LECTURE 6. ACCOUNTING POLICIES, ESTIMATES AND ERRORS FRS 108. Development: FRS 108 (Revised)2006. IASB issued : IAS 8 (Revised) Replaces FRS 108 2004 : Net Profit or Loss for the Period
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ACCOUNTING POLICIES, ESTIMATES AND ERRORS
(i) Selection of Actg Policies
(iii) Voluntary Changes in Actg Policies and Corrections of Prior Period Errors
FRS 108(Revised) requiresretrospective application of voluntary changes in accounting policy and retrospective restatement to correct prior period errors byremoving allowed alternative in FRS 108 2004. As a result?
Have to include in P&L of current period the adj from changing actg policy or the amount of a correction of a prior period error. JUSTIFIED?
To present unchanged comparative information from financial statements of prior periods. WHY?
Comparative information for prior periods is presented as if new accounting policies had always been applied and prior period had never occurred
(YOUR HOMEWORK: TO FIND TO WHAT EXTEND PREPARER HAS TO REPORT COMPARITVE INFO OF PRIOR ACTG PERIOD IN CURRENT ACTG PERIOD F/S. Is it 1 year, 2 year, 5 years? Or depends)Continue….. Main Changes
IF NOT PRACTICABLE, X change on comparative info when
changing actg policies retrospectively or prior period errors
corrected. FRS 108 (Revised) sets out def. ‘impracticable’ and
its guidelines. [IS THIS NECESSARY? WHOM IT WILL
PROTECT? ANY BENEFITS?]
(a) applying a new accounting policy to all prior periods
(b) an error on all periods
WHAT THE ENTITY NEEDS TO DO ?
the entity changes the comparative info as if the new accounting policy had been applied, or the error had been corrected, prospectively from the earliest date possible
(v) Fundamental Errors
Eliminated; Removing difference bet fundamental errors and materials errors (GOOD?), DEF. PRIOR PERIOD ERRORS
NOW REQUIRES, PREVIOUSLY ENCOURAGES (DIFFERENCE, IS THIS GOOD?)
to disclose known or reasonably (?) estimable info. relevant to assessing the possible impact of New Std or Interpretation (?) will have on entity’s f/s in the period of initial application
(viii) Other changes
(a) Entity to select and apply actg policies CONSISTENTLY
for similar transactions, events and conditions. UNLESS stds or interpretation specifically requires categorisation of items which result different policies > appropriate. In this case the diff policies need to be applied consistently for the respective category throughout accounting periods
Provided that changes in actg estimate lead to change in assets, liabilities and/or equity, ADJUSTMENTS need to be made on the carrying amount of related asset, liability or equity IN THE PERIOD CHANGE TAKEN PLACE
(a) actg policies,
(b) actg estimates and
(c) corrections of errors
(c) comparability (to what extent?)
Mgt Shall Use Its JudgementIn Developg And Applying
FRS Govern this action by Requiring Results of info. have to
Para 11 -In making judgement Mgt shall
refer to following sources in descending
(i) most recent pronouncements of other standard setting bodies (that use similar conceptual framework to develop actg stds)
(ii) actg literatures
(iii) accepted industry practice
PROVIDED that (i), (ii) and (iii) do not conflict
With PARA 11 , FRS 108 (Revised)
Why Consistency Matters?
To enable users to make comparative study of f/s?
(1) Entity shall change its accounting policies Prior Period ErrorsONLY if:
Required by a Std or Interpretation
It’ll make F/s more relevant and reliable wrt the effects of transactions, other events and conditions on the entity’s financial position, performance and c/f (Why the concentration on these 3 statements?)
(2) Users to be able to compare f/s of an entity over time to identify trends in fin posit., perform, cash flow. Hence for this purpose same actg policies have to be apllied…CONSISTENCY in ACTG POLICIES
(3) Followings, X Changes in actg Policies:
(i)Apply actg policies for transact. etc, differ in substance from previous occurrence
(ii) Apply new actg policies for transact. Etc did not occur previously or were immaterialContinue…Changes in Actg Policies
changes an actg policy voluntarily, SHALL APPLY CHANGE RETROSPECTIVELY