The standard then looks at events which do not require adjustment.
One example of such an event is where the value of an investment falls between the end of reporting period and and the date the financial statements are authorised for issue. The fall in value represents circumstances during the current period, not conditions existing at the end of the previous reporting period, so it is not appropriate to adjust the value of the investment in the financial statements.
Disclosure is an aid to users, however, indicating 'unusual changes' in the state of assets and liabilities after the reporting date.
The rule for disclosure of events occurring after the reporting period which relate to conditions that arose after that date, is that disclosure should be made if non-disclosure would hinder the user's ability to made proper evaluations and decision based on the financial statements. An example might be the acquisition of another business.
The distinction between an adjusting event and a non-adjusting event can be shown by the following diagram.
6: Reporting financial performance
Dividends
Dividends declared by the entity after the reporting period are a special case. Even if they are stated to be in respect of the period covered by the financial statements, they should not be provided for. They should simply be disclosed in the notes.
Disclosures
The following disclosure requirements are given for events which occur after the reporting period which do not require adjustment. If disclosure of events occurring after the reporting period is required by this standard, the following information should be provided:
(a) The nature of the event
(b) An estimate of the financial effect, or a statement that such an estimate cannot be made
2 IAS 8: Accounting policies, changes in accounting estimates and errors
IAS 8 deals with the treatment of changes in accounting estimates, changes in accounting policies and errors, as defined below.
Definitions
Accounting policiesare the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.
Material: as defined in IAS 1
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 authorised 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.
Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied.
Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.
Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are:
(a) Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changes; and (b) Recognising the effect of the change in the accounting estimate in the
current and future periods affected by the change.
6: Reporting financial performance
3 Accounting policies
Accounting policies are determined by applying the relevant IFRS or IAS and considering any relevant Implementation Guidance issued by the IASB for that IFRS/IAS.
Where there is no applicable IFRS management should use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. Management should refer to:
(a) The requirements and guidance in IFRSs dealing with similar and related issues
(b) The definitions, recognition criteria and measurement concepts for assets, liabilities and expenses in the Conceptual Framework
Management may also consider the most recent pronouncements of other standard setting bodies that use a similar conceptual framework to develop standards, other accounting literature and accepted industry practices if these do not conflict with the sources above.
An entity must select and apply its accounting policies for a period consistently for similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If an IFRS requires or permits categorisation of items, an appropriate accounting policy must be selected and applied consistently to each category.
Impracticable. Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. It is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if one of the following apply.
(a) The effects or the retrospective application or retrospective restatement are not determinable.
(b) The retrospective application or retrospective restatement requires assumptions about what management's intent would have been in that period.
(c) The retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: provides evidence of circumstances that existed on the date(s) at which those amounts are to be recognised, measured or disclosed; and would have been available when the financial statements for that prior period were authorised for issue from other information. (IAS 8)
4 Changes in accounting policies
The same accounting policies are usually adopted from period to period, to allow users to analyse trends over time in profit, cash flows and financial position.
Changes in accounting policy will therefore be rare and should be made only if required by one of three things.
(a) By statute
(b) By an accounting standard setting body
(c) If the change will result in a more appropriate presentation of events or transactions in the financial statements of the entity
The standard highlights two types of event which do not constitute changes in accounting policy.
(a) Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity.
(b) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material.
In the case of tangible non-current assets, if a policy of revaluation is adopted for the first time then this is treated, not as a change of accounting policy under IAS 8, but as a revaluation under IAS 16 Property, plant and equipment. The following paragraphs do not therefore apply to a changes in policy to adopt revaluations.
A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, at the earliest date such transactions or events occurred, the policy is applied from that date.
Prospective application is no longer allowed under the revised IAS 8 unless it is impracticable to determine the cumulative amount of change.
What would constitute a change in accounting policy? Examples are:
A change from inventory valuation using FIFO to weighted average, or vice versa
A change in presentation, such as depreciation transferred from cost of sales to expenses