5. The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and practices applied 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 accountingestimates result from new information or new developments and, accordingly, are not corrections of errors.
I am pleased to share that the Committee has brought out the Educational Material on Indian Accounting Standard (Ind AS) 8, Accounting Policies,
Changes in AccountingEstimates and Errors. The objective of Ind AS 8 is to
prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accountingestimates 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. This Educational Material on Ind AS 8 addresses all relevant aspects envisaged in the Standard by way of brief summary of the Standard and Frequently Asked Questions (FAQs) which are being/expected to be encountered while implementing the Standard.
53 Hindsight should not be used when applying a new accounting policy to, or correcting amounts for, a prior period, either in making assumptions about what management’s intentions would have been in a prior period or estimating the amounts recognised, measured or disclosed in a prior period. For example, when an entity corrects a prior period error in measuring financial assets previously classified as held-to-maturity investments in accordance with HKAS 39 Financial Instruments: Recognition and Measurement, it does not change their basis of measurement for that period if management decided later not to hold them to maturity. In addition, when an entity corrects a prior period error in calculating its liability for employees’ accumulated sick leave in accordance with HKAS 19 Employee Benefits, it disregards information about an unusually severe influenza season during the next period that became available after the financial statements for the prior period were authorised for issue.
Prospective recognition of the effect of a change in an accounting estimate means that the change is applied to transactions, other events and conditions from the date of that change. A change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. For example, a change in a loss allowance for expected credit losses affects only the current period’s profit or loss and therefore is recognised in the current period. However, a change in the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the asset’s remaining useful life. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised as income or expense in those future periods.
PUBLIC SECTOR Extracts from the Notes
1. During 20X2, the entity changed its accounting policy for the treatment of borrowing costs related to a hydro-electric power station. Previously, the entity capitalized such costs. They are now written off as expenses as incurred. Management judges that this policy provides reliable and more relevant information because it results in a more transparent treatment of finance costs and is consistent with local industry practice, making the entity’s financial statements more comparable. This change in accounting policy has been accounted for retrospectively and the comparative statements for 20X1 have been restated. The effect of the change on 20X1 is tabulated below. Opening accumulated surpluses for 20X1 have been reduced by CU5,200 which is the amount of the adjustment relating to periods prior to 20X1.
IG14. During 20X2, the entity changed its accounting policy for depreciating property, plant, and equipment, so as to apply much more fully a components approach, while at the same time adopting the revaluation model.
IG15. In years before 20X2, the entity’s asset records were not sufficiently detailed to apply a components approach fully. At the end of year 20X1, management commissioned an engineering survey, which provided information on the components held and their fair values, useful lives, estimated residual values, and depreciable amounts at the beginning of 20X2. However, the survey did not provide a sufficient basis for reliably estimating the cost of those components that had not previously been accounted for separately, and the existing records before the survey did not permit this information to be reconstructed.
26 When an entity applies a new accounting policy retrospectively, it applies the new accounting policy to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statement of financial position for that period. The amount of the resulting adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings. However, the adjustment may be made to another component of equity (for example, to comply with an IFRS). Any other information about prior periods, such as historical summaries of financial data, is also adjusted as far back as is practicable.
Prescribed Accounting Treatment The main requirements of IAS 8 include:
• accounting policies are determined by applying the IFRS that addresses a specific issue
• in the absence of an IFRS, the development of an accounting policy shall be based on providing relevant and reliable information. Primary consideration is given to IFRSs dealing with similar and related issues and then followed by the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. The most recent pronouncements of other standard setting bodies may be consulted as long as they use a similar conceptual framework and do not conflict with any of the IASB’s pronouncements
its prospective application to prior periods) or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.
51 It is frequently necessary to make estimates in applying an accounting policy to elements of financial statements recognised or disclosed in respect of transactions, other events or conditions. Estimation is inherently subjective, and estimates may be developed after the reporting period. Developing estimates is potentially more difficult when retrospectively applying an accounting policy or making a retrospective restatement to correct a prior period error, because of the longer period of time that might have passed since the affected transaction, other event or condition occurred. However, the objective of estimates related to prior periods remains the same as for estimates made in the current period, namely, for the estimate to reflect the circumstances that existed when the transaction, other event or condition occurred.
.A44 A difference between the outcome of an accounting estimate and the amount recognized in the prior period financial statements does not necessar- ily represent a misstatement of the prior period financial statements. However, it may do so if, for example, the difference arises from information that was available to management when the prior period's financial statements were fi- nalized or that could reasonably be expected to have been obtained and taken into account in the preparation of those financial statements. Section 560, Sub- sequent Events and Subsequently Discovered Facts, addresses situations when facts become known to the auditor after the date of the auditor's report that, had they been known to the auditor at the date of the auditor's report, may have caused the auditor to revise the auditor's report. The applicable financial reporting framework may contain guidance on distinguishing between changes in accountingestimates that constitute misstatements and changes that do not and the accounting treatment required to be followed.
10. A company accounts for a change in accounting principle at the beginning of the first interim period, regardless of the interim period in which it makes the change.
Accounting for a Change in an Estimate
11. A change in accounting estimate normally results when uncertainties are resolved as new events occur, more experience is acquired, or as new information is obtained. Changes in estimates are given prospective accounting treatment. That is, the company adjusts the current (and future) financial statements to reflect the new estimate. Prior years' financial statements are not adjusted for changes in accountingestimates.
At the end of each accounting period there are a number of estimates made in order to prepare the financial statements. These estimates are based on the facts and circumstances that exist at the time. These facts and circumstances will change from one accounting period to the next. It is not practical to restate the financial statements every time there is new information that makes the prior estimates incorrect. Therefore, on an ongoing basis management applies its best judgment and modifies such estimates as the facts and circumstances change in each subsequent accounting period. Changes in accountingestimates are handled on a prospective basis.
.14 As discussed in section 312, Audit Risk and Materiality in Conducting an Audit, paragraph .56, the auditor evaluates the reasonableness of accountingestimates in relationship to the financial statements taken as a whole:
Because no one accounting estimate can be considered accurate with certainty, the auditor may determine that a difference between an estimated amount best supported by the audit evidence and the estimated amount included in the financial statements may not be significant, and such difference would not be considered to be a likely misstatement. However, if the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between that estimate and the closest reasonable estimate as a likely misstatement.
6. Critical AccountingEstimates and Judgements Estimates and judgements are currently evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Apar t from information disclosed elsewhere in these financial statements, the following summarise estimates and assumptions that have a significant risk of causing a material adjustment to the carr ying amounts of assets and liabilities within next financial year.
The European Accounting Guide was published in 2003 in order to assist interna- tional accountants in the preparation of the first financial statements according to IFRS in 2005. We have taken this guide as a historical source because it shows the termi- nology used before the statements were prepared. It is interesting to see that the European Accounting Guide does not use in all cases the designations that later en- tered the EU texts. For example, the item referred to by property, plant and equip- ment in the English version of IAS is called as displayed in table 3 in the chapters on different European countries. There is a mix of the two types of terms designating our concept. Interestingly enough, there is a terminological difference between the Ger- man and Austrian designations, although the term is Sachanlagen both in Austria and in Germany.
A65. In some cases, events that contradict the accounting estimate may indicate that management has ineffective processes for making accountingestimates, or that there is management bias in the making of accountingestimates.
A66. Even though the auditor may decide not to undertake this approach in respect of specific accountingestimates, the auditor is required to comply with ISA 560. 16 The auditor is required to perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified 17 and appropriately reflected in the financial statements. 18 Because the measurement of many accountingestimates, other than fair value accountingestimates, usually depends on the outcome of future conditions, transactions or events, the auditor’s work under ISA 560 is particularly relevant.
Pervasive, Yet of Questionable Usefulness
Financial statement information, be it balance sheet items such as net property, plant and equipment, goodwill and other intangibles, accounts receivable and inventories, deferred taxes and contingent liabilities, or key income statement figures, such as revenues, pension expense, in-process R&D or the soon-to-be-expensed employee stock options is largely based on managerial estimates and projections. The economic welfare of the enterprise and the consequences of its operations as portrayed by quarterly and annual financial reports are therefore an intricate and ever changing web of facts and conjectures, where the dividing line between the two is largely unknown to information users. With the current move of accounting standard-setters in the U.S. and abroad toward increased fair-value measurement of assets and liabilities, the role of estimates and projections in financial reports will further increase.
Stochastically simulated rainfall ensembles have various applications in hydrological and meteorological applications. For example, using ensemble analysis one can evaluate flood prediction uncertainty and its associated risks for a given precipitation using an ensemble of precipitation estimates, instead of a single realization. Furthermore, climate change studies may also require simulated precipitation fields as possible future precipitation estimates in order to investigate long term changes in the hydrologic cycle of a specific region. The aim of this study was to present a simple, yet practical model that can be applied with minimum computational costs, considering the fact that the assumptions behind the model may result in imperfect ensembles in some cases. There are a number of issues regarding the characteristics of satellite error that are not fully understood and require further investigations (e.g., spatial and temporal dependencies of satellite error estimates in different temporal and spatial scales). A better understanding of the satellite error characteristics may lead to further improvements in the presented model. It is expected that the developed model and the results of this research can be used to assess the uncertainties associated with satellite precipitation estimates, as it is believed that with accurate information about surface rainfall and its associated uncertainties, hydrologists and meteorologists have the potential to improve hydrologic predictions and global climate studies.
Response—Whether an SME can assert compliance with the IFRS for SMEs in such a case will depend on management’s assessment of relevance and reliability as required by paragraph 10.4 of Section 10 Accounting Policies, Estimates and Errors. In the absence of specific requirements in the IFRS for SMEs, paragraph 10.4 requires management to use its judgement in developing an accounting policy that is reliable and results in information that is relevant to the economic decision-making needs of users. Paragraph 10.5 establishes the following hierarchy for an entity to follow in deciding on the appropriate accounting policy: (a) the requirements and guidance in the IFRS for SMEs dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles. Paragraph 10.6 notes that, in making the judgement described in paragraph 10.4, management may also consider the requirements and guidance in full IFRSs that deal with similar and related issues. Taken together, paragraphs 10.4 to 10.6 allow the full IFRS principles to be used in the absence of specific guidance in the IFRS for SMEs, provided that they do not conflict with requirements in the hierarchy in paragraph 10.5. This scenario is different from allowing a free choice to follow full IFRS requirements when specific requirements exist in the IFRS for SMEs for a transaction, other event or condition. Where there are such specific requirements in the IFRS for SMEs, they must be applied even if they differ from full IFRSs. If the entity follows a requirement in full IFRSs for that transaction, other event or condition for which the IFRS for SMEs contains different guidance, it will not be able to state compliance with the IFRS for SMEs unless the effect is not material.