Ind AS-8: Accounting Policies, Changes in Accounting Estimates and Errors

Indian Accounting standard 8 is intended to enhance the reliability and relevance of an organization’s financial statements. It also aims to make them more comparable over time within the entity and also with financial statements of other entities.

Accounting policies, estimates and correction of errors play a major role in the presentation of financial statements. That is why Ind AS 1 state that an entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material. If there is any change in accounting policies, that needs to be dealt with due diligence and not just by mere note or explanation.

Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements.

Bases are the methods in which accounting principles may be applied to financial transactions. Eg. Method used to depreciate assets.

Principles are the guidelines which must be followed when reporting financial transactions.

Conventions consists of practices that arise from the practical application of accounting principles and is designed to help accountants vercome practical problems that arise while reporting financial transactions.

Practices are the ways by which its accounting policies are implemented and adhered to on a routine basis.

Rules are the golden rules of debit and credit of accounting.

This standard prescribes the guidelines for selecting and modifying accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of error. To understand the standard, we must first understand the following terms:

• Accounting principles are the specific principles, rules, bases, conventions and practices followed by an organization in preparing and presenting financial statements.

Example of accounting principle is the accrual and matching concept which requires the entity to record the expenses and income in the period in which it is incurred. Accounting principles form the very basis of accounting for transactions and presenting them.

• A change in accounting estimate is a modification of the carrying amount of a liability or an asset or the life of the asset, that results from the evaluation of the current status of, and expected future advantages and obligations linked with, assets and liabilities. Changes in accounting estimates arise due to new findings or new developments and, hence, are not corrections of errors.

Changes in Accounting Estimates

Accounting estimates are the estimations used by management to recognize amounts in the financial statements where precise values cannot be determined.

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 (depreciation), that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.

• Changes in accounting estimates result from new information or new developments and accordingly are not corrections of errors.

Example of a change in accounting estimate is the change in depreciation owing to change in the estimation of the useful life of the asset.

• Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior period refers to such errors that have occurred due to failure to use or misuse relevant information that was available when the statements were approved for the issue and could have been taken into account then.

Such errors include the outcomes of mathematical mistakes, errors in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Ind AS specifically applies to a transaction, other event or condition if it applies then, the accounting policy or policies to be applied shall be determined by applying Ind AS If the Ind AS does not apply then the management shall use its judgement in formulating and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users; and reliable, in that the financial statements:

• Reflect the economic substance of transactions, other events and conditions, and not merely the legal form.
• Represent accurately the financial position, financial performance and cash flows of the entity.
• Are neutral, ie free from bias.
• Are complete in all material respects.
• Are prudent.

Error Treatment

Errors can arise in respect of the identification, measurement, presentation or disclosure of elements of financial statements. An entity shall rectify material prior period errors retrospectively unless impracticable, after the finding of errors in the first set of financial statements:

(a) for the prior periods presented in which the error occurred by restating the comparative amounts; or

(b) 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. The standard also prescribes disclosure requirements in the case of changes in accounting policy, estimates and prior period errors.

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:

a) Was available when financial statement for those periods were approved for issue, and

b) Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statement.

Such errors include:

a) The effects of mathematical mistakes,

b) Mistakes in applying accounting policies,

c) Oversights or misinterpretations of facts, and

d) Fraud.

Change in Accounting estimates Versus prior period errors