IAS 8 Prospective or Retrospective in Changes in Accounting Policies and Estimates PDF

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Summary

IAS 8
retrospective and prospective changes...

Description

Financial statements are prepared based on Company’s accounting policy and estimation. Every company has a different accounting policies and different estimation as well, depend on the nature of business, size of business, strategy, internal and external environment.

Accounting policies and estimation are made to make financial statements relevant and reliable for the user and economic condition on the reporting date. In applying accounting policies and estimation, Entity is required to apply consistently, so that the financial statements can be compared with previous period. Example: if in 20X1, X Company use average method for inventory valuation, then in 20X2, they should use the same inventory valuation that they used for 20X1 in preparing financial statement 20X2. Because if, X company change the accounting policies on inventory valuation (from FIFO to average), the financial statements for 20X1 and 20X2 can’t be compared.

Consistency in applying accounting policies and estimates doesn’t mean that we can’t change the policies and estimates. Accounting policies can be changed if only:

● The changes are required by Mandatory Accounting Standards (Local Accounting Standards). ● The changes can produce financial statements that give more reliable and relevant information on impact of transaction, event, or other circumstances.

How it is Treated? In applying changes in accounting policies and estimates, IAS divided into two treatments, retrospective or prospective. Retrospective means Implementation new accounting policies for transaction, event, or other circumstances as if it had been implemented. In other words, retrospective will effect presentation of financial statements for previous periods. While prospective means implementation new accounting policies for transaction, event, or other circumstances after new accounting policies or estimation has been implemented.

Prospective or Retrospective Implementation? When prospective or retrospective implementation should be applied? ● Retrospective implementation should be applied if the new accounting standards or policies are required by mandatory accounting standards and the changes can produce financial statements that give more reliable and relevant information on impact of transaction, event, or other circumstances. In the example above, if X company in 20X2 changes the inventory valuation method from FIFO to average, so that new accounting policies should be applied retrospectively. Then, the financial statements of X company for 20X1 should be restated. And Errors may arise from mistakes and oversights or misinterpretation of information. Material prior- period errors are adjusted retrospectively (that is, by restating comparative figures) unless this is impracticable. ● Prospective implementation should be applied if there is changes in accounting estimation....