IND AS 8 Accounting Policies

• Accounting & Bookkeeping
• ||
• December 9, 2021

Accounting policies are the specific principles, procedures, rules, and practices applied by an entity’s management to prepare and present financial statements.

• Principles are the guidelines that must be followed when reporting financial transactions.
• Rules are the debit and credit of accounting (i.e. golden rules).
• Practices are how accounting policies are implemented and adhered to on a routine basis.

Example: Valuation of inventory using FIFO, average cost or another reasonable basis as per IAS 2. Basis of measurement of non-current assets such as historical cost and revaluation basis. Accrual basis of preparation of financial statements.

This standard shall be applied in:

• Selecting and applying accounting policies;
• Accounting for changes in accounting policies;
• Accounting for changes in accounting estimates; and
• Accounting for corrections of prior period errors.

Change in accounting policies
The company’s management is authorized to change an accounting policy (AP) only if the change:

• Is required by an IND AS (mandatory change); or
• The financial statements (FS) provide more reliable and relevant information about the transaction on the entity’s financial statements, which consist of financial position, financial performance, and cash flows (voluntary change).

It would be changed retrospectively. It means adjusting the opening balance of each affected equity component for the earliest prior period presented and comparative amounts disclosed for each last period shown as if the new accounting policy had always been applied.

Changes in accounting estimates
Accounting estimates are the techniques or estimations used by management to recognize amounts in financial statements where accurate values cannot be determined. Changes in accounting estimates result from the latest information or developments. They are based on specialized knowledge and judgement derived from experience and training. Examples of accounting estimates include the useful life of non-current assets.

Difference between accounting estimation and accounting policies

Accounting treatment of changes in accounting estimate:
The effects of change in accounting estimate are applied eventually, i.e. from the date of the change in estimate by including it in the statement of profit and mislaying in:

• The time of the change if the change influences that particular period only; or
• If the change influences both the time of the change and future periods.

Suppose a change in accounting estimate relates to asset, liability, or equity items. In that case, it shall be recognized by adjusting the carrying amount of the related item of asset, liability, or equity in the period of the change.

Prior period errors
Prior period errors are deletion from and misstatements in the entity’s financial statements, which consist of the income statement, the balance sheet, and the statement of cash flows for one or more prior periods ascending from a failure to use relevant and reliable information that was available when financial statement (FS) for those periods was sanction for the issue, and could reasonably be expected to have been taken into account in the preparation and presentation financial statements. Such errors include:

• The effects of mathematical mistakes,
• Mistakes in applying accounting policies,
• Oversights or misinterpretations of facts, and
• Fraud.

Accounting treatment of prior period errors
The organization must correct material prior period errors retrospectively in the first set of financial statements approved for issue after their finding by restating:

• The comparative amounts or figures for the initial period presented in which the mistake appeared; or
• The opening balance of assets, liabilities and equity for the untimely period presented if the mistake occurred before the earliest prior period error presented unless impracticable.

 The immaterial prior period error can be corrected in the period’s financial statement in which it is discovered.

Change in accounting estimate v/s prior period errors

 At AJSH, we assist our clients in bookkeeping, payroll, auditing, taxation, secretarial compliances and preparation of financial statements ensuring compliance with applicable standards. If you have any questions or wish to know more about IND AS 8, kindly contact us.