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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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Lecture 6



FRS 108

Development frs 108 revised 2006
Development: FRS 108 (Revised)2006

  • IASB issued : IAS 8 (Revised)

  • Replaces FRS 108 2004 : Net Profit or Loss for the Period

  • Revised standard: Eliminate alternatives, redundancies and conflicts within Standards, to deal with convergence issues (i.e. Malaysia to fully converge to IAS and IFRS by 1/1/2012) and make improvements

Continue iasb objs for changes
Continue….IASBobjs for Changes

  • To remove allowed alternative to retrospective (i.e. to go back and assess previous accounting period reporting) application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors (More ctrl of retrospective adj)

  • To eliminate concept of fundamental error

  • Articulate (i.e. Clarify) and Updates the hierarchy of guidance to which management refers when making decisions on accounting policies to be adopted in the absence of specific Standards and Interpretations

Continue ias 108 revised objs
Continue….IAS 108 (Revised) Objs

  • Define material omissions or misstatements, Describe how to apply concept of materiality when applying accounting policies and correcting errors

  • To incorporate consensus of SIC 2- Consistency: Capitalisation of Borrowing Costs and SIC-18: Consistency Alternative Methods (both had not been incorporated in FRS 108 2004)

Main changes to frs 108 2004
Main Changes to FRS 108 2004

(i) Selection of Actg Policies

  • Requirements for the selection and application of accounting policies in FRS 101 2004 transferred to FRS 108 (Revised) + Updates hierarchy of guidance for selection of actg policies, mgt refers when specific actg std not available

Continue main changes
Continue…Main Changes

(ii) Materiality

  • FRS 108 (Revised) defines material omission and misstatement such that

    • X need to apply FRSs if the effect immaterial + complement FRS101 req. on disclosure x need if immaterial

    • F/s x comply with FRSs if material errors exist.

    • Material prior period errors are to be corrected retrospectively in the first set of financial statements authorised for issue after their discovery (e.g. If errors found in actg period 2009 wrt to actg period 2008, to correct 2009 accounts as well as 2008)

Continue main changes1

(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


Continue….. Main Changes

Continue main changes2
Continue…Main Changes Prior Period Errors

(iv) Impracticability

  • This EXEMPTION criterion is retained,

    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


  • When impracticableto determine cumulative effect, in particular at beginning of the current period of:

    (a) applying a new accounting policy to all prior periods

    (b) an error on all periods


    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

  • Continue main changes3
    Continue…Main Changes Prior Period Errors

    (v) Fundamental Errors

    Eliminated; Removing difference bet fundamental errors and materials errors (GOOD?), DEF. PRIOR PERIOD ERRORS

    (vi) Disclosures


    • To disclose impending (awaiting) change in actg policy when the Standards and Interpretations have been issued but implementation x yet compulsory. Together

      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

    Continue main changes disclosures
    Continue…Main Changes…Disclosures Prior Period Errors

    • MORE DETAILED disclosure of amounts of adj. resulting from changing actg policues or correcting prior periods. Specifically on f/s line items, E.g FRS 133 EPS, to account for both basic and diluted EPS

      (viii) Other changes

    • Presentation req for P&L under FRS 101

    • Incorporates consensus of SIC-18: Consistency –Alternatives Methods

      (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

    • Include def. of change in actg est.

    • Include EXCEPTIONS from including effects of changes in actg est. propectively in P&L.

      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

    Frs 108 revised objs
    FRS 108 (Revised): OBJs Prior Period Errors

    • To prescribe the criteria for selecting and changing actg policies, actg treatment and disclosure of CHANGES in :

      (a) actg policies,

      (b) actg estimates and

      (c) corrections of errors

    • To enhance entity’s f/s :

      (a) relevance

      (b) reliability

      (c) comparability (to what extent?)

    • Deal with disclosure of CHANGES IN ACTG POLICIES, (Disclosure of Actg Policies to refer to FRS 101)

    Frs 108 revised scope
    FRS 108 (REVISED): SCOPE Prior Period Errors

    • Selecting and Applying Actg Policies

    • Accounting for Changes in Actg Policies

    • Changes in Actg Estimates

    • Corrections of Prior Period Errors

    Accounting policies selection and application of actg policies
    Accounting Policies Prior Period ErrorsSelection and Application of Actg Policies

    • Selection based on Stds, Interpretations, Implementation Guidance (x form or be part of FRS) issued by MASB

    • Specifically, MASB concluded FRSs result in f/s contain relevant and reliable info when reporting transactions, events and conditions. UNLESS effects applying FRS immaterial. Further CAUTION need to be exercised when x following FRSs in the event of immateriality, consequence ur action may x be inappropriate, leave error uncorrected? THINK about it?

    Continue selecting applic actg policies
    Continue….Selecting + Prior Period ErrorsApplic. Actg Policies

    • Absence of Std or an Interpretations. What the preparer should do? VERY CRITICAL?

      Mgt Shall Use Its JudgementIn Developg And Applying

      Acounting Policies:

      FRS Govern this action by Requiring Results of info. have to


    • Relevant to the economic decision-making of users of a/c

    • Reliable

      • Faithfully represented, finl position, performance, cash flow of the reporting entity

      • Substance over form, reflect economic substance of transactions and x merely legal form

      • Neutral (x bias, balance?)

      • Prudent

      • Complete in all material respects

    Continue…. Prior Period Errors

    Para 11 -In making judgement Mgt shall

    refer to following sources in descending


    • The requirements and guidance in Standards and Interpretations wrt similar or related issues

    • Def., recog criteria and measurement concepts of assets, liabilities , income, expenses as set out in FRAMEWORK of Financial Stat

    Continue…… Prior Period Errors

    • In making the judgement, Mgt may also consider

      (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)

    Continue consistency actg policies
    Continue…Consistency Prior Period ErrorsActg Policies

    • To apply actg policies CONSISTENTLY (is about time frame, types of transactions, events or condition) for similar and related transactions through out actg periods UNLESS CATEGORISATION of item (e.g. diff parts of large asset may be depreciated using diff methods) > appropriate --- > apply more appropriate Actg Policies--- > consistently

      Why Consistency Matters?

      To enable users to make comparative study of f/s?

    Continue changes in actg policies

    (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 immaterial

    Continue…Changes in Actg Policies

    Continue changes in actg policies1
    Continue…… Prior Period Errors Changes in Actg Policies

    • Initial application of a policy to revalue assets - Considered a change in an actg policy (FRS 116: PPE; FRS 3: Intangibles

    Changes in actg policies applying changes in accounting policies
    Changes in Prior Period ErrorsActg Policies ….. Applying Changes in Accounting Policies

    • Account for change in actg policy as a result initial application of a Std OR Interpretation in accordance with specific transitional provisions, in the Stds or Interpretation

    • When entity changes actg policy upon initial application of a std or Interpretation that x include specific transitional provisions applying to that change, or

      changes an actg policy voluntarily, SHALL APPLY CHANGE RETROSPECTIVELY

    Continue Prior Period Errors

    • HOWEVER, early application of a std or an Interpreattaion is not a voluntary change in actg policy

    • When appropriate Stds / Interpretation not available, MGT may apply an actg policy from the most recent pronouncements of other std setting bodies that use similar conceptual framework

    Changes in actg policies retrospective application
    Changes in Prior Period ErrorsActg Policies …..Retrospective application

    • When change in actg policy is applied retrospectively, the entity shall adjust the OPENING BAL. of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new actg policy had always been applied (PARA 22)

    Continue changes in actg policies limitation on retrospective application para 23 27
    Continue …Changes in Prior Period Errorsactg policies…Limitation on retrospective application PARA 23 -27

    • Except to the extent that it is impracticable to determine either the period specific effects or cumulative effect of the change.

    • When entity applies new act policy retrospectively, it applies the new actg policy to comparative info. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect