IND AS 8 on Accounting Policies , Changes in Accounting
Ind AS 1 also narrates the importance of accounting policies, but Ind AS 8 takes a step further and gives a guidance to the entity on how to select and apply accounting policies.
Ind AS 1 as Accounting standards in India are issued by, Presentation of Financial Statements, place down the foundation for an entity which is regarding that how the financial statements are needed to be presented. Ind AS 8 also gives equal importance to the in notes, disclosure, significant accounting policies and other explanatory information apart from statement of profit and loss, statement of changes in equity, ba;ance sheet and statement of cash flows.
According to accounting policies, estimates and correction of errors may play a major role in the presentation of financial statements. Ind AS 8 also states that an entity is not able to rectify inappropriate accounting policies either by the disclosure of the accounting policies which are used or by notes or explanatory material. Any change in accounting policies needs to be deal with due rigour and not just by mere note or explanation.
Further, Ind AS 8 also makes it compulsory for the entity for presenting a third balance sheet at the start of the preceding period if it is applied retrospectively on an accounting policy , which is having a material effect on the information in the balance sheet at that date.
Further, Ind AS 8 also provides detailed guidance about the genuine disclosure of accounting policies and various estimates.
Therefore, in the contemporary chapter, we are going to learn about how to select the accounting policies, how to make various changes in accounting policies if it is needed, how to deal with changes in estimation, how to rectify errors, etc., as all these elements will have an effect on the fair and true position of the financial statements.
OBJECTIVES Ind AS 8
For prescribing the criteria for changing and selection accounting policies:
As according to the Ind AS 8 deals with an entity is need for disclosing the significant accounting policies. However, it do not specified that which accounting policies can be disclosed. Depending upon the character of business and types of transactions, the entity should decide whether an accounting policy is to be disclosed. In this regard, Ind AS 1 emphasizes the usefulness of the disclosure in assisting the users in understanding financial statements, the nature of an entity’s operations, and users’ expectations. Further, Ind AS 8 provides some criteria/guidelines which will facilitate the entity for deciding the selection and application of accounting policies and make changes in them.
For prescribing the accounting disclosure and treatment for various changes in accounting policies:
At certain times, there is a requirement for making the changes in the policies in the light of changing circumstances of a business, changing nature of business, new guidelines which are issued by regulatory authorities, enforcement of up to date laws etc. In such cases, an entity requires guidance as to whether the changes is need to be achieve retrospectively or only prospectively and how to present and disclose the same effect in the financial statements. Ind AS 8 guides the entity in such areas.
For prescribing the accounting treatment and disclosure of changes in accounting estimates:
In business, many things are uncertain. For example, how many trade receivables will turn bad? What will be the estimated life of property, plant and equipment?
What will be the value of investments? Will the net realizable value of closing inventory be more or less than the actual cost of value, less actual costs of completion and realized value which are necessary for making the sale? And so on. In this type of case, the entity would have to make few assumptions and make an estimation.
Ind AS 1 also allows an entity to do the estimation. Ind AS 8 takes it ahead and deals with incorporating various changes in the accounting which estimates already made in the past. Is it also possible for changing such estimation with various changing in circumstances and available new information? If yes, then how the entity would is incorporating the effect of the changes? Such questions have been addressed in Ind AS 8.
For prescribing the accounting treatment and disclosure of corrections of errors:
Conducting mistakes is an integral part of life, and the possibility of making some errors in the financial statements have been already published, and it cannot be ruled out. In such cases, the question is arisen that how to rectify the errors and provide the true and fair position to the stakeholders of financial statements.
Should the entity rectify the error through retrospective restatement, or it should rectify the same in the present reporting period? Such questions are inscribed in Ind AS 8.
For providing a better base comparison for inter-firm and intra-firm as accounting standards in India are issued by:
The standard is intended for enhancing the relevance and reliability of financial statements of an entity and the overtime comparability of those financial statements and with the financial statements of other entities.
SCOPE Ind AS 8
This standard should be applied in:
- Selecting and applying accounting policies.
- Accounting for changes in accounting policies.
- Accounting for changes in accounting estimates.
- Accounting for corrections of prior period errors.
However, this standard does not deal with tax effects of retrospective application of accounting policy changes and correction of prior period errors. The effects of tax on these items are dealt with Ind AS 12, Income Taxes.
DEFINITIONS of Ind AS 8 summary
- The specific principles, bases, conventions, rules, and practices are the accounting policies that an entity is using in preparing and presenting financial statements.
- A change in accounting can estimate in an adjustment of the amount carried of an asset or a liability or the value of the regular consumption of an asset that results from the assessment of the present status and expected benefits of future and obligations which are associated with assets and liabilities. Changes in accounting which estimates result from new information or developments and, accordingly, are not corrections of errors.
- Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of the Companies Act, 2013 read with Companies (Indian Accounting Standards) Rules, 2015 (as amended from time to time).
- Material – (As per Ind AS 1) Information is material if omitted, misstated or obscured then it can reasonably be expected for influencing decisions that the primary users of general purpose financial statements to make base on those financial statements, which are providing financial details about a specific reporting entity.
Materiality also depends on the nature or magnitude of detail or both. An entity should assess whether details, either individually or if combined with other information, is material in the context of its financial statements, which can be taken as a whole.
Information is obscured if communicated in a way that would have a similar effect for primary users of financial statements to omit or misstate that information. The following are the examples of circumstances that might result in material information for being obscured:
(a) Details regarding a material item, transaction or several other events can be disclosed in the financial statements, but the language used would be vague or unclear.
(b) Information which are regarding to a material item, transaction or other event can be scattered throughout the financial statements.
(c) Dissimilar items, transactions or other events can be inappropriately aggregated.
(d) Those items that are similar, transactions or other events are inappropriately disaggregated.
(e) The understanding of the financial statements is reduced due to hidden material information in the form of immaterial information to the extent that a primary user is not able for determining what information is material.
Assessment of the information that could reasonably be expected to influence decisions made by the primary users of a specific reporting entity’s general purpose financial statements requires an entity to consider the characteristics of those users while also considering the entity’s circumstances.
Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly. They must rely on general-purpose of financial statements for the financial information they need. Consequently, they are the primary users for whom the general purpose of financial statements have been directed. Accounting standards in India are issued by as Financial statements are prepared for these users who have a reasonable knowledge of business and economic activities and who review and
- Prior period mistakes are deletion from, and misstatements in, the financial statements of an entity for prior periods arising from a failure for using, or misuse of, reliable information that:
(a) It was available when financial statements for those periods were approved for issue; and
(b) It could reasonably be expected to have been obtained and taken into account in preparing and presenting those financial statements. Such errors can be included in the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
- Retrospective application applies a new accounting policy for transactions, other events and conditions as if always that policy had been applied.
- Retrospective restatement means correcting the recognition, measurement, and disclosure of elements of financial statements as if it is a prior period error that had never occurred.
- Impracticable= Application of a requirement is impracticable when the entity is not applying after making every reasonable effort. For a particular period, it is impracticable for applying for a change in an accounting policy retrospectively or to even make a retrospective restatement for the correction of an error if:
(a) The outcome of the retrospective application or retrospective restatement cannot be determined.
(b) The retrospective application or retrospective restatement usually requires assumptions about what management’s purpose would have been in that period; or
(c) The retrospective application or retrospective restatement also requires significant estimation of amounts, and it is not possible for distinguishing information about those estimates that: objectively
(i) It provides various evidence of circumstances that are existing on the date as at which those amounts can be recognized, measured or disclosed; and
(ii) It would have been available when the financial statements for that prior period were approved for a problem from other information.
- Applying prospectively for a change in accounting policy and of recognition of the effect of a change in an accounting can be estimated, respectively and those are:
(a) Applying for the new accounting policy for various transactions, other events and conditions occurring after the date the policy is changed.
(b) Recognizing the effect of the changes in the accounting, which is estimated in the current and future periods affected by the change.
Application and Selection of Accounting Policies:
When an Ind AS 8 deals with is specifically applied to a transaction, other event or various conditions, the accounting policies are applied to that item that should be determined by the application of the Ind AS.
The compulsion of applying accounting policies:
- Ind AS set’s out accounting policies that are resulting in financial statements which contains relevant and reliable data about the transactions, other events and conditions for which they are applied.
- Those policies are need not be applied when the outcome of applying them is immaterial.
- However, it is not appropriate for making or leaving uncorrected, immaterial departures from Ind AS for achieving a particular presentation of an entity’s financial position, financial performance or cash flows.
How to make a selection and apply for an accounting policy when a specific Ind AS is not available for the particular transaction or event?
- If Ind AS summary is absent than that specifically can be applied to a transaction, other event or various condition, management should use its judgment in developing and applying an accounting policy that results in information that is:
(a) It is relevant to the economic decision-making needs of users; and
(b) It is reliable in that the financial statements:
(i) It represents the financial position, financial performance and cash flows of the entity faithfully.
(ii) It reflects the economic substance of transactions, other events and conditions, and not merely the legal form.
(iii) They are neutral, i.e. free from bias.
(iv) They are prudent.
(v) They are complete in all material respects.
An entity shall consistently select and apply its accounting policies for similar transactions, other events and conditions unless an Ind AS 8 deals with is specifically requiring or permitting the categorization of items for which different policies might be appropriate. If an Ind AS 8 mca is requiring or permitting such categorization, an appropriate accounting policy should be selected and consistently applied to each category.
Various changes in accounting policies:
- An entity should make changes in an accounting policy only if the change is:
(a) An Ind AS 8 mca requires it.
(b) It is concluded in the Accounting standards in India are issued noted by financial statements by providing reliable and more relevant data about the outcome of transactions, other events or conditions on the financial position of an entity, financial performance or cash flows.
- Users of financial statements is required to be able for comparing the financial statements of an entity over time to identify the trends in its financial position, financial performance and even cash flows. Therefore, the same accounting policies can be applied within and from one period to the next period unless a change in accounting policy is meeting one of the above criteria.
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