Accounting policies are the principles, bases, conventions, rules and practices applied by a Company which specify how the effects of the transactions and other events are reflected in the financial statements
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International Accounting Standards (IAS) 8 “Accounting Policies, Estimates and Errors” requires a Company to select and apply appropriate accounting policies complying with International Financial Reporting Standards (IFRS) and Interpretations to ensure the financial statements provide information that is:
1) Relevant to the decision-making needs of users
Who are the users of the financial statements?
- Shareholders – they are concerned with receiving adequate return on their investment
2) Reliable in that they:
- Represent faithfully the results and financial position of the entity
- Reflect the economic substance of events and
transactions and not merely the legal form
- Are neutral, i.e. free from bias
- Are prudent
- Are complete in all material aspects
CHANGE IN ACCOUNTING POLICIES
IAS8 requires accounting policies to be change only if the change is:
- Required by IFRSs or
- Will result in a reliable and more relevant
presentation of events or transactions
A change in accounting policy occurs if there has been a change in:
- Recognition, e.g. A pre-operating expenses is now recognized as expense rather than asset
- - Presentation, e.g. A depreciation expense is now
charged in cost of sales rather than administrative expenses, or
- - Measurement basis, e.g. stating assets at replacement
cost rather than historical cost
Accounting treatment
- The change should be applied retroactively, with an adjustment to the opening balance of retained earnings in the statement of changes in equity
ACCOUNTING ESTIMATE
Is a method adopted by an entity to arrive at estimated amounts for the financial statements
Most figures in the FS require some estimation:
- The exercise of the judgment based on the latest information available at the time
- At a later date, the estimates may have to be revised
as a result of the availability of new information, more experience or
subsequent developments
CHANGE IN ACCOUNTING ESTIMATES
The requirements of IAS 8 are:
- The effects of a change in accounting estimate should
be included in the statement of income in the period of the change and, if
subsequent periods are affected, in those subsequent periods.
Example of change in accounting estimates is change in:
- The useful lives of non-currents; e.g. the Company change the life of its computer equipment from 5 years to 3 years because of technology advancement.
Are omissions from and misstatements in the financial statements for one or more periods arising from a failure to use information that:
- - was available when the FS for those periods were
authorized for issue and
- - could reasonably expected to have been taken into
account in preparing those financial statements
Such errors include mathematical mistakes, mistakes in applying accounting policies, oversights and fraud.
Current period errors that are discovered in that period should be corrected before the financial statements are authorized for issue.
Correction of prior period errors:
- Restating the opening balance of assets, liabilities
and equity as if the error had never occurred, and presenting the necessary
adjustment to the opening balance of Retained Earnings in the statement of
changes in equity
UNDERLYING ASSUMPTIONS
The framework identifies the underlying assumption governing financial statements the accrual basis of accounting and going-concern
Accrual Basis
- The accrual basis of accounting means that the effect of transactions and the over events are recognized as they occur and not as cash or its equivalent is received or paid
Going Concern
- - The going-concern basis assumes that the Company has
neither the need nor the intention to liquidate or curtail materially the scale
of the operations.
Accural Basis and Going Concern must be taken into account by an entity when deciding on accounting policies and estimates.
Traditionally, accounts have been presented using the historical cost convention:
- Assets are stated in the statement of the financial
position at their cost
- Less any amounts written off (e.g. depreciation in the
case of tangible non-currents assets)
The objective of financial statements is to provide information about the reporting entity’s financial performance and position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.
- Replacement Cost is the cost to the business of
replacing the asset
- Net Realisable value (NRV) is the estimated sales
proceeds less any costs involved in selling the asset.
- Economic value is the present value of future cash
flows from an asset.
FAIR VALUES
A further method of valuing assets which is particularly relevant to financial assets is that of fair value.
Fair value is the amount at which an asset or liability could be exchanged in an arm’s length transaction between informed and willing parties, other than is a forced or liquidation sale.
Fair value is sometimes known as current value.
Example: If the item is quoted on an active market, then its FV is its market value on that market e.g. the shares in public companies are quoted on stock exchanges. The FV of 1,000 shares in Company AB quoted at $7 each would be $7,000.
FAIR PRESENTATION
When do financial statements show fair presentation?
- Financial statements will generally show a fair presentation when
- - They conform with accounting standards
- - They conform with any relevant legal requirements
- - They have applied the qualitative characteristics from
the Framework
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