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Summary Financial Reporting 2 (ACC2012W) - IAS 8 and IAS 10
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Summary of all that you must know for IAS8 and IAS10
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IAS 8 & IAS 10ACCOUNTING POLICIES
WHAT ARE ACCOUNTING POLICIES? IAS8.5
Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
EXAMPLES: In inventory, we can choose from FIFO, WAC or specific identification. In PPE,
an entity can either apply the cost model or the revaluation model. For Investment Property,
an entity can choose between the cost model and the fair value model. For Financial
Instruments, an entity would either apply the fair value model or amortised cost basis.
CREATING ACCOUNTING POLICIES – IAS8.10-12
DEFINITION - IAS 8.10
When the accounting framework being used does not explicitly give us the accounting
policy for our specific transaction, paragraph 10 of IAS8 tells us that we must use our
judgement to come up with an accounting policy ourselves.
The accounting policy must result in information that is:
(a) Relevant to the economic decision-making needs of the users
(b) Reliable, in that the financial statements:
i. Represent faithfully the financial position, financial performance and cash
flows of the entity
ii. Reflect the economic substance of transactions, other events and conditions,
and not merely the legal form
iii. Are neutral (free from bias)
iv. Are prudent
v. Are complete in all material aspects
HEIRACHY - IAS 8.11 AND IAS 8.12
These paragraphs provide us with further guidance in developing these accounting
policies. This is called the hierarchy in developing accounting policies, which means
that we follow the order of these paragraphs until we come up with an accounting policy.
“In making the judgement described in paragraph 10, management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) the requirements in IFRSs dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework for Financial Reporting
(Conceptual Framework).
, In making the judgement described in paragraph 10, management may also consider the
most recent pronouncements of other standard-setting bodies that use a similar conceptual
framework to develop accounting standards, other accounting literature and accepted
industry practices, to the extent that these do not conflict with the sources in paragraph 11.”
Therefore, we can follow the following steps:
1. Look at another standard of IFRS which deals with similar transactions and use those
principles to help you develop your own accounting policy for your specific
transaction.
2. If a similar standard does not exist, we formulate a policy using the principles of
the Conceptual Framework.
3. If you’ve exhausted all other options in developing your accounting policy, you
may look towards the accounting standards of another standards setting body if it
does not conflict with the principles of IFRS.
CONSISTENCY – IAS8.13
This paragraph tells us that we should apply our accounting policies consistently for
similar transactions.
EXAMPLE: This means we can’t have our building in Claremont on the cost model while our
building in Rondebosch is on the revaluation model. This does not mean that all your PPE
must be on the same accounting policy, remember IAS 16 tells us to apply the same
accounting policy to a class of PPE, not every single item of PPE. For example, you might have
all your buildings on the revaluation model, but it is perfectly fine to then use the cost model
for your vehicles.
CHANGES IN ACCOUNTING POLICY
WHAT IS NOT A CHANGE IN ACCOUNTING POLICY – IAS8.16
According to IAS8.16, the following are not changes in accounting policy:
- The application of an accounting policy for transactions that differ in substance from
those previously occurring.
- The application of a new accounting policy for transactions that did not occur
previously or were immaterial.
WHEN ARE CHANGES ALLOWED – IAS8.14
If we used FIFO in the first year, specific identification the next, and WAC in the new year,
we are not conforming to the Conceptual Framework qualitative characteristic that
information must be comparable from year to year. If it is not comparable, then it is not
useful, and if it is not useful, then we are defeating the objective of preparing a set of
financial statements.
IAS8.14 sets out two scenarios in which we can have a change in accounting policy:
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