Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors: Ind AS 8 specifies the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates 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.
The disclosures required in respect of changes in accounting policies are set out in Ind AS 8. Other disclosure requirements for accounting policies are laid down in Ind AS 1, Presentation of Financial Statements.
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Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
This Standard provides guidance in selection and application of the accounting policies. A two-step approach is advocated.
Step 1 requires that when an Ind AS specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the Ind AS.
Step 2 provides that in the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy. This judgment should result in information that is:
- relevant to the economic decision-making needs of users; and
- reliable, so that the financial statements:
- represent faithfully the financial position, financial performance and cash flows of the entity;
- reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
- are neutral, e., free from bias;
- are prudent; and
- are complete in all material
An entity shall select and apply the accounting policies consistently for similar transactions, other events and conditions, unless an Ind AS specifically requires or permits categorisation of items for which different policies may be appropriate. If an Ind AS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.
Changes in Accounting Policies
An entity is permitted to change an accounting policy only if the change:
- is required by an Ind AS; or
- results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash
The Standard also specifies how changes in accounting policies is to be applied:
- A change in accounting policy may result due to the first time application of an Ind The change shall be applied as per the transitional provisions in that Ind AS.
- If that Ind AS does not contain any transitional provisions, it shall apply the change
- A voluntary change in accounting policy is to be applied An early application of an Ind AS is not a voluntary change in accounting policy.
When it is impracticable for an entity to apply a new accounting policy retrospectively, because it cannot determine the cumulative effect of applying the policy to all prior periods, the entity will apply the new policy prospectively from the start of the earliest period practicable. It therefore disregards the portion of the cumulative adjustment to assets, liabilities and equity arising before that date. Changing an accounting policy is permitted even if it is impracticable to apply the policy prospectively for any prior period.
Change in Accounting Estimates
The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. 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
The effect of change in an accounting estimate shall be recognised prospectively by including it in profit or loss in:
- the period of the change, if the change affects that period only; or
- the period of the change and future periods, if the change affects
Prior Period Errors
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:
- was available when financial statements for those periods were approved for issue; and
- 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.
Except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error, the Standard requires to correct material prior period errors retrospectively in the first set of financial statements approved for issue after their discovery by:
- restating the comparative amounts for the prior period(s) presented in which the error occurred; or
- if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, and equity for the earliest prior period
Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.
Difference Between Ind AS 8 and AS 5
| AS 5 | IND AS 8 |
| Less disclosures required as compared to IND AS 8 | Disclosure requirements given in IND AS 8 are more detailed as compared to AS 5. |
Change in Accounting policy is allowed:
|
Change in accounting policy is allowed:
|
| It requires each extraordinary item to be disclosed separately on the Face of P&L Statement. | IND AS 1 prohibits presentation of any item of income or expense as extraordinary item and hence this AS does not deal with the same. |
| It restricts the definition of accounting policies to mean specific accounting principles + method of applying those principles. | It broadens the definition of accounting policies by stating that accounting policies, in addition to accounting principles and method of applying those principles, also includes rules and practices, bases, conventions, etc. applied by an entity in preparation and presentation of financial statements. |
| Existing AS 5 does not specify how change in accounting policy should be accounted for except when the change in accounting policy is due to adoption of new AS. | IND AS 8 requires that any change in the accounting policy should be accounted for, with retrospective effect. i.e. all comparative information, opening balances and curreny year figures have to be restated to bring them in line with new policy. There are however, some exceptions to the above. |
| AS 5 requires the rectification of prior period items with prospective effect. | IND AS 8 requires the rectification of material prior period errors with retrospective effect i.e. restating the erroneous comparative amounts and opening balances. The above will however not be required if it is impracticable to determine the period specific effects. |
| AS 5 defines “Prior Period Items” as incomes or expenses which arises in current period as a result of errors or ommissions in preparation of financial statements of one or more prior periods. | IND AS 8 uses the word “Prior period errors” and defines it as errors and ommissions arising due to:
which was available when the financial statements of the prior periods were approved and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. |
| Does not contain such requirements | Specifically states that errors include frauds. |
| Objective is to prescribe the classification and disclosure of certain items in the statement of profit and loss for uniform preparation and presentation of financial statements. | 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 accounting estimates, and corrections of errors. |
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