LKAS 08

Accounting Policies, Changes in Accounting Estimates and Errors (LKAS 8) by N. Amalihapuhinna

Objective

  • Provides guidance on how to account for:

    • Changes in accounting policies

    • Changes in accounting estimates

    • Corrections of prior period errors

Scope

  • This Standard shall be applied in:

    • Selecting and applying accounting policies

    • Accounting for changes in accounting policies

    • Accounting for changes in accounting estimates

    • Corrections of prior period errors

  • Tax effects of corrections and retrospective adjustments:

    • Accounted for and disclosed per LKAS 12 Income Taxes

Definitions

  • Accounting policies: Specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

  • Accounting Estimates: Monetary amounts determined when measurement involves uncertainty. Examples include:

    • Depreciation

    • Provisions

Sri Lanka Accounting Standards (SLFRSs)

  • SLFRSs are Standards and Interpretations adopted by CA Sri Lanka.

  • They comprise:

    • Sri Lanka Accounting Standards (SLFRSs)

    • Sri Lanka Accounting Standards (LKASs)

    • Statement of Recommended Practices (SoRPs)

    • Statement of Alternative Treatments (SoATs)

    • Interpretations adopted (IFRIC & SIC)

    • Financial Reporting guidelines issued by CA Sri Lanka

Materiality

  • Omissions or misstatements are material if they could influence economic decisions made by users based on financial statements.

  • Judged by size and nature of omission, considering surrounding circumstances.

Prior Period Errors

  • Defined as omissions and misstatements in an entity's financial statements for one or more prior periods, arising from:

    • Failure to use or misuse reliable information available at the time financial statements were authorized for issue.

    • These errors can include:

    • Mathematical mistakes

    • Mistakes in applying accounting policies

    • Oversights or misinterpretations of facts

    • Fraud

Retrospective Application & Restatement

  • Retrospective application: Applying a new accounting policy as if the policy had always been in use.

  • Retrospective restatement: Correcting recognition, measurement, and disclosure of financial statements as if a prior error had never occurred.

  • Impracticable: When the entity cannot apply a requirement after reasonable effort. This includes scenarios where:

    • Effects are not determinable

    • Assumptions about management's intent are required

    • Significant estimates cannot be objectively distinguished and verified

Prospective Application

  • Prospective application of a change in accounting policy and accounting estimates includes:

    • Applying new policy to transactions and conditions after the change date

    • Recognizing effects of changes in estimates in the current and future affected periods.

Judgment in Policy Development

  • In the absence of SLFRS that applies, management uses judgment to develop and apply accounting policies that provide:

    • Relevant information for economic decision-making

    • Reliable financial statements that:

    • Faithfully represent financial position, performance, cash flows

    • Reflect economic substance, not just legal form

    • Are neutral, prudent, and complete in material respects

Consistency of Accounting Policies

  • Policies should be applied consistently for similar transactions unless a SLFRS allows different categorization. If so, appropriate policies must be consistently applied to each category.

Changes in Accounting Policies

  • An entity may change an accounting policy only if:

    • Required by SLFRS

    • Results in financial statements providing more reliable and relevant information

  • The following are not considered changes in accounting policies:

    • Application of a policy for different substances

    • Initial application of a revaluation policy in accordance with LKAS 16 or LKAS 38

Retrospective Application Requirements

  • When a change is applied retrospectively, the entity must:

    • Adjust the opening balance for affected equity components for the earliest prior period presented.

    • Adjust other comparative amounts disclosed as if the new policy had always been applied.

Disclosure Requirements

  • When the initial application of a SLFRS affects periods:

    • The entity must disclose:

    • Title of the SLFRS

    • Nature of the policy change

    • Amount of adjustment for financial statement items affected

    • Circumstances of impracticability if applicable

  • Financial statements of future periods do not need to repeat these disclosures.

Guidelines for Voluntary Changes in Accounting Policy

  • When a voluntary change affects periods:

    • Disclosures should include:

    • Nature of the change

    • Reasons for the change providing more reliable information

    • Amount of adjustments for affected periods

    • Cirumstances leading to impracticality if applicable.

Practical Questions (PQs)

  • PQ 1 B: A change in inventory valuation method is classified as a change in accounting policy under LKAS 8. Other examples like allowances for doubtful debts and depreciation methods are accounting estimates.

  • PQ 2 B + C: A mandatory change in accounting policy must comply with IFRS. Otherwise, a company may choose a new policy if it enhances reliability and relevance. Changing policies solely for easier reporting is not permitted.

  • Changes in Accounting Estimates: Due to uncertainties, estimations like bad debts and inventory obsolescence are crucial in financial statements. Reasonable estimates preserve reliability.

  • The change effect is recognized:

    • Prospectively in profit or loss in the change period or in subsequent affected periods.

    • Adjust the carrying amount of related assets, liabilities, equity in that change period.

  • Error Disclosure: Must detail:

    • Nature of the error

    • Amount of correction per financial statement line item

    • Correction of Material Prior Period Errors: Corrected retrospectively in the first financial statements authorized after discovery. Errors must be relatively restated unless impractical to determine.

  • PQ 3: If depreciation expense for 20X3 was overstated, the entity must:

    • Reissue corrected financial statements

    • Reduce depreciation for 20X4 accordingly

    • Restate depreciation in comparative figures for 20X4.

  • PQ 4: If financial statements were authorized after the discovery, the entity must:

    • Correct its statements before issuing

    • Follow prospective and retrospective requirements as in PQ 3.

  • PQ 5: True statement: Financial statements need not repeat disclosures for changes in accounting policy or prior period error corrections.

  • PQ 6: Not a change in accounting policy: A basis change for measuring a building due to fair value measurement difficulties.

  • PQ 7: In 2019, an error in inventory included in the CRO has impacted financial statements.

    • Comparative figures provided for re-evaluation based on this error.