In this article, we delve into the crucial concepts of accounting policies, changes in accounting estimates, and errors as outlined in Ind AS 8 (Indian Accounting Standards 8). We also explore the differences between Ind AS 8 and its international counterpart, IAS 8.
Accounting Policies, Change in Accounting Estimates and Errors by incorporating Changes as per Companies (Indian Accounting Standards) Amendment Rules 2023. (Ind AS 8).
Accounting is the language of business, and financial statements are the means by which companies communicate their financial performance to stakeholders. In this comprehensive guide, we will delve into the intricate world of accounting policies, changes in accounting estimates, and errors, focusing on the Indian context and the relevant Indian Accounting Standard (Ind AS) 8.
Before we dive into the intricacies of accounting policies, changes in estimates, and errors, let’s briefly explore the differences between Ind AS 8 and its international counterpart, IAS 8. These distinctions may seem subtle but are crucial for accounting professionals operating under the Indian regulatory framework.
i. Language and Terminology:
Ind AS 8 employs the phrase “Approval of the financial statements for issue” when discussing financial statements considered for events after the reporting period. In contrast, IAS 8 uses the term “Authorization of the financial statements for issue” for the same context.
ii. Financial Statement Terminology:
Ind AS 8 uses the terms “Statement of Profit and Loss” and “Balance Sheet.” On the other hand, IAS 8 utilizes “Statement of Comprehensive Income” and “Statement of Financial Position.”
Despite these differences, the core content and principles of Ind AS 8 and IAS 8 are largely identical. Thus, the following sections of this article are applicable to both Ind AS 8 and IAS 8.
Ind AS 8, which pertains to “Accounting Policies, Changes in Accounting Estimates, and Errors,” provides comprehensive guidelines in the following areas:
The primary objective of Ind AS 8 (as well as IAS 8) is to set the criteria for selecting and altering accounting policies. Additionally, it outlines the accounting treatment and disclosure related to changes in accounting policies, changes in accounting estimates, and corrections of errors.
A. Definition of Accounting Policies:
Accounting policies encompass specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. These policies form the foundation of financial reporting and affect how transactions are recognized, measured, and presented.
B. Selection and Application of Accounting Policies:
The selection and application of accounting policies are crucial aspects of financial reporting. Here are the key considerations in this context:
i. Determining Accounting Policies: Entities should determine accounting policies by considering the relevant Ind AS specifically applicable to the transaction or event.
ii. Judgment and Non-Specific Ind AS: In cases where no specific Ind AS applies to a transaction, event, or condition, management should exercise judgment to develop and apply an accounting policy that results in information that is both relevant and reliable.
iii. Sources of Judgment: When making these judgments, management should refer to specific Ind ASs dealing with similar and related issues. In the absence of such Ind ASs, they should turn to the conceptual framework.
Consistency in accounting policies is a fundamental principle. It ensures that similar transactions and events are treated consistently across periods. This consistency fosters comparability and reliability in financial reporting.
D. Changes in Accounting Policies:
Changing an accounting policy is not a decision to be taken lightly. Ind AS 8 allows for changes in accounting policies under two primary conditions:
a. Required by an Ind AS: A change in accounting policy can be made if it is required by a specific Ind AS. Regulatory changes and updates may necessitate such adjustments.
b. Improving Information Relevance and Reliability: An entity can change an accounting policy if it results in the financial statements providing more reliable and relevant information about the effects of transactions, events, or conditions on the entity’s financial position, financial performance, or cash flows.
E. First-Time Adoption:
It’s important to note that the first-time adoption of an accounting policy, such as the transition to Ind AS, is not considered a change in accounting policy. The transition process is governed by specific transitional provisions, if any, in the applicable Ind AS.
F. Applying Changes in Accounting Policies:
The application of changes in accounting policies depends on the specific circumstances. Here’s how it is addressed:
G. Retrospective Application:
Retrospective application is a critical aspect of implementing changes in accounting policies. When applied retrospectively, the entity adjusts the opening balance of each affected component of equity for the earliest prior period presented. Additionally, other comparative amounts disclosed for each prior period are restated to reflect the new accounting policy’s impact.
H. Impracticable Retrospective Application:
In some cases, applying a new accounting policy retrospectively may be impracticable due to the volume of data or other reasons. In such instances, the entity adjusts the comparative information to apply the new accounting policy prospectively from the earliest date feasible.
Estimation is an inherent part of accounting due to the uncertainties present in business activities. Many items in financial statements cannot be measured precisely and must be estimated. Changes in these estimates can have a significant impact on financial reporting. Here’s how changes in accounting estimates are handled:
i. Changes in Accounting Estimates: Estimation involves making judgments based on the latest available, reliable information. Changes in accounting estimates occur when these judgments are updated based on new information.
ii. Accounting Treatment of Changes in Accounting Estimates: When changes in accounting estimates occur, the effect of these changes is recognized prospectively in profit or loss. This means that the impact of the change is included in the current period’s profit or loss and in future periods as applicable. The rationale behind this approach is to reflect the evolving understanding of financial events and conditions.
Errors can occur in various aspects of financial statements, such as recognition, measurement, presentation, or disclosure. These errors, if material, must be corrected. Here’s how they are addressed:
i. Errors: Errors can arise in respect of the recognition, measurement, presentation, or disclosure of elements in financial statements.
ii. Accounting Treatment of Errors:
iii. Prospective Application: In cases where it’s impracticable to determine the cumulative effect of an error at the beginning of the current period, the entity should correct the error prospectively. This means that the error is applied from the earliest date at which it is practical to do so.
The Companies (Indian Accounting Standards) Amendment Rules 2021 introduced critical changes related to references to the Conceptual Framework. These changes ensure alignment with the “Conceptual Framework for Financial Reporting under Indian Accounting Standards” issued by the Institute of Chartered Accountants of India.
This amendment specifically affects the references to the Conceptual Framework in Ind AS 8. It replaces the word “Framework” with the words “Conceptual Framework for Financial Reporting under Indian Accounting Standards (Conceptual Framework) *issued by the Institute of Chartered Accountants of India.”
It also addresses the application of these amendments for annual periods beginning on or after 1st April 2021. Entities are expected to apply the amendments to paragraph 11(b) retrospectively, aligning them with the principles outlined in Ind AS 8. However, in cases where retrospective application is deemed impractical or entails undue cost or effort, the amendments are applied by reference to relevant provisions of Ind AS 8.
Additionally, when considering regulatory account balances, entities are encouraged to follow the definitions, recognition criteria, and measurement concepts in the Conceptual Framework for Financial Reporting under Indian Accounting Standards instead of those in the Conceptual Framework issued in 2020.
Accounting policies, changes in accounting estimates, and the correction of errors form the bedrock of financial reporting and contribute to the transparency, consistency, and reliability of financial statements. Ind AS 8, while sharing significant common ground with IAS 8, is essential for Indian entities to ensure compliance with accounting standards and regulations.
This comprehensive guide has provided an in-depth understanding of these critical aspects of accounting. By following the guidelines outlined in Ind AS 8 and considering the recent amendments, Indian businesses can continue to provide accurate and relevant financial information to their stakeholders.
Remember, accounting is not just about numbers; it’s about telling a compelling financial story to your stakeholders and ensuring that it’s a story based on sound principles, judgments, and practices.
(Republished with amendments)