Accounting Policies, Change in Accounting Estimates and Errors (Latest up to Aug 29,2020 and Simplest version)
Every Accounting Standard has significant place in modern day accounting as those give unprecedented glory to the already fast growing profession of the world. In this juncture, we have to understand latest and simplest version of IAS 8 and INDAS 8.
1.Following are the Accounting Standards related with “Accounting Policies, Change in Accounting Estimates and Errors “
A. IAS 8
B. INDAS 8
2.Differences between IAS 8 and INDAS 8
|INDAS 8||IAS 8|
|1. The words “Approval of the financial statements for issue have been used “in context of financial statements considered for the purpose of events after the reporting period.||1. The words “Authorization of the financial statements for issue have been used “in context of financial statements considered for the purpose of events after the reporting period.|
|2.Relevant terms are Statement of profit and loss and balance sheet
|2. Relevant terms are Statement of Comprehensive Income and Statement of Financial Position|
No Major differences between INDAS 8and IAS 8 except the above. Therefore, the following paragraphs relate to both INDAS 8 and IAS 8
The standards sets out:
-Changes in accounting policies
-Changes in accounting estimates
-The corrections of errors
The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors.
5. Accounting Policies
A. Definition of Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
B. Selection and Application of accounting Policies.
Following are the important points in this connection.
i. The entity should determine the accounting policy by considering the relevant INDAS specifically applies to the transaction
ii. In the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable.
iii. In making that judgement ,the management should refer the following sources in the descending order :
a. INDASs dealing with similar and related issues
b. The Framework
C. The Accounting Standards demand Consistency of Accounting Policies for Similar Transactions and from period to period.
D. Changes in accounting policies
An entity shall change an accounting policy only if the change:
(a) is required by an Ind AS; or
(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.
E. First time adoption of an Accounting policy is not a change in Accounting Policy
F. Applying changes in accounting policies
(i). An entity shall account for a change in accounting policy resulting from the initial application of an Ind AS in accordance with the specific transitional provisions, if any, in that Ind AS; and
(ii) when an entity changes an accounting policy upon initial application of an Ind AS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively.
G. Retrospective Application
when a change in accounting policy is applied retrospectively ,the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
H.When it is impracticable to apply retrospective application, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable .
6. Changes in accounting estimates
As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required of:
(a) bad debts;
b) inventory obsolescence;
(c) the fair value of financial assets or financial liabilities;
(d) the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and
(e) warranty obligations.
7. Accounting treatment of Changes in accounting estimates
The effect of change in accounting estimate is recognized prospectively in profit or loss (By including in the current period and future period profit or loss)
Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements.
9. Accounting treatment of errors
An entity shall correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
(b) 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.
When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable.