nasr

Changes in accounting Changes in accounting estimatesestimates

Accounting estimates needed to prepare F/SAccounting estimates needed to prepare F/S Bad debts, inventory obsolescence, warrant Bad debts, inventory obsolescence, warrant

obligations, useful life of assetsobligations, useful life of assets Due to changes in circumstances and judgments Due to changes in circumstances and judgments

used in estimates and uncertainties inherent in used in estimates and uncertainties inherent in business activitiesbusiness activities

Change in an accounting estimate Change in an accounting estimate included in the period of the change and future included in the period of the change and future

periods (if change affects future periods)periods (if change affects future periods) Same income statement classification as was Same income statement classification as was

used previously for the estimateused previously for the estimate

IAS 8

Deloitte-Roger Nasr

Changes in accounting policies Changes in accounting policies vs. changes in estimates.vs. changes in estimates.

IAS 8

Situation AE AP

1 The management of a hotel changed its strategic plans and as a result the rooms had to be refurbished within 2 years in stead of 4. Consequently the period over which the 7 years refurbishment is depreciated has decreased.

2 A trade company decided to change the calculation of its allowance for bad debts. In previous years the calculation of the allowance for bad debts was based on fixed percentages multiplied by the total outstanding balance over 90 days. Now, the company calculates the allowance for bad debts on a review of individual balances.

3 An enterprise dealing in electronic equipment decided to change the valuation of inventories from FIFO to Weighted Average.

4 In 1999, an enterprise adopts IAS 19, Employee Benefits. Previously, retirements benefits were already provided for using an actuarial valuation method. However, some adjustments result from the application of IAS 19

5 In order to better reflect the depreciation pattern of a machine, the depreciation method of this machine is changed from the straight-line method to the diminishing balance method

Deloitte-Roger Nasr

Retrospective Restatement of Retrospective Restatement of ErrorsErrors

During 20-2, Beta Co discovered that some products that had been During 20-2, Beta Co discovered that some products that had been sold during 20-1 were incorrectly included in inventory at 31 sold during 20-1 were incorrectly included in inventory at 31 December 20-1 at CU6,500.*December 20-1 at CU6,500.*

Beta’s accounting records for 20-2 show sales of CU104,000, cost Beta’s accounting records for 20-2 show sales of CU104,000, cost of goods sold of CU86,500 (including CU6,500 for the error in of goods sold of CU86,500 (including CU6,500 for the error in

opening inventory), and income taxes of CU5,250opening inventory), and income taxes of CU5,250.. In 20-1 Beta reported the followingIn 20-1 Beta reported the following

Deloitte-Roger Nasr

Retrospective Restatement of ErrorsRetrospective Restatement of Errors 20-1 opening retained earnings was CU20,000 and closing retained 20-1 opening retained earnings was CU20,000 and closing retained

earnings was CU34,000.earnings was CU34,000. Beta’s income tax rate was 30 per cent for 20-2 and 20-1. It had no other Beta’s income tax rate was 30 per cent for 20-2 and 20-1. It had no other

income or expenses.income or expenses. Beta had CU5,000 of share capital throughout, and no other components of Beta had CU5,000 of share capital throughout, and no other components of

equity except for retained earnings. Its shares are not publicly traded and it equity except for retained earnings. Its shares are not publicly traded and it does not disclose earnings per share.does not disclose earnings per share.

Restated Income statement is as followsRestated Income statement is as follows

Deloitte-Roger Nasr

Extracts from the NotesExtracts from the NotesSome products that had been sold in 20-1 were incorrectly included in Some products that had been sold in 20-1 were incorrectly included in inventory at 31 December 20-1 at CU6,500. The financial statements inventory at 31 December 20-1 at CU6,500. The financial statements of 20-1 have been restated to correct this error. The effect of the of 20-1 have been restated to correct this error. The effect of the restatement on those financial statements is summarised below. There restatement on those financial statements is summarised below. There is no effect in 20-2.is no effect in 20-2.

Statement of changes in Equity

Deloitte-Roger Nasr

Change in Accounting Policy with Change in Accounting Policy with Retrospective ApplicationRetrospective Application

During 20-2, Gamma Co changed its accounting policy for the During 20-2, Gamma Co changed its accounting policy for the treatment of borrowing costs that are directly attributable to the treatment of borrowing costs that are directly attributable to the acquisition of a hydro-electric power station under construction for acquisition of a hydro-electric power station under construction for use by Gamma. In previous periods, Gamma had capitalised such use by Gamma. In previous periods, Gamma had capitalised such costs. Gamma has now decided to treat these costs as an costs. Gamma has now decided to treat these costs as an expense, rather than capitalise them. Management judges that the expense, rather than capitalise them. Management judges that the new policy is preferable because it results in a more transparent new policy is preferable because it results in a more transparent treatment of finance costs and is consistent with local industry treatment of finance costs and is consistent with local industry practice, making Gamma’s financial statements more comparable.practice, making Gamma’s financial statements more comparable.

Gamma capitalised borrowing costs incurred of CU2,600 during 20-Gamma capitalised borrowing costs incurred of CU2,600 during 20-1 and CU5,200 in periods before 20-1. All borrowing costs incurred 1 and CU5,200 in periods before 20-1. All borrowing costs incurred in previous years in respect of the acquisition of the power station in previous years in respect of the acquisition of the power station were capitalised.were capitalised.

Gamma’s accounting records for 20-2 show profit before interest Gamma’s accounting records for 20-2 show profit before interest and income taxes of CU30,000; interest expense of CU3,000 (which and income taxes of CU30,000; interest expense of CU3,000 (which relates only to 20-2); and income taxes of CU8,100.relates only to 20-2); and income taxes of CU8,100.

Gamma has not yet recognised any depreciation on the power Gamma has not yet recognised any depreciation on the power station because it is not yet in use.station because it is not yet in use.

Deloitte-Roger Nasr

20-1 Income statement before 20-1 Income statement before changechange

• opening retained earnings was CU20,000 and closing retained earnings was CU32,600.• Gamma’s tax rate was 30 per cent for 20-2, 20-1 and prior periods.• Gamma had CU10,000 of share capital throughout, and no other components of equity except for retained earnings. Its shares are not publicly traded and it does not disclose earnings per share.

Deloitte-Roger Nasr

Income statement after changeIncome statement after change

Deloitte-Roger Nasr

Statement of changes in equity Statement of changes in equity after changeafter change

IAS 8

Deloitte-Roger Nasr

Extracts from the notesExtracts from the notes During 20-2, Gamma changed its accounting policy for the treatment of During 20-2, Gamma changed its accounting policy for the treatment of

borrowing costs related to a hydro-electric power station under construction for borrowing costs related to a hydro-electric power station under construction for use by Gamma. Previously, Gamma capitalised such costs. They are now use by Gamma. Previously, Gamma capitalised such costs. They are now written off as expenses as incurred. Management judges that this policy written off as expenses as incurred. Management judges that this policy provides reliable and more relevant information because it results in a more provides reliable and more relevant information because it results in a more transparent treatment of finance costs and is consistent with local industry transparent treatment of finance costs and is consistent with local industry practice, making Gamma’s financial statements more comparable. This change practice, making Gamma’s financial statements more comparable. This change in accounting policy has been accounted for retrospectively, and the in accounting policy has been accounted for retrospectively, and the comparative statements for 20-1 have been restated. The effect of the change comparative statements for 20-1 have been restated. The effect of the change on 20-1 is tabulated below. Opening retained earnings for 20-1 have been on 20-1 is tabulated below. Opening retained earnings for 20-1 have been reduced by CU3,640, which is the amount of the adjustment relating to periods reduced by CU3,640, which is the amount of the adjustment relating to periods prior to 20-1prior to 20-1

Deloitte-Roger Nasr

Prospective Application of a Change in Accounting Prospective Application of a Change in Accounting Policy When Retrospective Application is not Policy When Retrospective Application is not

PracticablePracticable During 20-2, Delta Co changed its accounting policy for depreciating property, During 20-2, Delta Co changed its accounting policy for depreciating property,

plant and equipment, so as to apply much more fully a components approach, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model.whilst at the same time adopting the revaluation model.

In years before 20-2, Delta’s asset records were not sufficiently detailed to In years before 20-2, Delta’s asset records were not sufficiently detailed to apply a components approach fully. At the end of 20-1, management apply a components approach fully. At the end of 20-1, management commissioned an engineering survey, which provided information on the commissioned an engineering survey, which provided information on the components held and their fair values, useful lives, estimated residual values components held and their fair values, useful lives, estimated residual values and depreciable amounts at the beginning of 20-2. However, the survey did and depreciable amounts at the beginning of 20-2. However, the survey did not provide a sufficient basis for reliably estimating the cost of those not provide a sufficient basis for reliably estimating the cost of those components that had not previously been accounted for separately, and the components that had not previously been accounted for separately, and the existing records before the survey did not permit this information to be existing records before the survey did not permit this information to be reconstructed.reconstructed.

Delta’s management considered how to account for each of the two aspects of Delta’s management considered how to account for each of the two aspects of the accounting change. They determined that it was not practicable to the accounting change. They determined that it was not practicable to account for the change to a fuller components approach retrospectively, or to account for the change to a fuller components approach retrospectively, or to account for that change prospectively from any earlier date than the start of account for that change prospectively from any earlier date than the start of 20-2. Also, the change from a cost model to a revaluation model is required to 20-2. Also, the change from a cost model to a revaluation model is required to be accounted for prospectively. Therefore, management concluded that it be accounted for prospectively. Therefore, management concluded that it should apply Delta’s new policy prospectively from the start of 20-2.should apply Delta’s new policy prospectively from the start of 20-2.

Deloitte-Roger Nasr

Additional InformationAdditional Information

Deloitte-Roger Nasr

Extract from the NotesExtract from the Notes

From the start of 20-2, Delta changed its accounting policy for From the start of 20-2, Delta changed its accounting policy for depreciating property, plant and equipment, so as to apply much more depreciating property, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the fully a components approach, whilst at the same time adopting the revaluation model. Management takes the view that this policy provides revaluation model. Management takes the view that this policy provides reliable and more relevant information because it deals more accurately reliable and more relevant information because it deals more accurately with the components of property, plant and equipment and is based on with the components of property, plant and equipment and is based on up-to-date values. The policy has been applied prospectively from the up-to-date values. The policy has been applied prospectively from the start of 20-2 because it was not practicable to estimate the effects of start of 20-2 because it was not practicable to estimate the effects of applying the policy either retrospectively, or prospectively from any applying the policy either retrospectively, or prospectively from any earlier date. Accordingly, the adoption of the new policy has no effect earlier date. Accordingly, the adoption of the new policy has no effect on prior years. on prior years.

The effect on the current year is to The effect on the current year is to increase the carrying amount of property, plant and equipment at the start of increase the carrying amount of property, plant and equipment at the start of

the year by CU6,000;the year by CU6,000; increase the opening deferred tax provision by CU1,800;increase the opening deferred tax provision by CU1,800; create a revaluation reserve at the start of the year of CU4,200;create a revaluation reserve at the start of the year of CU4,200; increase depreciation expense by CU500; and increase depreciation expense by CU500; and reduce tax expense by CU150.reduce tax expense by CU150.