Indian Accounting Standard 8, Accounting Policies, Changes in Accounting Estimates and Errors
Ind AS 8 specifies 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. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.
The disclosures required in respect of changes in accounting policies are set out in Ind AS 8. Other disclosure requirements for accounting policies are laid down in Ind AS 1, Presentation of Financial Statements.
Accounting Policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
Selection and application of accounting policies
In case specific Ind AS exists – accounting policy shall be determined as per the applicable Ind AS.
In case no specific Ind AS exists – management shall use its judgment to develop and apply accounting policy that results in information that is:
- relevant to the economic decision-making needs of users; and
- reliable, such that the financial statement:
- 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, i.e. free from bias;
- are prudent; and
- are complete in all material respects.
In making the above judgment consider the following sources in descending order:-
- requirements in Ind ASs dealing with similar and related issues;
- the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework; and
- most recent pronouncements of International Accounting Standards Board and in absence thereof those of the 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 above mentioned sources.
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.
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.
The Standard clarifies that initial application of a policy to revalue assets in accordance with Ind AS 16, Property, Plant and Equipment, or Ind AS 38, Intangible Assets, is a change in an accounting policy to be dealt with as a revaluation in accordance with Ind AS 16 or Ind AS 38, rather than in accordance with Ind AS 8.
Changes in accounting estimates
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.
Prior period errors
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 approved for issue; and
- could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.
An entity should correct material prior period errors retrospectively in the first set of financial statements approved 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.
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.
Retrospective and Prospective
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.
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 approved 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.