Ias08_bv2009.fm

International Accounting Standard 8
Accounting Policies, Changes in Accounting Estimates and Errors This version includes amendments resulting from IFRSs issued up to 31 December 2008. IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies wasissued by the International Accounting Standards Committee in December 1993. It replacedIAS 8 Unusual and Prior Period Items and Changes in Accounting Policies (issued in February 1978).
The Standing Interpretations Committee developed two Interpretations relating to IAS 8: SIC-2 Consistency—Capitalisation of Borrowing Costs (issued December 1997) SIC-18 Consistency—Alternative Methods (issued January 2000).
Paragraphs of IAS 8 (1993) that dealt with discontinued operations were superseded byIAS 35 Discontinuing Operations (issued in June 1998 and superseded by IFRS 5).
In April 2001 the International Accounting Standards Board (IASB) resolved that allStandards and Interpretations issued under previous Constitutions continued to beapplicable unless and until they were amended or withdrawn.
In December 2003 the IASB issued a revised IAS 8 with a new title—Accounting Policies, Changesin Accounting Estimates and Errors. The revised standard also replaced SIC-2 and SIC-18.
IAS 8 and its accompanying documents have been amended by the following IFRSs: IAS 23 Borrowing Costs (as revised in March 2007)* IAS 1 Presentation of Financial Statements (as revised in September 2007)* Improvements to IFRSs (issued May 2008).* The following Interpretations refer to IAS 8: SIC-7 Introduction of the Euro (issued May 1998 and subsequently amended) SIC-10 Government Assistance—No Specific Relation to Operating Activities (issued July 1998 and subsequently amended) SIC-12 Consolidation—Special Purpose Entities (issued December 1998 and subsequently amended) SIC-13 Jointly Controlled Entities—Non-Monetary Contributions by Venturers (issued December 1998 and subsequently amended) SIC-15 Operating Leases—Incentives (issued December 1998 and subsequently amended) SIC-21 Income Taxes—Recovery of Revalued Non-Depreciable Assets (issued July 2000 and subsequently amended) SIC-25 Income Taxes—Changes in the Tax Status of an Entity or its Shareholders (issued July 2000 and subsequently amended) SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease (issued December 2001 and subsequently amended) SIC-31 Revenue—Barter Transactions Involving Advertising Services (issued December 2001 and subsequently amended) RIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities (issued May 2004 and subsequently amended) RIC 4 Determining whether an Arrangement contains a Lease (issued December 2004 and subsequently amended) IC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (issued December 2004) IC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment (issued September 2005) RIC 8 Scope of IFRS 2 (issued January 2006) RIC 11 IFRS 2—Group and Treasury Share Transactions (issued November 2006) RIC 12 Service Concession Arrangements (issued November 2006 and subsequently amended) RIC 13 Customer Loyalty Programmes (issued June 2007) IC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (issued July 2007 and subsequently amended) RIC 15 Agreements for the Construction of Real Estate (issued July 2008)* RIC 16 Hedges of a Net Investment in a Foreign Operation (issued July 2008).† INTRODUCTION
IN1–IN18
INTERNATIONAL ACCOUNTING STANDARD 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES
AND ERRORS
OBJECTIVE
DEFINITIONS
ACCOUNTING POLICIES
Selection and application of accounting policies
Consistency of accounting policies
Changes in accounting policies
Limitations on retrospective application CHANGES IN ACCOUNTING ESTIMATES
Disclosure
Limitations on retrospective restatement
Disclosure of prior period errors
IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE APPLICATION AND
RETROSPECTIVE RESTATEMENT
EFFECTIVE DATE
WITHDRAWAL OF OTHER PRONOUNCEMENTS
APPENDIX
Amendments to other pronouncements
APPROVAL BY THE BOARD OF IAS 8 ISSUED IN DECEMBER 2003
BASIS FOR CONCLUSIONS
IMPLEMENTATION GUIDANCE
International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimatesand Errors (IAS 8) is set out in paragraphs 1–56 and the Appendix. All the paragraphshave equal authority but retain the IASC format of the Standard when it was adoptedby the IASB. IAS 8 should be read in the context of its objective and the Basis forConclusions, the Preface to International Financial Reporting Standards and the Framework forthe Preparation and Presentation of Financial Statements.
Introduction
International Accounting Standard 8 Accounting Policies, Changes in AccountingEstimates and Errors (IAS 8) replaces IAS 8 Net Profit or Loss for the Period, FundamentalErrors and Changes in Accounting Policies (revised in 1993) and should be applied forannual periods beginning on or after 1 January 2005. Earlier application isencouraged. The Standard also replaces the following Interpretations: SIC-2 Consistency—Capitalisation of Borrowing Costs SIC-18 Consistency—Alternative Methods. Reasons for revising IAS 8
The International Accounting Standards Board developed this revised IAS 8 aspart of its project on Improvements to International Accounting Standards.
The project was undertaken in the light of queries and criticisms raised inrelation to the Standards by securities regulators, professional accountantsand other interested parties. The objectives of the project were to reduce oreliminate alternatives, redundancies and conflicts within the Standards, todeal with some convergence issues and to make other improvements.
For IAS 8, the Board’s main objectives were: to remove the allowed alternative to retrospective application of voluntarychanges in accounting policies and retrospective restatement to correctprior period errors; to eliminate the concept of a fundamental error; to articulate the hierarchy of guidance to which management refers, whoseapplicability it considers when selecting accounting policies in the absenceof Standards and Interpretations that specifically apply; to define material omissions or misstatements , and describe how to applythe concept of materiality when applying accounting policies andcorrecting errors; and to incorporate the consensus in SIC-2 and in SIC-18.
The Board did not reconsider the other requirements of IAS 8.
Changes from previous requirements
The main changes from the previous version of IAS 8 are described below.
Selection of accounting policies
The requirements for the selection and application of accounting policies in IAS 1Presentation of Financial Statements (as issued in 1997) have been transferred to theStandard. The Standard updates the previous hierarchy of guidance to whichmanagement refers and whose applicability it considers when selectingaccounting policies in the absence of International Financial Reporting Standards(IFRSs) that specifically apply. Materiality
The Standard defines material omissions or misstatements. It stipulates that: the accounting policies in IFRSs need not be applied when the effect ofapplying them is immaterial. This complements the statement in IAS 1that disclosures required by IFRSs need not be made if the information isimmaterial. financial statements do not comply with IFRSs if they contain materialerrors. material prior period errors are to be corrected retrospectively in the firstset of financial statements authorised for issue after their discovery. Voluntary changes in accounting policies and corrections of
prior period errors
The Standard requires retrospective application of voluntary changes inaccounting policies and retrospective restatement to correct prior period errors.
It removes the allowed alternative in the previous version of IAS 8: to include in profit or loss for the current period the adjustment resultingfrom changing an accounting policy or the amount of a correction of aprior period error; and to present unchanged comparative information from financial statementsof prior periods.
As a result of the removal of the allowed alternative, comparative information forprior periods is presented as if new accounting policies had always been appliedand prior period errors had never occurred. Impracticability
The Standard retains the ‘impracticability’ criterion for exemption fromchanging comparative information when changes in accounting policies areapplied retrospectively and prior period errors are corrected. The Standard nowincludes a definition of ‘impracticable’ and guidance on its interpretation. The Standard also states that when it is impracticable to determine thecumulative effect, at the beginning of the current period, of: applying a new accounting policy to all prior periods, or the entity changes the comparative information as if the new accounting policyhad been applied, or the error had been corrected, prospectively from the earliestdate practicable.
Fundamental errors
The Standard eliminates the concept of a fundamental error and thus thedistinction between fundamental errors and other material errors. The Standarddefines prior period errors.
Disclosures
The Standard now requires, rather than encourages, disclosure of an impendingchange in accounting policy when an entity has yet to implement a new IFRS thathas been issued but not yet come into effect. In addition, it requires disclosure ofknown or reasonably estimable information relevant to assessing the possibleimpact that application of the new IFRS will have on the entity’s financialstatements in the period of initial application.
The Standard requires more detailed disclosure of the amounts of adjustmentsresulting from changing accounting policies or correcting prior period errors.
It requires those disclosures to be made for each financial statement line itemaffected and, if IAS 33 Earnings per Share applies to the entity, for basic and dilutedearnings per share. Other changes
The presentation requirements for profit or loss for the period have beentransferred to IAS 1.
The Standard incorporates the consensus in SIC-18, namely that: an entity selects and applies its accounting policies consistently for similartransactions, other events and conditions, unless an IFRS specificallyrequires or permits categorisation of items for which different policies maybe appropriate; and if an IFRS requires or permits such categorisation, an appropriateaccounting policy is selected and applied consistently to each category.
The consensus in SIC-18 incorporated the consensus in SIC-2, and requires thatwhen an entity has chosen a policy of capitalising borrowing costs, it should applythis policy to all qualifying assets.
The Standard includes a definition of a change in accounting estimate.
The Standard includes exceptions from including the effects of changes inaccounting estimates prospectively in profit or loss. It states that to the extentthat a change in an accounting estimate gives rise to changes in assets orliabilities, or relates to an item of equity, it is recognised by adjusting the carryingamount of the related asset, liability or equity item in the period of the change.
International Accounting Standard 8
Accounting Policies, Changes in Accounting Estimates
and Errors
Objective
The objective of this Standard is to prescribe the criteria for selecting andchanging accounting policies, together with the accounting treatment anddisclosure of changes in accounting policies, changes in accounting estimatesand corrections of errors. The Standard is intended to enhance the relevance andreliability of an entity’s financial statements, and the comparability of thosefinancial statements over time and with the financial statements of otherentities.
Disclosure requirements for accounting policies, except those for changes inaccounting policies, are set out in IAS 1 Presentation of Financial Statements.
This Standard shall be applied in selecting and applying accounting policies, and
accounting for changes in accounting policies, changes in accounting estimates
and corrections of prior period errors.
The tax effects of corrections of prior period errors and of retrospectiveadjustments made to apply changes in accounting policies are accounted for anddisclosed in accordance with IAS 12 Income Taxes.
Definitions
The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset
or a liability, or the amount of the periodic consumption of an asset, that results
from the assessment of the present status of, and expected future benefits and
obligations associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and, accordingly,
are not corrections of errors.
International Financial Reporting Standards (IFRSs) are Standards and
Interpretations adopted by the International Accounting Standards Board (IASB).
They comprise:
International Financial Reporting Standards;
International Accounting Standards; and
Interpretations developed by the International Financial Reporting
Interpretations Committee (IFRIC) or the former Standing Interpretations
Committee (SIC).
Material Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that users make on
the basis of the financial statements. Materiality depends on the size and nature
of the omission or misstatement judged in the surrounding circumstances.
The size or nature of the item, or a combination of both, could be the determining
factor.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse
of, reliable information that:
was available when financial statements for those periods were authorised
for issue; and
could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
Retrospective application is applying a new accounting policy to transactions, other
events and conditions as if that policy had always been applied.
Retrospective restatement is correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a prior period
error had never occurred.
Impracticable Applying a requirement is impracticable when the entity cannot
apply it after making every reasonable effort to do so. For a particular prior
period, it is impracticable to apply a change in an accounting policy
retrospectively or to make a retrospective restatement to correct an error if:
the effects of the retrospective application or retrospective restatement are
not determinable;
the retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in that
period; or
the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to distinguish
objectively information about those estimates that:
provides evidence of circumstances that existed on the date(s) as at
which those amounts are to be recognised, measured or disclosed; and
would have been available when the financial statements for that
prior period were authorised for issue
from other information.
Prospective application of a change in accounting policy and of recognising the
effect of a change in an accounting estimate, respectively, are:
applying the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed; and
recognising the effect of the change in the accounting estimate in the
current and future periods affected by the change.
Assessing whether an omission or misstatement could influence economicdecisions of users, and so be material, requires consideration of thecharacteristics of those users. The Framework for the Preparation and Presentation ofFinancial Statements states in paragraph 25 that ‘users are assumed to have areasonable knowledge of business and economic activities and accounting and awillingness to study the information with reasonable diligence.’ Therefore, theassessment needs to take into account how users with such attributes couldreasonably be expected to be influenced in making economic decisions.
Accounting policies
Selection and application of accounting policies
When an IFRS specifically applies to a transaction, other event or condition, the
accounting policy or policies applied to that item shall be determined by applying
the IFRS.
IFRSs set out accounting policies that the IASB has concluded result in financialstatements containing relevant and reliable information about the transactions,other events and conditions to which they apply. Those policies need not beapplied when the effect of applying them is immaterial. However, it isinappropriate to make, or leave uncorrected, immaterial departures from IFRSs toachieve a particular presentation of an entity’s financial position, financialperformance or cash flows.
IFRSs are accompanied by guidance to assist entities in applying theirrequirements. All such guidance states whether it is an integral part of IFRSs.
Guidance that is an integral part of the IFRSs is mandatory. Guidance that is notan integral part of the IFRSs does not contain requirements for financialstatements.
In the absence of an IFRS 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 to the economic decision-making needs of users; and
reliable, in that the financial statements:
represent faithfully the financial position, financial performance and
cash flows of the entity;
reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
are neutral, ie free from bias;
are prudent; and
are complete in all material respects.
In making the judgement described in paragraph 10, management shall refer to,
and consider the applicability of, the following sources in descending order:
the requirements in IFRSs dealing with similar and related issues; and
the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the Framework.
In making the judgement described in paragraph 10, management may also
consider the most recent pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards, other
accounting literature and accepted industry practices, to the extent that these do
not conflict with the sources in paragraph 11.
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless an IFRS specifically requires or
permits categorisation of items for which different policies may be appropriate.
If an IFRS requires or permits such categorisation, an appropriate accounting
policy shall be selected and applied consistently to each category.
Changes in accounting policies
An entity shall change an accounting policy only if the change:
is required by an IFRS; or
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.
Users of financial statements need to be able to compare the financial statementsof an entity over time to identify trends in its financial position, financialperformance and cash flows. Therefore, the same accounting policies are appliedwithin each period and from one period to the next unless a change in accountingpolicy meets one of the criteria in paragraph 14.
The following are not changes in accounting policies:
the application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring; and
the application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial.
The initial application of a policy to revalue assets in accordance with IAS 16
Property, Plant and Equipment or IAS 38 Intangible Assets is a change in an
accounting policy to be dealt with as a revaluation in accordance with IAS 16 or
IAS 38, rather than in accordance with this Standard.
Paragraphs 19–31 do not apply to the change in accounting policy described inparagraph 17. Applying changes in accounting policies
Subject to paragraph 23:
an entity shall account for a change in accounting policy resulting from the
initial application of an IFRS in accordance with the specific transitional
provisions, if any, in that IFRS; and
when an entity changes an accounting policy upon initial application of an
IFRS that does not include specific transitional provisions applying to that
change, or changes an accounting policy voluntarily, it shall apply the
change retrospectively.
For the purpose of this Standard, early application of an IFRS is not a voluntarychange in accounting policy.
In the absence of an IFRS that specifically applies to a transaction, other event orcondition, management may, in accordance with paragraph 12, apply anaccounting policy from the most recent pronouncements of otherstandard-setting bodies that use a similar conceptual framework to developaccounting standards. If, following an amendment of such a pronouncement,the entity chooses to change an accounting policy, that change is accounted forand disclosed as a voluntary change in accounting policy.
Subject to paragraph 23, when a change in accounting policy is applied
retrospectively in accordance with paragraph 19(a) or (b), 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.
Limitations on retrospective application When retrospective application is required by paragraph 19(a) or (b), a change in
accounting policy shall be applied retrospectively except to the extent that it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change.
When it is impracticable to determine the period-specific effects of changing an
accounting policy on comparative information for one or more prior periods
presented, the entity shall apply the new accounting policy to the carrying
amounts of assets and liabilities as at the beginning of the earliest period for
which retrospective application is practicable, which may be the current period,
and shall make a corresponding adjustment to the opening balance of each
affected component of equity for that period.
When it is impracticable to determine the cumulative effect, at the beginning of
the current period, of applying a new accounting policy to all prior periods, the
entity shall adjust the comparative information to apply the new accounting
policy prospectively from the earliest date practicable.
When an entity applies a new accounting policy retrospectively, it applies the newaccounting policy to comparative information for prior periods as far back as ispracticable. Retrospective application to a prior period is not practicable unlessit is practicable to determine the cumulative effect on the amounts in both theopening and closing statements of financial position for that period. The amountof the resulting adjustment relating to periods before those presented in thefinancial statements is made to the opening balance of each affected componentof equity of the earliest prior period presented. Usually the adjustment is madeto retained earnings. However, the adjustment may be made to anothercomponent of equity (for example, to comply with an IFRS). Any otherinformation about prior periods, such as historical summaries of financial data,is also adjusted as far back as is practicable.
When it is impracticable for an entity to apply a new accounting policyretrospectively, because it cannot determine the cumulative effect of applying thepolicy to all prior periods, the entity, in accordance with paragraph 25, applies thenew policy prospectively from the start of the earliest period practicable.
It therefore disregards the portion of the cumulative adjustment to assets,liabilities and equity arising before that date. Changing an accounting policy ispermitted even if it is impracticable to apply the policy prospectively for any priorperiod. Paragraphs 50–53 provide guidance on when it is impracticable to applya new accounting policy to one or more prior periods. Disclosure
When initial application of an IFRS has an effect on the current period or any
prior period, would have such an effect except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future
periods, an entity shall disclose:
the title of the IFRS;
when applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
the nature of the change in accounting policy;
when applicable, a description of the transitional provisions;
when applicable, the transitional provisions that might have an effect on
future periods;
for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:
for each financial statement line item affected; and
if IAS 33 Earnings per Share applies to the entity, for basic and diluted
earnings per share;
the amount of the adjustment relating to periods before those presented,
to the extent practicable; and
if retrospective application required by paragraph 19(a) or (b) is
impracticable for a particular prior period, or for periods before those
presented, the circumstances that led to the existence of that condition and
a description of how and from when the change in accounting policy has
been applied.
Financial statements of subsequent periods need not repeat these disclosures.
When a voluntary change in accounting policy has an effect on the current period
or any prior period, would have an effect on that period except that it is
impracticable to determine the amount of the adjustment, or might have an effect
on future periods, an entity shall disclose:
the nature of the change in accounting policy;
the reasons why applying the new accounting policy provides reliable and
more relevant information;
for the current period and each prior period presented, to the extent
practicable, the amount of the adjustment:
for each financial statement line item affected; and
if IAS 33 applies to the entity, for basic and diluted earnings per share;
the amount of the adjustment relating to periods before those presented,
to the extent practicable; and
if retrospective application is impracticable for a particular prior period, or
for periods before those presented, the circumstances that led to the
existence of that condition and a description of how and from when the
change in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these disclosures.
When an entity has not applied a new IFRS that has been issued but is not yet
effective, the entity shall disclose:
this fact; and
known or reasonably estimable information relevant to assessing the
possible impact that application of the new IFRS will have on the entity’s
financial statements in the period of initial application.
In complying with paragraph 30, an entity considers disclosing: the nature of the impending change or changes in accounting policy; the date by which application of the IFRS is required; the date as at which it plans to apply the IFRS initially; and a discussion of the impact that initial application of the IFRS isexpected to have on the entity’s financial statements; or if that impact is not known or reasonably estimable, a statement tothat effect.
Changes in accounting estimates
As a result of the uncertainties inherent in business activities, many items infinancial statements cannot be measured with precision but can only beestimated. Estimation involves judgements based on the latest available, reliableinformation. For example, estimates may be required of: the fair value of financial assets or financial liabilities; the useful lives of, or expected pattern of consumption of the futureeconomic benefits embodied in, depreciable assets; and The use of reasonable estimates is an essential part of the preparation of financialstatements and does not undermine their reliability. An estimate may need revision if changes occur in the circumstances on whichthe estimate was based or as a result of new information or more experience.
By its nature, the revision of an estimate does not relate to prior periods and is notthe correction of an error.
A change in the measurement basis applied is a change in an accounting policy,and is not a change in an accounting estimate. When it is difficult to distinguisha change in an accounting policy from a change in an accounting estimate, thechange is treated as a change in an accounting estimate.
The effect of a change in an accounting estimate, other than a change to which
paragraph 37 applies, shall be recognised prospectively by including it in profit or
loss in:
the period of the change, if the change affects that period only; or
the period of the change and future periods, if the change affects both.
To the extent that a change in an accounting estimate gives rise to changes in
assets and liabilities, or relates to an item of equity, it shall be recognised by
adjusting the carrying amount of the related asset, liability or equity item in the
period of the change.
Prospective recognition of the effect of a change in an accounting estimate meansthat the change is applied to transactions, other events and conditions from thedate of the change in estimate. A change in an accounting estimate may affectonly the current period’s profit or loss, or the profit or loss of both the currentperiod and future periods. For example, a change in the estimate of the amountof bad debts affects only the current period’s profit or loss and therefore isrecognised in the current period. However, a change in the estimated useful lifeof, or the expected pattern of consumption of the future economic benefitsembodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the asset’s remaining useful life. In bothcases, the effect of the change relating to the current period is recognised asincome or expense in the current period. The effect, if any, on future periods isrecognised as income or expense in those future periods.
Disclosure
An entity shall disclose the nature and amount of a change in an accounting
estimate that has an effect in the current period or is expected to have an effect in
future periods, except for the disclosure of the effect on future periods when it is
impracticable to estimate that effect.
If the amount of the effect in future periods is not disclosed because estimating it
is impracticable, an entity shall disclose that fact.
Errors can arise in respect of the recognition, measurement, presentation ordisclosure of elements of financial statements. Financial statements do notcomply with IFRSs if they contain either material errors or immaterial errorsmade intentionally to achieve a particular presentation of an entity’s financialposition, financial performance or cash flows. Potential current period errorsdiscovered in that period are corrected before the financial statements areauthorised for issue. However, material errors are sometimes not discovereduntil a subsequent period, and these prior period errors are corrected in thecomparative information presented in the financial statements for thatsubsequent period (see paragraphs 42–47). Subject to paragraph 43, an entity shall correct material prior period errors
retrospectively in the first set of financial statements authorised for issue after
their discovery by:
restating the comparative amounts for the prior period(s) presented in
which the error occurred; or
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.
Limitations on retrospective restatement
A prior period error shall be corrected by retrospective restatement except to the
extent that it is impracticable to determine either the period-specific effects or
the cumulative effect of the error.
When it is impracticable to determine the period-specific effects of an error on
comparative information for one or more prior periods presented, the entity shall
restate the opening balances of assets, liabilities and equity for the earliest period
for which retrospective restatement is practicable (which may be the current
period).
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.
The correction of a prior period error is excluded from profit or loss for the periodin which the error is discovered. Any information presented about prior periods,including any historical summaries of financial data, is restated as far back as ispracticable.
When it is impracticable to determine the amount of an error (eg a mistake inapplying an accounting policy) for all prior periods, the entity, in accordance withparagraph 45, restates the comparative information prospectively from theearliest date practicable. It therefore disregards the portion of the cumulativerestatement of assets, liabilities and equity arising before that date. Paragraphs50–53 provide guidance on when it is impracticable to correct an error for one ormore prior periods. Corrections of errors are distinguished from changes in accounting estimates.
Accounting estimates by their nature are approximations that may need revisionas additional information becomes known. For example, the gain or lossrecognised on the outcome of a contingency is not the correction of an error.
Disclosure of prior period errors
In applying paragraph 42, an entity shall disclose the following:
the nature of the prior period error;
for each prior period presented, to the extent practicable, the amount of
the correction:
for each financial statement line item affected; and
if IAS 33 applies to the entity, for basic and diluted earnings per share;
the amount of the correction at the beginning of the earliest prior period
presented; and
if retrospective restatement is impracticable for a particular prior period,
the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
Impracticability in respect of retrospective application and
retrospective restatement
In some circumstances, it is impracticable to adjust comparative information forone or more prior periods to achieve comparability with the current period.
For example, data may not have been collected in the prior period(s) in a way thatallows either retrospective application of a new accounting policy (including, forthe purpose of paragraphs 51–53, its prospective application to prior periods) orretrospective restatement to correct a prior period error, and it may beimpracticable to recreate the information.
It is frequently necessary to make estimates in applying an accounting policy toelements of financial statements recognised or disclosed in respect oftransactions, other events or conditions. Estimation is inherently subjective, andestimates may be developed after the reporting period. Developing estimates ispotentially more difficult when retrospectively applying an accounting policy ormaking a retrospective restatement to correct a prior period error, because of thelonger period of time that might have passed since the affected transaction, otherevent or condition occurred. However, the objective of estimates related to priorperiods remains the same as for estimates made in the current period, namely, forthe estimate to reflect the circumstances that existed when the transaction, otherevent or condition occurred.
Therefore, retrospectively applying a new accounting policy or correcting a priorperiod error requires distinguishing information that provides evidence of circumstances that existed on the date(s) as at whichthe transaction, other event or condition occurred, and would have been available when the financial statements for that priorperiod were authorised for issue from other information. For some types of estimates (eg an estimate of fair valuenot based on an observable price or observable inputs), it is impracticable todistinguish these types of information. When retrospective application orretrospective restatement would require making a significant estimate for whichit is impossible to distinguish these two types of information, it is impracticableto apply the new accounting policy or correct the prior period errorretrospectively.
Hindsight should not be used when applying a new accounting policy to, orcorrecting amounts for, a prior period, either in making assumptions about whatmanagement’s intentions would have been in a prior period or estimating theamounts recognised, measured or disclosed in a prior period. For example, whenan entity corrects a prior period error in measuring financial assets previouslyclassified as held-to-maturity investments in accordance with IAS 39 FinancialInstruments: Recognition and Measurement, it does not change their basis ofmeasurement for that period if management decided later not to hold them tomaturity. In addition, when an entity corrects a prior period error in calculatingits liability for employees’ accumulated sick leave in accordance with IAS 19Employee Benefits, it disregards information about an unusually severe influenzaseason during the next period that became available after the financialstatements for the prior period were authorised for issue. The fact that significantestimates are frequently required when amending comparative informationpresented for prior periods does not prevent reliable adjustment or correction ofthe comparative information.
Effective date
An entity shall apply this Standard for annual periods beginning on or after1 January 2005. Earlier application is encouraged. If an entity applies thisStandard for a period beginning before 1 January 2005, it shall disclose that fact.
Withdrawal of other pronouncements
This Standard supersedes IAS 8 Net Profit or Loss for the Period, Fundamental Errors andChanges in Accounting Policies, revised in 1993.
This Standard supersedes the following Interpretations: SIC-2 Consistency—Capitalisation of Borrowing Costs; and SIC-18 Consistency—Alternative Methods. Appendix
Amendments to other pronouncements
The amendments in this appendix shall be applied for annual periods beginning on or after1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall beapplied for that earlier period. The amendments contained in this appendix when this Standard was revised in 2003 have beenincorporated into the relevant pronouncements published in this volume. Approval by the Board of IAS 8 issued in December 2003
International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates andErrors (as revised in 2003) was approved for issue by the fourteen members of theInternational Accounting Standards Board. Basis for Conclusions on
IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors
This Basis for Conclusions accompanies, but is not part of, IAS 8. Introduction
This Basis for Conclusions summarises the International Accounting StandardsBoard’s considerations in reaching its conclusions on revising IAS 8 Net Profit orLoss for the Period, Fundamental Errors and Changes in Accounting Policies in 2003.
Individual Board members gave greater weight to some factors than to others.
In July 2001 the Board announced that, as part of its initial agenda of technicalprojects, it would undertake a project to improve a number of Standards,including IAS 8. The project was undertaken in the light of queries and criticismsraised in relation to the Standards by securities regulators, professionalaccountants and other interested parties. The objectives of the Improvementsproject were to reduce or eliminate alternatives, redundancies and conflictswithin Standards, to deal with some convergence issues and to make otherimprovements. In May 2002 the Board published its proposals in an ExposureDraft of Improvements to International Accounting Standards, with a comment deadlineof 16 September 2002. The Board received over 160 comment letters on theExposure Draft.
The Standard includes extensive changes to the previous version of IAS 8.
The Board’s intention was not to reconsider all of the previous Standard’srequirements for selecting and applying accounting policies, and accounting forchanges in accounting policies, changes in accounting estimates and correctionsof errors. Accordingly, this Basis for Conclusions does not discuss requirementsin IAS 8 that the Board did not reconsider. Removing allowed alternative treatments
The previous version of IAS 8 included allowed alternative treatments ofvoluntary changes in accounting policies (paragraphs 54–57) and corrections offundamental errors (paragraphs 38–40). Under those allowed alternatives: the adjustment resulting from retrospective application of a change in anaccounting policy was included in profit or loss for the current period; and the amount of the correction of a fundamental error was included in profitor loss for the current period.
In both circumstances, comparative information was presented as it waspresented in the financial statements of prior periods.
The Board identified the removal of optional treatments for changes inaccounting policies and corrections of errors as an important improvement to theprevious version of IAS 8. The Standard removes the allowed alternativetreatments and requires changes in accounting policies and corrections of priorperiod errors to be accounted for retrospectively. The Board concluded that retrospective application made by amending thecomparative information presented for prior periods is preferable to thepreviously allowed alternative treatments because, under the now requiredmethod of retrospective application: profit or loss for the period of the change does not include the effects ofchanges in accounting policies or errors relating to prior periods. information presented about prior periods is prepared on the same basis asinformation about the current period, and is therefore comparable. Thisinformation possesses a qualitative characteristic identified in theFramework for the Preparation and Presentation of Financial Statements, andprovides the most useful information for trend analysis of income andexpenses.
prior period errors are not repeated in comparative information presentedfor prior periods.
Some respondents to the Exposure Draft argued that the previously allowedalternative treatments are preferable because: correcting prior period errors by restating prior period informationinvolves an unjustifiable use of hindsight; recognising the effects of changes in accounting policies and corrections oferrors in current period profit or loss makes them more prominent to usersof financial statements; and each amount credited or debited to retained earnings as a result of anentity’s activities has been recognised in profit or loss in some period.
The Board concluded that restating prior period information to correct a priorperiod error does not involve an unjustifiable use of hindsight because priorperiod errors are defined in terms of a failure to use, or misuse of, reliableinformation that was available when the prior period financial statements wereauthorised for issue and could reasonably be expected to have been obtained andtaken into account in the preparation and presentation of those financialstatements. The Board also concluded that the disclosures about changes in accountingpolicies and corrections of prior period errors in paragraphs 28, 29 and 49 of theStandard should ensure that their effects are sufficiently prominent to users offinancial statements.
The Board further concluded that it is less important for each amount credited ordebited to retained earnings as a result of an entity’s activities to be recognised inprofit or loss in some period than for the profit or loss for each period presentedto represent faithfully the effects of transactions and other events occurring inthat period.
Eliminating the distinction between fundamental errors and other
material prior period errors
The Standard eliminates the distinction between fundamental errors and othermaterial prior period errors. As a result, all material prior period errors areaccounted for in the same way as a fundamental error was accounted for underthe retrospective treatment in the previous version of IAS 8. The Board concludedthat the definition of ‘fundamental errors’ in the previous version was difficult tointerpret consistently because the main feature of the definition—that the errorcauses the financial statements of one or more prior periods no longer to beconsidered to have been reliable—was also a feature of all material prior perioderrors.
Applying a Standard or an Interpretation that specifically applies to
an item
The Exposure Draft proposed that when a Standard or an Interpretation appliesto an item in the financial statements, the accounting policy (or policies) appliedto that item is (are) determined by considering the following in descending order: the Standard (including any Appendices that form part of the Standard); Appendices to the Standard that do not form a part of the Standard; and Implementation Guidance issued in respect of the Standard.
The Board decided not to set out a hierarchy of requirements for thesecircumstances. The Standard requires only applicable IFRSs to be applied.
In addition, it does not mention Appendices. The Board decided not to rank Standards above Interpretations because thedefinition of International Financial Reporting Standards (IFRSs) includesInterpretations, which are equal in status to Standards. The rubric to eachStandard clarifies what material constitutes the requirements of an IFRS andwhat is Implementation Guidance.* The term ‘Appendix’ is retained only formaterial that is part of an IFRS.
Pronouncements of other standard-setting bodies
The Exposure Draft proposed that in the absence of a Standard or anInterpretation specifically applying to an item, management should develop andapply an accounting policy by considering, among other guidance,pronouncements of other standard-setting bodies that use a similar conceptualframework to develop accounting standards. Respondents to the Exposure Draftcommented that this could require entities to consider the pronouncements of In 2007 the Board was advised that paragraphs 7 and 9 may appear to conflict, and may bemisinterpreted to require mandatory consideration of Implementation Guidance. The Boardamended paragraphs 7, 9 and 11 by Improvements to IFRSs issued in May 2008 to state that onlyguidance that is identified as an integral part of IFRSs is mandatory.
various other standard-setting bodies when IASB guidance does not exist.
Some commentators argued that, for example, it could require consideration ofall components of US GAAP on some topics. After considering these comments,the Board decided that the Standard should indicate that considering suchpronouncements is voluntary (see paragraph 12 of the Standard).
As proposed in the Exposure Draft, the Standard states that pronouncements ofother standard-setting bodies are used only if they do not conflict with: the requirements and guidance in IFRSs dealing with similar and relatedissues; and the definitions, recognition criteria and measurement concepts for assets,liabilities, income and expenses in the Framework.
The Standard refers to the most recent pronouncements of other standard-settingbodies because if pronouncements are withdrawn or superseded, the relevantstandard-setting body no longer thinks they include the best accounting policiesto apply.
Comments received indicated that it was unclear from the Exposure Draftwhether a change in accounting policy following a change in a pronouncementof another standard-setting body should be accounted for under the transitionalprovisions in that pronouncement. As noted above, the Standard does notmandate using pronouncements of other standard-setting bodies in anycircumstances. Accordingly, the Board decided to clarify that such a change inaccounting policy is accounted for and disclosed as a voluntary change inaccounting policy (see paragraph 21 of the Standard). Thus, an entity is precludedfrom applying transitional provisions specified by the other standard-setting bodyif they are inconsistent with the treatment of voluntary changes in accountingpolicies specified by the Standard.
Materiality
The Standard states that accounting policies specified by IFRSs need not beapplied when the effect of applying them is immaterial. It also states thatfinancial statements do not comply with IFRSs if they contain material errors,and that material prior period errors are to be corrected in the first set of financialstatements authorised for issue after their discovery. The Standard includes adefinition of material omissions or misstatements, which is based on thedescription of materiality in IAS 1 Presentation of Financial Statements (as issued in1997) and in the Framework.
The former Preface to Statements of International Accounting Standards stated thatInternational Accounting Standards were not intended to apply to immaterialitems. There is no equivalent statement in the Preface to International FinancialReporting Standards. The Board received comments that the absence of such astatement from the Preface could be interpreted as requiring an entity to applyaccounting policies (including measurement requirements) specified by IFRSs toimmaterial items. However, the Board decided that the application of the conceptof materiality should be in Standards rather than in the Preface.
The application of the concept of materiality is set out in two Standards. IAS 1 (asrevised in 2007) continues to specify its application to disclosures. IAS 8 specifiesthe application of materiality in applying accounting policies and correctingerrors (including errors in measuring items).
Criterion for exemption from requirements
The previous version of IAS 8 included an impracticability criterion for exemptionfrom retrospective application of voluntary changes in accounting policies andretrospective restatement for fundamental errors, and from making relateddisclosures, when the allowed alternative treatment of those items was notapplied. The Exposure Draft proposed instead an exemption from retrospectiveapplication and retrospective restatement when it gives rise to undue cost oreffort. In the light of comments received on the Exposure Draft, the Board decided thatan exemption based on management’s assessment of undue cost or effort is toosubjective to be applied consistently by different entities. Moreover, the Boarddecided that balancing costs and benefits is a task for the Board when it setsaccounting requirements rather than for entities when they apply thoserequirements. Therefore, the Board decided to retain the impracticabilitycriterion for exemption in the previous version of IAS 8. This affects theexemptions in paragraphs 23–25, 39 and 43–45 of the Standard. Impracticabilityis the only basis on which specific exemptions are provided in IFRSs from applyingparticular requirements when the effect of applying them is material.* Definition of ‘impracticable’
The Board decided to clarify the meaning of ‘impracticable’ in relation toretrospective application of a change in accounting policy and retrospectiverestatement to correct a prior period error. Some commentators suggested that retrospective application of a change inaccounting policy and retrospective restatement to correct a prior period errorare impracticable for a particular prior period whenever significant estimates arerequired as of a date in that period. However, the Board decided to specify anarrower definition of impracticable because the fact that significant estimatesare frequently required when amending comparative information presented forprior periods does not prevent reliable adjustment or correction of thecomparative information. Thus, the Board decided that an inability todistinguish objectively information that both provides evidence of circumstancesthat existed on the date(s) as at which those amounts are to be recognised,measured or disclosed and would have been available when the financialstatements for that prior period were authorised for issue from other informationis the factor that prevents reliable adjustment or correction of comparativeinformation for prior periods (see part (c) of the definition of ‘impracticable’ andparagraphs 51 and 52 of the Standard). In 2006 the IASB issued IFRS 8 Operating Segments. As explained in paragraphs BC46 and BC47 ofthe Basis for Conclusions on IFRS 8, that IFRS includes an exemption from some requirements ifthe necessary information is not available and the cost to develop it would be excessive.
The Standard specifies that hindsight should not be used when applying a newaccounting policy to, or correcting amounts for, a prior period, either in makingassumptions about what management’s intentions would have been in a priorperiod or estimating the amounts in a prior period. This is becausemanagement’s intentions in a prior period cannot be objectively established in alater period, and using information that would have been unavailable when thefinancial statements for the prior period(s) affected were authorised for issue isinconsistent with the definitions of retrospective application and retrospectiverestatement. Applying the impracticability exemption
The Standard specifies that when it is impracticable to determine the cumulativeeffect of applying a new accounting policy to all prior periods, or the cumulativeeffect of an error on all prior periods, the entity changes the comparativeinformation as if the new accounting policy had been applied, or the error hadbeen corrected, prospectively from the earliest date practicable (see paragraphs 25and 45 of the Standard). This is similar to paragraph 52 of the previous version ofIAS 8, but it is no longer restricted to changes in accounting policies. The Boarddecided to include such provisions in the Standard because it agrees withcomments received that it is preferable to require prospective application fromthe start of the earliest period practicable than to permit a change in accountingpolicy only when the entity can determine the cumulative effect of the change forall prior periods at the beginning of the current period.
Consistently with the Exposure Draft’s proposals, the Standard provides animpracticability exemption from retrospective application of changes inaccounting policies, including retrospective application of changes made inaccordance with the transitional provisions in an IFRS. The previous version ofIAS 8 specified the impracticability exemption for retrospective application ofonly voluntary changes in accounting policies. Thus, the applicability of theexemption to changes made in accordance with the transitional provisions in anIFRS depended on the text of that IFRS. The Board extended the applicability ofthe exemption because it decided that the need for the exemption applies equallyto all changes in accounting policies applied retrospectively.
Disclosures about impending application of newly issued IFRSs
The Standard requires an entity to provide disclosures when it has not yet applieda new IFRS that has been issued but is not yet effective. The entity is required todisclose that it has not yet applied the IFRS, and known or reasonably estimableinformation relevant to assessing the possible impact that initial application ofthe new IFRS will have on the entity’s financial statements in the period of initialapplication (paragraph 30). The Standard also includes guidance on specificdisclosures the entity should consider when applying this requirement(paragraph 31). Paragraphs 30 and 31 of the Standard differ from the proposals in the ExposureDraft in the following respects: they specify that an entity needs to disclose information only if it is knownor reasonably estimable. This clarification responds to comments on theExposure Draft that the proposed disclosures would sometimes beimpracticable. whereas the Exposure Draft proposed to mandate the disclosures now inparagraph 31, the Standard sets out these disclosures as items an entityshould consider disclosing to meet the general requirement in paragraph 30.
This amendment focuses the requirement on the objective of the disclosure,and, in response to comments on the Exposure Draft that the proposeddisclosures were more onerous than the disclosures in US GAAP, clarifiesthat the Board’s intention was to converge with US requirements, ratherthan to be more onerous.
Recognising the effects of changes in accounting estimates
The Exposure Draft proposed to retain without exception the requirement in theprevious version of IAS 8 that the effect of a change in accounting estimate isrecognised in profit or loss in: the period of the change, if the change affects that period only; or the period of the change and future periods, if the change affects both.
Some respondents to the Exposure Draft disagreed with requiring the effects ofall changes in accounting estimates to be recognised in profit or loss. They arguedthat this is inappropriate to the extent that a change in an accounting estimategives rise to changes in assets and liabilities, because the entity’s equity does notchange as a result. These commentators also argued that it is inappropriate topreclude recognising the effects of changes in accounting estimates directly inequity when that is required or permitted by a Standard or an Interpretation.
The Board concurs, and decided to provide an exception to the requirementdescribed in paragraph BC32 for these circumstances. Guidance on implementing
IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors
This guidance accompanies, but is not part of, IAS 8. Example 1 – Retrospective restatement of errors
1.1 During 20X2, Beta Co discovered that some products that had been sold during 20X1 were incorrectly included in inventory at 31 December 20X1 at CU6,500.* 1.2 Beta’s accounting records for 20X2 show sales of CU104,000, cost of goods sold of CU86,500 (including CU6,500 for the error in opening inventory), and income taxes of CU5,250.
1.4 20X1 opening retained earnings was CU20,000 and closing retained earnings was 1.5 Beta’s income tax rate was 30 per cent for 20X2 and 20X1. It had no other income or 1.6 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 does not disclose earnings per share.
Extract from the statement of comprehensive income
* In these examples, monetary amounts are denominated in ‘currency units (CU)’.
continued.
.continued
Statement of changes in equity
Profit for the year ended 31 December 20X1as restated Profit for the year ended 31 December 20X2 Extracts from the notes
Some products that had been sold in 20X1 were incorrectly included in inventory at31 December 20X1 at CU6,500. The financial statements of 20X1 have been restated tocorrect this error. The effect of the restatement on those financial statements issummarised below. There is no effect in 20X2.
Example 2 – Change in accounting policy with retrospective
application
Example 3 – Prospective application of a change in accounting
policy when retrospective application is not practicable
During 20X2, Delta Co changed its accounting policy for depreciating property, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model.
In years before 20X2, Delta’s asset records were not sufficiently detailed to apply a components approach fully. At the end of 20X1, management commissioned an engineering survey, which provided information on the components held and their fair values, useful lives, estimated residual values and depreciable amounts at the beginning of 20X2. However, the survey did not provide a sufficient basis for reliably estimating the cost of those components that had not previously been accounted for separately, and the existing records before the survey did not permit this information to be reconstructed.
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 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 20X2. Also, the change from a cost model to a revaluation model is required to be accounted for prospectively. Therefore, management concluded that it should apply Delta’s new policy prospectively from the start of 20X2.
Property, plant and equipment at the end of 20X1: Prospective depreciation expense for 20X2 (old basis) Depreciation expense on existing property, plant and equipment for 20X2 (new basis) continued.
.continued
Extract from the notes
From the start of 20X2, Delta changed its accounting policy for depreciating property, plant and equipment, so as to apply much more fully a components approach, whilst at the same time adopting the revaluation model. Management takes the view that this policy provides reliable and more relevant information because it deals more accurately with the components of property, plant and equipment and is based on up-to-date values. The policy has been applied prospectively from the start of 20X2 because it was not practicable to estimate the effects of applying the policy either retrospectively, or prospectively from any earlier date. Accordingly, the adoption of the new policy has no effect on prior years. The effect on the current year is to increase the carrying amount of property, plant and equipment at the start of the year by CU6,000; increase the opening deferred tax provision by CU1,800; create a revaluation surplus at the start of the year of CU4,200; increase depreciation expense by CU500; and reduce tax expense by CU150.

Source: http://www.finwise.ro/IFRS2009/12%20IAS%208%20Accounting%20Policies,%20Changes%20in%20Accounting%20Estimates%20and%20Errors.pdf