Chapter 3 – Presentation of Financial Statements Page 46
8. Are the following statements true or false, according to IAS1 Presentation of
financial statements? 1
Biological assets should be shown in the statement of financial position.
2 The number of shares authorised for issue should be shown in the
statement of financial position or the statement of changes in equity or in the notes.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D
True True
9. Are the following statements true or false, according to IAS1 Presentation of
financial statements? 1
An entity presenting a single statement of comprehensive income should present a statement of changes in equity
2 An entity presenting a separate income statement and a statement of
comprehensive income should present a statement of changes in equity
Statement 1 Statement 2
A
False False
B False
True
C True
False
D
True True
10. In which section of the statement of financial position should cash that is
restricted to the settlement of a liability due 18 months after the reporting period be presented, according to IAS1 Presentation of financial statements?
select one answer
A Current assets
B
Equity
C
Non-current liabilities
D Non-current assets
Chapter 3 – Presentation of Financial Statements Page 47
11. In which section of the statement of financial position should employment
taxes that are due for settlement in 15 months time be presented, according to IAS1 Presentation of financial statements?
select one answer
A
Current liabilities
B
Current assets
C Non-current liabilities
D
Non-current assets
12. The Oakes Company has a loan due for repayment in six months time, but
Oakes has the option to refinance for repayment two years later. Oakes plans to refinance this loan.
In which section of its statement of financial position should this loan be presented, according to IAS1 Presentation of financial statements?
select one answer
A Current liabilities
B
Current assets
C
Non-current liabilities
D Non-current assets
Chapter 4 – Accounting Policies Page 49
Chapter 4 ACCOUNTING POLICIES
1 Business Context
The ability to compare financial statements year on year for an individual entity and between different entities is a fundamental process for investors and businesses alike. Effective
comparisons allow an entity to benchmark itself within a particular sector. Useful comparisons could not be undertaken if financial statements were prepared on different bases.
It is also imperative that companies are restricted in their ability to select different ways of treating the same information period on period. Such an ability would allow entities to choose
the most beneficial outcome in that period.
IAS 8 Accounting policies, changes in accounting estimates and errors provides the guidelines under which accounting policies can be changed, and therefore represents the
structure that underpins the successful comparison of financial statements.
2 Chapter Objectives
This chapter reviews IAS 8 which is primarily concerned with the statement of comprehensive income.
On completion of this chapter you should be able to: understand the objectives and scope of IAS 8;
interpret the important terminology and definitions which relate to the treatment of accounting policies, estimates and errors in financial statements;
understand the key principles relating to the recognition and measurement of retrospective and prospective adjustments;
demonstrate knowledge of the principal disclosure requirements of IAS 8; and apply knowledge and understanding of IAS 8, in particular circumstances, through
basic calculations.
Chapter 4 – Accounting Policies Page 50
3 Objectives, Scope and Definitions of IAS 8
The objective of IAS 8 is to enhance the relevance, reliability and comparability of financial statements, and it should be applied by an entity to select and apply its accounting policies. In
addition, IAS 8 should be applied where an entity changes its accounting policies or estimates, and for the correction of errors arising in prior periods.
The IASB Framework identifies comparability as one of the key qualitative characteristics of financial information. Comparability allows both the identification of trends over time in relation
to a single entity and the evaluation of comparative performance across different entities.
To facilitate comparability, it is important that: different entities take account of the same types of income and expenditure in arriving
at the profit or loss for the period; information is available about the accounting policies adopted by different entities;
different entities treat changes in accounting policies or estimates and the accounting for errors in the same way; and
the scope for accounting policy changes is constrained. Accounting policies are defined by IAS 8 as the specific principles, bases, conventions,
requirements and practices used by an entity in preparing and presenting its financial statements. In summary, accounting policies explain the way that an entity treats items within
its financial statements.
Accounting standards set out the required recognition and measurement principles that an entity should follow in preparing its financial statements, and will often prescribe the
accounting policy to be adopted. However, in the absence of a standard which specifically applies, management will be required to use its judgement in developing the most appropriate
accounting policies. It is important that such policies should be based on the IASB Framework to ensure wider comparability of the financial information published. Such policies should
reflect the economic substance of transactions and provide relevant information so that users of the financial statements are able to make informed investment decisions. [IAS 8.5, 8.10,
8.11, 8.12]
IAS 8 requires that accounting policies are applied consistently to similar transactions. [IAS 8.13]
Chapter 4 – Accounting Policies Page 51
4 Changes in Accounting Policies
An existing accounting policy should only be changed where a new accounting standard requires such a change or where the new policy will result in reliable and more relevant
information being presented. [IAS 8.14]
It is important to note how restricted the powers of management are in relation to accounting policies. Accounting policies should be based on the recognition and measurement
requirements laid down in international standards. Some standards provide choices which provide management with more flexibility.
A change of an existing accounting policy to another policy of equal relevance is not permitted on the grounds that, in these circumstances, comparability should take precedence.
IAS 8 requires changes in accounting policies to be accounted for retrospectively except where it is not practicable to determine the effect in prior periods. [IAS 8.19, 8.23]
Retrospective application is where the financial statements of the current period and each prior period presented are adjusted so that it appears as if the new policy had always been
followed. This is achieved by restating the profits in each period presented and adjusting the opening position by restating retained earnings i.e. cumulative profits held in the statement of
financial position as part of equity. [IAS 8.5]
Where it is not practicable to determine either the specific effect in a particular period or the cumulative effect of applying a new policy to past periods, the new policy should be applied
from the earliest date that it is practicable to do so. [IAS 8.24]
The reasons for and effects of a change in accounting policy should be disclosed. [IAS 8.28, 8.29]
Where a new standard has been issued but an entity is not yet required to implement it and the entity has not implemented it early, it should disclose this fact. The information provided
should quantify the effect on future periods if this can be reasonably estimated. This provides useful information to users of the financial statements about an entity’s future reported
performance. [IAS 8.30]
Illustration 1
Multi Ltd commenced trading two years ago, on 1 January 2006, and adopted the accounting policy then allowed by IAS 23 Borrowing costs of recognising all interest costs in profit or loss.
Its draft statement of financial position at 31 December 2007, and its final statement of financial position for the previous year are as follows:
2007 2006
CUm CUm
Property, plant and equipment 284
241 Other assets
899 900
1,183 1,141
Share capital 100
100 Retained earnings
year ended 2006 41
41 year ended 2007
42 Liabilities
1,000 1,000
1,183 1,141
In each of the two years borrowing costs attributable to qualifying assets of CU10 million have been recognised in profit or loss.
Chapter 4 – Accounting Policies Page 52
The revised IAS 23 requires borrowing costs attributable to qualifying assets to be recognised as part of the cost of those assets. Multi Ltd has adopted this standard early and designated
1 January 2006, the date on which it commenced trading, as the date on which the new standard should be adopted.
This change in accounting policy should be applied retrospectively as follows the tax implications as a consequence of this change and the potential impact on depreciation have
been ignored for the purposes of this illustration:
Restated 2007
2006 CUm
CUm Property, plant and equipment 284+10+10 241+10
304 251
Other assets 899
900 1,203
1,151 Share capital
100 100
Retained earnings year ended 2006 41+10
51 51
year ended 2007 42+10 52
- Liabilities
1,000 1,000
1,203 1,151
Chapter 4 – Accounting Policies Page 53
5 Changes in Accounting Estimates
The preparation of financial statements requires many estimates to be made on the basis of the latest available, reliable information. Key areas in which estimates are made include, for
example, the recoverability of amounts owed by customers, the obsolescence of inventories and the useful lives of non-current assets.
As more up-to-date information becomes available estimates should be revised to reflect this new information. These are changes in estimates and are not changes in accounting policies
or the correction of errors. [IAS 8.5]
Illustration 2
An entity’s accounting policy is to recognise assets at no more than their recoverable amounts. Consistent with this and based upon experience it has always provided in full
against trade receivables which have been outstanding for five months or more.
Because the economy is entering a period of recession, it reconsiders the recoverability of its receivables and decides to provide in full for amounts outstanding for four months or more.
This is not a change in accounting policy. What has changed is the level of the receivables that are thought to be recoverable. This is a change in estimate.
By its very nature the revision of an estimate to take account of more up to date information does not relate to prior periods. Instead such a revision is based on the latest information
available and therefore should be recognised in the period in which that change arises. The effect of a change in an accounting estimate should therefore be recognised prospectively,
i.e. by recognising the change in the current and future periods affected by the change. [IAS 8.5, 8.36]
Illustration 3
A machine tool with an original cost of CU100,000, has an originally estimated useful life of ten years, and residual value of nil. The annual straight-line depreciation charge will be
CU10,000 per annum and the carrying amount after three years will be CU70,000.
If in the fourth year it is decided that, as a result of changes in market conditions, the remaining useful life is only three years so a total of six years, then the depreciation charge
in that year and in the next two years will be the carrying amount brought forward divided by the revised remaining useful life, CU70,0003 = CU23,333. There should be no change to the
depreciation charged for the past three years.
The effect of the change in this case an increase in the annual depreciation charge from CU10,000 to CU23,333 in the current year, and the next two years, should be disclosed.
