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1MACC7001 Financial Accounting Foundation 2021-22Dr. Winnie S.C. LeungIAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES ANDERRORSLEARNING OBJECTIVESIntroduction of IAS 8Accounting Policies, Changes in Accounting Estimates and ErrorsApply the requirements of IAS 8 regarding the selection and application of accounting policiesDiscuss the accounting for changes in accounting estimatesExplain the correction of prior period errorsIntroduction of IAS 8The requirements regarding the selection and application of accounting policies, accounting for changein accounting estimates and correction of prior period errors are specified in IAS 8Accounting Policies,Changes in Accounting Estimates and Errors.Accounting policyrefers to principles or conventions applied in preparing the financial statements.Accounting estimateis a judgement applied in determining the carrying amount of an item in the financialstatements.Prior period erroris an omission or misstatement in the financial statements of a prior period resultingfrom the misuse or failure to use reliable information.Selecting and changing accounting policiesPrincipleIAS 8.10 specifies that where there is no IFRS Standard dealing with a particular transaction, preparersshould use judgement in developing and applying accounting policies so that the resulting informationis relevant and reliable.For example: IAS 2 does not specify the inventory valuation method that should be used by thecompany. Management can choose the one that results in more reliable or relevant information.IAS 8.13 requires an entity to apply accounting policies consistently for similar transactions,events or conditions unless otherwise required by an accounting standard.IAS 8.14 specifies only two circumstances in which an entity is permitted to change anaccounting policy. These are:-if the change isrequiredby an IFRS Standard; or-if the change,made voluntarily, results in the financial statements providing reliable and morerelevant information about the effects of transactions, other events or conditions on the entity'sfinancial position, financial performance or cash flows.
2MACC7001 Financial Accounting Foundation 2021-22Dr. Winnie S.C. LeungRetrospective applicationRetrospective application means applying a new accounting policy to transactions, other events andconditions as if that policy had always been applied (IAS 8.5).If the accounting standard does not specify how to account for the change, then the changemust be applied retrospectively.Retrospective application is also required for all voluntary changes in accounting policy (IAS8.19).When an entity retrospectively applies a change of accounting policy, theopeningbalance of eachaffected component of equity for the earliest prior period presented must be adjusted, and the othercomparative amounts must be disclosed for each prior period presented as if the new accounting policyhad always been applied (IAS 8.22).