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

Chandan Kumar Gupta

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Ind AS 8 specifies the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities.The disclosures required in respect of changes in accounting policies are set out in Ind AS 8. Other disclosure requirements for accounting policies are laid down in Ind AS 1, Presentation of Financial Statements.

Selection and Application of Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.This Standard requires that when an Ind AS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the Ind AS.In the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy. The accounting policy should be such as results in information that is:

• relevant to the economic decision-making needs of users; and

• reliable, so that the financial statements:- represent faithfully the financial position, financial performance and cash flows of the entity;

- reflect the economic substance of transactions, other events and conditions, and not merely the legal form;

- are neutral, i.e., free from bias;- are prudent; and

- are complete in all material respects.

In making the aforesaid judgement, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements in Ind ASs dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Conceptual Framework) issued by the ICAI.

Further, in making the judgement, management may also first consider the most recent pronouncements of International Accounting Standards Board and in absence thereof those of the other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources referred to in the preceding paragraph.

Consistency of Accounting Policies

An entity shall select and apply the accounting policies consistently for similar transactions, other events and conditions, unless an Ind AS specifically requires or permits categorisation of items for which different policies may be appropriate. If an Ind AS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.

Changes in Accounting Policies

An entity shall change an accounting policy only if the change:

(a) is required by an Ind AS; or

(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

Subject to the exception discussed below, a change in an accounting policy shall be applied as follows:

• A change in accounting policy resulting from the initial application of an Ind AS shall be applied as per the transitional provisions in that Ind AS.

• If that Ind AS does not contain any transitional provisions, the change shall be applied retrospectively.

• A voluntary change in accounting policy shall be applied retrospectively. The Standard clarifies that an early application of an Ind AS is not a voluntary change in accounting policy.

Retrospective application of a change in accounting policy involves adjustment to the opening balance 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 accounting policy had always been applied.

An exception to giving retrospective effect to a change in accounting policy applies where it is impracticable to determine either the period-specific effects or the cumulative effect of the change.When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period.When it is impracticable to determine the cumulative effect at the beginning of the current period of applying the new policy to all prior periods, the entity shall apply the new policy prospectively from the start of the earliest period practicable. Thus, in such a situation, the entity disregards the portion of the cumulative adjustment to assets, liabilities and equity arising before that date. Changing an accounting policy is permitted even if it is impracticable to apply the policy prospectively for any prior period.The application of an accounting policy for transactions, other events or conditions that (a) differ in substance from those previously occurring or (b) are applied to transactions, other events or conditions that did not occur previously or were immaterial are not change in accounting policy.The Standard clarifies that initial application of a policy to revalue assets in accordance with Ind AS 16, Property, Plant and Equipment, or Ind AS 38, Intangible Assets, is a change in an accounting policy to be dealt with as a revaluation in accordance with Ind AS 16 or Ind AS 38, rather than in accordance with Ind AS 8.

Accounting Estimates

Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty. An accounting policy may require items in financial statements to be measured in a way that involves measurement uncertainty—that is, the accounting policy may require such items to be measured at monetary amounts that cannot be observed directly and must instead be estimated. In such a case, an entity develops an accounting estimate to achieve the objective set out by the accounting policy. Developing accounting estimates involves the use of judgements or assumptions based on the latest available, reliable information.An entity uses measurement techniques and inputs to develop an accounting estimate.The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

Changes in accounting estimates

An entity may need to change an accounting estimate if changes occur in the circumstances on which the accounting estimate was based or as a result of new information, new developments or more experience. By its nature, a change in an accounting estimate does not relate to prior periods and is not the correction of an error.The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors.

Applying changes in accounting estimates

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.The effects of other changes in accounting estimates shall be recognised prospectively by including them in profit or loss in:(a) the period of the change, if the change affects that period only; or(b) the period of the change and future periods, if the change affects both.

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

Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of an error, the Standard requires an entity to correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by:

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; 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.

Potential current period errors discovered during the period are corrected before the financial statements are approved for issue.

The term Material has been defined in Ind AS 1 and is used in this Standard with the same meaning.

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.

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