IFRS for SMEs:
Accounting policies, estimates and errors
This Section covers:-
- Accounting Policies
- Accounting Estimates
- Accounting Errors
Accounting Policies
Definition
They are specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
Basic principles of accounting policies
- If the Standard (IFRS for SMEs) specifically addresses a transaction, event or condition, the requirements of the Standard should be applied.
- However, this requirement doesn't need to be applied if the effect of doing so wouldn't be material.
- If the Standard doesn't address a transaction, event or condition, then judgement should be used in developing and applying an accounting policy.
- The judgement should result in information that is relevant and reliable. The qualitative characteristics under 'Concepts and Pervasive Principles' must be applied.
- In making a judgement, requirements and guidance in this Standard for similar/related issues should be used. If such issue cannot be found, the definitions, recognition criteria and measurement concepts of assets, liabilities, incomes and expenses and pervasive principles of this Standard should be used.
Consistency of accounting policies
Accounting policies that are chosen should be applied consistently for similar transactions, events or conditions, unless this Standard requires/permits the use of different policies for certain categories of transactions.
Changing accounting policies
An accounting policy can only be changed in the following circumstances:
- It is required by the Standard
- It results in the financial statement providing more reliable and relevant information, based on judgement of the preparers of financial statements.
The following aren't considered as a change in accounting policy:
- An application of an accounting policy for transactions that differ in substance from previous transactions.
- An application of a new accounting policy for transactions that didn't previously occur or weren't material.
- A change to cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset for which the use of fair value is permitted/required.
All changes in accounting policy should be applied 'retrospectively', except in the following cases where it should be applies 'prospectively':
- Policy changes resulting from changes in this Standard
- When an entity changes from cost model to revaluation model in property, plant and equipment measurement
- When an entity chooses to follow IAS 39 - Financial Instruments: Recognition and Measurement instead of this Standard
Disclosure of a change in accounting policy
The following should be disclosed in the Notes to the Financial Statements (this disclosure doesn't need to be repeated in subsequent periods).
- Nature of the change in accounting policy
- The amount of the adjustment for each financial statement line item affected
- An explanation is it's impracticable to determine the amounts
- Reasons for applying new accounting policy (if it wasn't due to a change in this Standard)
Retrospective application
- The new accounting policy is applied to comparative information as if the new policy had always been applied.
- This should be done, unless it is impracticable to do so. It's impracticable if it cannot be done after making every reasonable effort to do so.
- If it's impracticable retrospectively apply a policy for 'all' prior periods, then the policy should be applied to the carrying amounts of assets and liabilities at the beginning of the earliest period for which retrospective application is practicable. A corresponding adjustment is made to the opening balance of each affected component of equity for that period.
Prospective application
- The new accounting policy is applied to transactions occurring after the date of the policy change. No changes are made to comparative or older figures.
Accounting Estimates
Changes in accounting estimates
A change in accounting estimate is an adjustment to the carrying amount of an asset/liability, or an amount reflecting the consumption of an asset, which resulted from the assessment of the present status of, and expected future benefits and obligations associated with assets and liabilities.
In circumstances where it's difficult to distinguish between a change in accounting estimate and a correction of errors, treat it as a change in accounting estimate.
A change in accounting estimate is applied retrospectively by including the effect of the change in profit/loss in the period of the change (and future periods, if it affects the future periods). The effects on the carrying amounts of assets/liabilities/equity are recognized in the period of change.
Disclosure of a change in accounting estimate
The following should be disclosed in the Notes to the Financial Statements
- Nature of the change in estimate
- Effect of change on assets, liabilities, income and expenses for the current period.
Accounting Errors
Correction of prior period errors
Prior period errors are omissions and misstatements in the entity's financial statements of prior period(s) arising from a failure to use, or misuse of, reliable information that:
- Was available when the financial statements of those periods were authorized for issue
- Could reasonably be expected to have been obtained and taken into account
A material error is corrected retrospectively in the first financial statements authorized for issue after its discovery, to the extent practicable by:
- Restating comparative amounts for prior periods in which the error occurred
- 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.
Disclosure of prior period errors
The following should be disclosed in the Notes to the Financial Statements
- Nature of the prior period error
- The amount of the correction for each financial statement line item affected
- The amount of correction at the beginning of the earliest prior period presented
- Explanation if it's impracticable to determine the amounts