IAS 8 Notes PDF

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Summary

1. Introduction: Disclosure standard provides relevant info to assist understanding of the FS o Selection application of accounting policies o in accounting policies o in accounting estimates (based on most recent relevant info available could change) o Correction of prior period errors Question can...

Description

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Disclosure standard – provides relevant info to assist users’ understanding of the FS o Selection & application of accounting policies o ∆s in accounting policies o ∆s in accounting estimates (based on most recent + relevant info available – could change) o Correction of prior period errors

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Question can either be: o Note :. ito line items (balances) o Journals :. GJ

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SFP: cumulative effect SPLOCI: period specific effect

2. Changes in Accounting Estimates: Definitions: 

Change in accounting estimate: adjustment of the CA of an A or L, or amt of periodic consumption of an A, that results from present status of, and expected future benefits + obligations associated with, A & L. Results from new information or new developments :.not a correction of an error

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Prospective application: recognizing effect of ∆ accounting estimate in current & future periods affected by change Affects only current & future periods

Use of estimates: 

Uncertainties inherent in business :. estimation involves judgements based on latest available reliable info e.g. o Bad debts o Inventory obsolescence o FairV of fin assets or fin liab.

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Useful lives of, or expected pattern of consumption of economic benefits (depreciation) embodied in, depreciable assets o Warranty obligations Reasonable estimates don’t undermine reliability of FS Estimate may need revision if changes occur in circumstances on which estimate based or due to new info/more experience Change in measurement basis is a change in accounting policy (not ∆ estimate) e.g. FIFO & WA Change in method of writing off depr./amort. is a change in estimate o

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Recognition 

Effect of ∆ accounting estimate is recognised prospectively from the period of the change being made by including it in P/L in: o period of change, if change affects that period only o period of change + future periods if change affects both

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Change in estimate must be worked back to beginning of yr to calculate CY’s dep./amort. e.g. RUL of 6 yrs on reporting date is RUL of 7 yrs at beg of yr

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If impairment indicator and ∆ estimate both occur on reporting date: o impairment loss recognised in current yr (CY) o depr./amort. for CY based on old estimate o new estimate applied in following yr

Disclosure  

Disclosed in PBT note (FRK 300) or in separate note “Change in estimate” Disclose: o nature o amt of ∆ estimate that has effect in current period + cumulative effect on future periods (excluding current yr :. [old dep x RUL] less [new dep x RUL]) Unless impracticable then disclose this fact

Income Tax Implications   

Affects starting point of current & deferred tax calcs i.e. PBT & CAs of affected Assets + Liab. PBT & CAs adjusted before tax calcs are done ∆ estimate doesn’t affect calc of tax allowances or tax base

3A. Choice & Application of Accounting Policies: Definitions 2

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Accounting policy: see IAS 8 IFRS: see IAS 8 Material: omissions/misstatements are material if they could, individually/collectively, influence economic decisions users make on basis of FS Depends on size + nature of omission/misstatement.

Selection & application  

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When an IFRS specifically applies to tx, event or condition, accounting policy (AP) applied determined by applying IFRS (results in FS containing relevant + reliable info) In absence of IFRS, management use judgment in developing + applying an AP that results in relevant + reliable info o See sources management should refer to (par 11 – 12) Entity select + apply AP consistently for similar txs, events & conditions unless IFRS requires/permits categorization of items (to which diff AP can be applied)

3B. Changes in Accounting Policies: Definitions 

Retrospective application: applying a new accounting policy to txs, events & conditions as if policy had always been applied o Adjust opening balance of each affected component of equity for earliest prior period presented; and o Adjust comparative amts disclosed for each prior period presented o As if new AP had always been applied

Recognition 

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2 types of changes in AP o Compulsory: required by an IFRS o Voluntary: results in more relevant + reliable info Change can only be made if one of the above applies Users of FS need to be able to compare FS over time Not ∆ AP: o AP never been applied before o AP applied for txs, events & conditions that differ in substance from those prev occurring IAS 16 or IAS 38 Revaluation: is a ∆ AP to be dealt with as revaluation ito IAS 16 (NOT in accordance with IAS 8) :. applied prospectively from date of first revaluation IAS 40: full restrospective application of change in AP from cost model to FV model

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Applying changes in AP 

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Compulsory (Required by IFRS) o dealt with in accordance with transitional provisions contained in the IFRS o if no transitional provisions – change is made retrospectively Voluntary : retrospective application

Disclosure: See booklet for example      

3 columns for SFP (Current; Comparative; Opening Balance of Comparative Yr) 2 columns for SPLOCI (Current; Comparative) Compulsory: Disclosed in separate note – see par 28 Voluntary: Disclosed in separate note – see par 29 FS of subsequent periods need not repeat these disclosures If entity not applied a new IFRS issued but not yet effective, entity shall disclose: o this fact; and o known/estimable info to assess possible impact that application will have on FS

Income Tax Implications ACCOUNTING RECORDS

INCOME TAX RETURNS

RE-OPEN: Prior years’ profit and loss (and OCI) GL accounts can be used to post jnls to account for changes in AP as if GL accounts had not been closed off to RE or another reserve.

RE-OPEN: Decision made by SARS. Indicates that SARS has also accounted for ∆ retrospectively. SARS will recalculate entity’s current tax (CT) obligation for prior years’ assessments. Deferred tax (DT) for prior periods recalculated if temp diffs change (i.e. if CAs or tax base amts change)  

Affects CT Usually no DT implication

NOT RE-OPENED: Prior yrs’ profit or loss (and OCI) GL accounts not available to process jnl entries.

NOT RE-OPENED: prior yrs recog in DT SARS did not accept retrospective ∆. Only accepts the closing balance of the current yr.

Adjustments made directly in opening balance of retained earnings (or other equity account).

SARS only accepts new AP when current yr’s CT obligation is calculated. Thus, current yr CT calc. includes an adjustment for ∆ AP where retrospective application would’ve affected opening balances.

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Affects only jnl entries Disclosure stays the same If doesn’t state otherwise, assume accounting Deferred tax (DT) for prior periods recalculated if records CANNOT be re-opened temp diffs change (i.e. if CAs or tax base amts 4

change). Since prior yrs’ assessments not reopened, no changes to Tax Base :. will be a ∆ temp diffs (due to ∆ CAs)  

Affects CT & DT Affects both jnl entries & disclosure

3C. Retrospective Application of ∆ AP not possible: Definitions 

Impracticable: entity cannot apply requirement after making every reasonable effort to do so – for prior period, it is impracticable to apply ∆ AP retrospectively if: (3) o effects thereof cannot be determined; o assumptions about what management intended would be required; or o estimations are necessary for application and there are no objective ways to distinguish between information available when policy applied in previous yrs & other info

Impracticability 

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Sometimes, it’s impracticable to adjust comparative info for 1+ prior periods: o data not collected at the time in prior period o estimates are subjective + more difficult to develop when retrospectively applying AP due to longer period of time that has passed NOTE: actual outcomes in prior periods cannot be used as estimated amts to be used for prior periods

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Impact of impracticability: o Cumulative effect (SFP); or o Period specific effect (SPLOCI) of retrospective application; or o Both o CANNOT BE DETERMINED for 1+ prior periods

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Alternative to full retrospective application: o

Impracticable to determine period specific effect on prior periods: the cumulative effect (sum of all individual movements) on prior periods can be determined but not individual movements per period :. retrospective application from earliest date possible (from 1st period for which cumul. effect @ be of yr can be det.)

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Impracticable to determine cumulative effect at beg of current yr: the cumulative effect at beg of current yr (sum of movements of prior periods) cannot be determined :. 5

retrospective application from earliest date possible (balances before this date remain unchanged) → if neither can be det., apply prospectively from 1st period practicable

4A. Correction of Prior Period Error: arises from existing info Definitions 

Prior period errors: omissions from, and misstatements in, FS for 1 or more prior periods arising from a failure to use, or misuse of, reliable information that: o was available when FS for those periods were authorised for issue o could reasonably be expected to have been obtained

Errors 

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FS don’t comply with IFRSs if contain either: o material errors; or o immaterial errors made intentionally Current period errors discovered in that period are corrected before FS authorized for issue

Correction 

Material prior period errors are corrected retrospectively (as if it had never occurred) by o Restating comparative amts for prior periods presented; or o if error occurred before earliest prior period presented, restating opening balances

Disclosure 

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Disclosed in a separate note “Prior period error” – see par 49 of IAS 8 o 2 columns for SFP (Comparative; Opening Balance of Comparative) o 1 column for SPLOCI (Comparative) TB ∆s: affects both CT & DT See booklet for example

Income Tax Implications: basically same as ∆ AP

Tax Rate ∆s: just DT – affects IT exp

ACCOUNTING RECORDS

INCOME TAX RETURNS

RE-OPEN: Prior years’ profit and loss (and OCI) GL accounts can be used to post jnls to account for correction of prior period error as if GL accounts had not been closed off to RE or another reserve.

RE-OPEN: Decision made by SARS. Indicates that SARS has also accounted for ∆ retrospectively. SARS will recalculate entity’s current tax (CT) obligation for prior years’ assessments. Deferred tax (DT) for prior periods recalculated if temp diffs change (i.e. if CAs or tax base amts change)  6

Affects CT

 NOT RE-OPENED: Prior yrs’ profit or loss (and OCI) GL accounts not available to process jnl entries.

NOT RE-OPENED: SARS did not accept retrospective ∆. Only accepts the closing balance of the current yr.

Adjustments made directly in opening balance of retained earnings (or other equity account).   

Usually no DT implication o Greater chance that tax base will change due to prior period error for which prior tax returns re-opened

SARS only accepts new AP when current yr’s CT obligation is calculated. Thus, current yr CT calc. already includes an adjustment for the correction of the prior period error.

Affects only jnl entries Disclosure stays the same If doesn’t state otherwise, assume accounting records CANNOT be re-opened

Deferred tax (DT) for prior periods recalculated if temp diffs change (i.e. if CAs or tax base amts change). Since prior yrs’ assessments not reopened, no changes to Tax Base :. will be a ∆ temp diffs (due to ∆ CAs)  

Affects CT & DT Affects both jnl entries & disclosure

4B. Retrospective Restatement of Prior Period Error Impracticable: Definitions  

Retrospective Restatement: Impracticable: see 3C

Impracticability: see 3C  

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3 reasons Impact: o Cumulative effect (SFP); or o Period specific effect (SPLOCI) of retrospective restatement; or o Both o Cannot be determined for 1 or more periods Alternative: o Impracticable to determine period-specific effect on prior periods: cumulative effect on prior periods (sum of all individual movements) can be determined but not individual movements per period :. retrospectively restated from earliest date possible o Impracticable to determine cumulative effect at beg of current yr: cumulative effect at beg of current yr (sum of movements of prior periods) cannot be determined :. correction 7

applied from earliest date possible (balances before this date remain unchanged) → if only from beg of CY, no retrospective application :. prospective application from CY

5. Additional Notes: ∆ Estimate 

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If depreciable/amortisable amt DID NOT change – cumulative effect on future periods is same as current yr’s effect (if DID change, will be different – future periods amt calculated after end of current yr) Can have a change in UL AND a change in residual value

∆ Accounting Policy    

Insert “Effect of change in AP” after old opening balance of RE in SCE Insert “re-stated” before adjusted amts in SCE If SARS doesn’t re-open tax returns from previous yrs, the tax impact of previous financial yrs is recognised against deferred tax. If cumulative effect of prev yr’s closing balance can’t be determined, period-specific effect of following yr can’t be determined either.

Correction of Prior Period Error  

Tax bases are not affected by impairment losses, revaluation surpluses or revaluation deficits o Only the CA is affected Tax allowances not influenced by impairment losses, revaluation surpluses or revaluation deficits :. taxable profit i.e. current tax is unaffected

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