IAS 8 is about implementation of accounting policies, the accounting for changes in estimates, and the correction of prior period errors.
The standard establishes rules for developing accounting methods for extra factors that provide reliable information as well as demands compliance with any specific IFRS that apply to a transaction, occurrence, or condition. Changes in accounting policies and errors/corrections are typically recorded retroactively, while adjustments to accounting estimates are recorded prospectively.
IAS 8 was updated in December 2005, and it is now applicable to fiscal years starting on or after that date.
Accounting policies selection and application
When a Standard or an Interpretation applies explicitly to a transaction, event, or circumstance, the accounting policy or policies that apply to that item must be established by applying the Standard or Interpretation and considering any appropriate Implementation Guidance published by the IASB for the Standard. In other words, when a Standard or an Interpretation applies specifically to an item, the accounting policy or policies that apply to that item must be decided by using the Standard or Interpretation.
Management must use its best judgment to create and put into place an accounting policy that generates relevant and reliable information where there is neither a Standard nor an Interpretation that specifically relates to a transaction, event, or circumstance.
Management must consider and weigh the applicability of the sources mentioned in descending order before reaching this decision related to the Framework’s definitions, standards for asset and liability recognition, and measurement guidelines for revenues and expenditures.
As long as they do not clash with the sources indicated in paragraph 11, management may also take into consideration the most current announcements of other standard-setting organizations that use a similar conceptual framework to produce accounting standards.
Consistency of accounting policies
For similar transactions, other occurrences, and circumstances, an entity must choose and apply its accounting policies consistently, unless a Standard or Interpretation requires or enables the categorization of items for which other rules may be acceptable. A proper accounting strategy must be devised and consistently applied to each category if a Standard or Interpretation requires or enables such classification.
Changes to accounting policies
An organization may change its accounting policy only if the change:
- a requirement of a standard or interpretation
- or conclusions in the financial statements that provide more accurate and pertinent information on how certain acts, other occasions, or situations affect the entity’s financial position, financial performance, or cash flows.
Note that applying a policy to a kind of transaction or occurrence that has never happened or is small does not constitute changing an accounting policy.
If a change in accounting policy is required by a new IASB standard or interpretation, then the change is taken into account for in accordance with the guidelines of that latest pronouncement. Whereas if new pronouncement does not specify any huge difference in its guidelines, then the change in accounting policy is applied retrospectively.
The retrospective application includes changing the starting balance of each affected equity component for the first previous period reported as well as the other similar amounts disclosed for each prior period as if the new accounting standard had been in place from the start.
- However, the organization must implement the new accounting policy to the carrying amounts of assets and liabilities as of the start of the earliest period for which retrospective application is practical, which might be the current period, and make a corresponding adjustment to the opening balance of every affected component if it is difficult or impossible to ascertain either as the period-specific effects or the cumulative impact of the change for one or more prior periods presented.
Disclosures on changes to accounting practices under IAS 8
The following disclosures are some of those related to accounting policy changes brought on by new standards or interpretations:
- the name of the revised standard.
- how the accounting policy changed and its nature
- an examination of the transitional clauses, particularly those that could influence future periods
- The amount of the adjustment is shown, to the extent practicable, for the current period and each prior period:
- for each affected line item on the financial statement, and
- pertaining to basic and diluted earnings per share (only if the entity is applying IAS 33)
- the amount of the adjustment that applies to earlier periods, wherever practicable.
- a description and illustration of the accounting policy change were executed if the retrospective implementation is not possible.
These disclosures need not be repeated in the financial statements for subsequent periods.
The following disclosures pertain to changes in voluntary accounting principles:
- how the accounting policy changed and its nature
- the justifications for why using the new accounting technique produces more reliable and relevant data
- the amount of the adjustment is shown, to the extent practicable, for the current period and each prior period:
- for each affected line item on the financial statement, and
- pertaining to basic and diluted earnings per share (only if the entity is applying IAS 33)
- the amount of the adjustment that applies to earlier periods, wherever practicable.
- an explanation and description of how the accounting policy change was executed if retrospective application is not possible.
These disclosures need not be repeated in the financial statements for subsequent periods.
An entity must report this fact as well as any known or reasonably estimable facts relevant to estimating the prospective impact of the new pronouncement in the year it is applied if it has not yet implemented a new standard or interpretation that has been released but is not yet effective.
Changes to accounting estimates under IAS 8
In the following circumstances, the effect of a change in an accounting estimate must be recognized prospectively by adding it to profit or loss: the change period, if it just affects that period, or the change period and succeeding periods, if it affects both.
If an accounting estimate changes and the outcome affects assets, liabilities, or equity items, the change is recorded by adjusting the carrying amount of the relevant asset, obligation, or equity item in the period in which the estimate changed.
Disclosures to accounting estimates under IAS 8
Disclose:
The sort and magnitude of an accounting estimate adjustment that has an impact on the current period or is anticipated to have an impact on future periods. The firm must provide the information even if it is not practical to calculate the impact’s magnitude in future periods.
Errors
IAS 8’s primary idea is that a company must correct any significant prior-period errors retrospectively in the first set of financial statements permitted to be released after they are discovered by: restatement of similar figures for the prior period(s) in which the error occurred; or the opening balances of assets, liabilities, and equity are reissued for the earliest previous period if the error occurred earlier than the earliest previous period indicated.
However, the entity is required to restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented (which may be the current period).
Additionally, the organization must restate the comparable information prospectively as of the earliest possible date if it is difficult to determine the cumulative effect of an error on all prior periods at the start of the current period.
Disclosures on prior period errors
Disclosures related to prior periods include:
- A description of the errors of the prior era
- The amount of the adjustment, to the degree practicable, for each reported prior period
- for each affected line item on the financial statement, and
- pertaining to basic and diluted earnings per share (only if the entity is applying IAS 33)
- the sum of the adjustment made at the start of the period prior to the period being shown.
- If a retrospective restatement is not possible, provide an explanation and a breakdown of the correction process.
Also read, IAS-10, Events after reporting date
These disclosures need not be repeated in the financial statements for subsequent periods.
