Some cash transactions, such as the issue of shares to acquire assets, and significant lease arrangements, are not shown on the cash flow statement.
However, such transactions may have a substantial impact on investing and financing activities and should be stated as a note.
If significant cash or cash equivalent balances are not available for use by the group due to legal or other restrictions in the subsidiary’s country of oper- ations, this fact and the amount involved should be stated in the notes.
EXAMPLES OF RELATED NATIONAL STANDARDS Australia: AASB 1026
Canada: CICA Handbook 1540 Germany: GAS 2, GAS 2-10, GAS 2-20 Malaysia: MASB 5
New Zealand: FRS 10 Taiwan: SFAS 17 United Kingdom: FRS 1 United States: SFAS 95
IAS 8
SCOPE
Entities producing financial statements that comply with IFRSs.
PROBLEM AND PURPOSE
The determination of an entity’s accounting policies is critical for the appropri- ate application of accounting standards. The disclosure of accounting policies is essential to assist the user in understanding financial statements. IAS 8 sets out the criteria for selecting and applying accounting policies, and accounting for changes in accounting policies. It also explains the appropriate treatment for changes in accounting estimates and corrections of prior period errors.
MAIN REQUIREMENTS
The standard deals with three separate matters:
• Accounting policies
• Changes in accounting estimates
• The treatment of material prior period errors
Accounting policies are specific principles, bases, conventions, rules, and practices. They are critical to the understanding of the financial statement and need not be applied only when the effect of applying them is immaterial.
Where an existing IFRS or SIC deals specifically with the appropriate ac- counting treatment of an issue, the entity must comply with that requirement.
Where an IFRS or SIC does not address the specific issues, management must use its own judgment by reference to the following criteria in the actual order set out as follows:
• Any other IASB Standard or Interpretation dealing with relevant matters
• Definitions, recognition criteria, and measurement concepts for assets, liabilities; income and expenses contained in the IASB’s Framework for the Preparation and Presentation of Financial Statements
• Recent pronouncements by other standard setting bodies that do not conflict with IFRSs and Framework
An entity must apply its accounting policies consistently unless an IFRS specifically requires or permits otherwise. It can only change its policies where required by a standard or interpretation or where the change improves the re- liability and relevancy of information in the financial statements. A change in IAS 8 • 83
accounting policy, resulting from the initial application of an IFRS, is ac- counted for in accordance with any specific transitional provisions that are in- cluded in the IFRS. If the change is not due to an IFRS, then it is applied retrospectively to all periods presented in the financial statements as if the new accounting policy has always been applied. In other words, the financial statements of the current period and each prior period presented are adjusted, so that it appears as if the new accounting policy had always been applied.
The disclosures to be made on changes due to a new standard or interpreta- tion are prescribed by these pronouncements.
Changes in accounting estimates will lead to adjustments in the carrying amounts of assets, liabilities, or related expenses. The change is due to a re- assessment of the expected future benefits and obligations. If there is a change in assets, liabilities, or equity, the carrying amount must be adjusted in the pe- riod of the change and future periods if they are affected. Financial statements of the prior period when the estimate was originally made do not need to be adjusted because it is assumed that the best estimate was made on the evi- dence that was available at that time. It is important to note that a change in an accounting estimate is different from a change in accounting policies. This difference is explained in the illustrative example.
Prior period errors, if material, should be adjusted in the financial state- ment of the prior period where the error occurred. The financial statements for the current period shall not be adjusted for prior period errors, since this would distort the results of the period when the error was identified rather than when it actually occurred. The comparative amounts of the prior period in which the error occurred should be restated. If the error occurred before the earliest prior period presented, the opening balances of assets, liabilities, and equity for the earliest prior period presented should be restated.
IAS 8 sets out the appropriate treatment if it is not practicable to make ret- rospective adjustments. Prior period errors are fundamental in nature and should only be recognized if it is clear that the original financial statements should not have been issued because of these errors. If the error arises due to a fault in an accounting estimate, but it was the best estimate that could be made at that time with the information available, it is a change in accounting estimates. No prior period adjustments are required.
MAIN DISCLOSURES
Accounting policies:
• Nature of the change in accounting policies
• Description of transitional provisions
• Details of the amount of adjustments
Accounting estimates:
• Nature of the change
• The financial effect expected in current period or future periods Prior period errors
• Nature of error
• Details of the amount of correction
• Explanation of error correction if there is no restatement
ILLUSTRATIVE EXAMPLE: ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
The ability of management to change accounting policies is severely restricted and should not be confused with accounting estimates. For example, if an en- tity determines that it should increase its provision for irrecoverable accounts receivable from 3% to 5% because of a poor economy, this is not a change in accounting policy. It is a change in the accounting estimate of the amount that it expects to recover from account receivables.
The application of the standard results in prior periods being adjusted for changes in accounting policies and correction of errors. Prior periods are there- fore comparable with the current period. Where there is a change in an account- ing estimate, the financial statements of prior periods are not adjusted but the new basis for making estimates will be used in the current and future periods.
EXAMPLES OF RELATED NATIONAL STANDARDS Australia: AASB 1001
Canada: CICA Handbook 1505, 1506 Germany: GAS 13
Malaysia: MASB 4 New Zealand: FRS 1 United Kingdom: FRS 18 United States: SFAS 16
IAS 8 • 85