IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

6 ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND ERRORS (lAS 8)

1. BACKGROUND AND INTRODUCTION 1.1

"Comparability" is one of the four qualitative attributes (or characteristics) of financia l state– ments according to the International Accou nting Standards Board (lASB) Framework. For users of financial statements, it is important to be able to compare not only the financial statements of an entity from one period to ano ther but also the financial statements of different entities. Such infor– mation is needed in order to make relative comparisons of financia l performance and financial po– sition and changes in financial positio n. 1.2 lAS 8 prescribes criteria for selecting and changing accounting policies and the disclosures thereof and also sets out the requirements and disclosures for changes in acco unting estimates and corrections of errors. In doing so it purport s to achieve these objectives: • To enhance the relevance and reliability of an entity's financia l statements; and • To ensure the comparabi lity of the financial statements of an entity over time as well as with financ ial statements of other entities 2. DEFINITIONS OF KEY TERMS (in accordance with lAS 8) Accounting policies. The specific principles, bases, conve ntions , rules, and practices applied by an entity in preparing and presenting financial statements. Change in accounting estimate. An adjustment of the carrying amount of an asse t or a liability, or the amount of periodic cons umption of an asset, that results from the assessment of the present status of, and expected future benefits and ob ligatio ns associated with, assets and liabiliti es. Changes in acco unting estimates result from new information or new developments and, acco rdingly, are not corrections of errors. Prior-period errors. Omi ssions from, and misstatements in, financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was avai lable at the time and could reasonably be expec ted to have been obtained and taken into account in the preparation and presentation of financ ial sta temen ts. 3. ACCOUNTING POLICIES Accounting policies are essential for a proper understanding of the information contai ned in the financial statements prepared by the management of an entity. An entity should clearly outline all significant accounting policies it has used in preparing the financial statements. Because under In– ternati onal Financial Reporting Standards (IFRS) alternative treatments are possible, it becomes all the more important for an entity to clearly state which accounting policy it has used in the preparation of the financial statements. For instance, under lAS 2 an entity has the choice of the weighted-average method or the first-in, first-out (FIFO) method in valuing its inventory. Unless the entity discloses which method of inventory valuation it has used in the preparation of its finan– cial statements, users of these financia l statements would not be able to use the financial statements properly to make relative comparisons with other entities. 4. SELECTION AND APPLICATION OF ACCOUNTING POLICIES 4.1 When a Standard or Interpretation specifically applies to a transaction , other event, or condi– tion, the accounting policy applied to that item shall be determin ed by applying that Standard or