Prescribes the criteria for selecting and changing accounting policies.
Defines the accounting treatment and disclosure for changes in accounting policies and changes in accounting estimates.
Sets out the process and disclosure requirements for the correction of prior period errors.
The standard aims to enhance the relevance, reliability, and comparability of financial statements over time and with other entities.
Definition:
The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
E.g., measuring PPE at cost vs. revaluation; using FIFO vs. WAC for inventory; recognizing revenue upon delivery vs. upon cash receipt (if allowed).
Selection of Accounting Policies:
If a specific IFRS Standard or Interpretation applies to a transaction/event, the policy used must comply with that standard/interpretation.
If no specific IFRS applies, management must use judgment to develop a policy that results in information that is:
Relevant to users' decision-making needs.
Faithfully represents financial position/performance.
Reflects economic substance over legal form.
Is neutral (free from bias).
Is prudent (cautious).
Is complete in all material respects.
Refer to the Hierarchy section below for sources to consider when developing a policy.
Consistency of Application:
An entity must select and apply its accounting policies consistently for similar transactions, other events, and conditions.
Change in Accounting Policy:
A change is permitted only if the change:
Is required by an IFRS standard or interpretation; or
Results in the financial statements providing reliable and more relevant information about the effects of transactions on the entity's financial position, performance, or cash flows (Voluntary change).
A change from one permitted method to another (e.g., Cost to Revaluation for PPE) is a change in policy. Applying a policy for the first time to new types of transactions is not a change in policy.
Accounting for Policy Change:
| Scenario | Approach | Disclosure Required |
| Mandated by new IFRS |
Follow the specific transitional provisions within that new IFRS. If none exist, apply retrospectively. |
Yes |
| Voluntary Change |
Apply the change retrospectively (adjust opening equity and restate comparatives) unless it is impracticable to determine the period-specific or cumulative effects. |
Yes |
| Retrospective Application Impracticable |
Apply the new policy to the carrying amounts of assets/liabilities as at the beginning of the earliest period for which retrospective application is practicable (may be the current period). Adjust opening equity of that period. |
Yes (incl. explanation of impracticability) |
Impracticable means the entity cannot apply the requirement after making every reasonable effort (e.g., data unavailable, requires assumptions about past management intent).
Definition:
An adjustment of the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset, that results from assessing the present status of, and expected future benefits and obligations associated with, assets and liabilities.
Changes in estimates result from new information or new developments and, accordingly, are not corrections of errors.
Common Examples:
Changes in the estimated useful lives or expected pattern of consumption of economic benefits of depreciable assets.
Changes in estimated bad debts (allowance for doubtful accounts).
Changes in estimated inventory obsolescence.
Changes relating to the fair value measurement of financial assets or liabilities.
Changes in estimated warranty obligations.
Accounting Treatment:
| Change Type | Method | Effective When |
| Change in Accounting Estimate |
Prospective Application |
Recognize the effect of the change in profit or loss in:
The period of the change, if it affects only that period.
The period of the change and future periods, if it affects both.
|
Changes in estimates do NOT require restatement of prior periods. The adjustment affects current and future periods only.
If it's difficult to distinguish between a change in policy and a change in estimate, the change is treated as a change in estimate.
Definition:
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 authorized for issue; and
Could reasonably be expected to have been obtained and taken into account in preparing those statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Correction of Errors:
| Scenario | Action Required | Notes |
| Material Prior Period Error Discovered |
Correct the error retrospectively in the first set of financial statements authorized for issue after its 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 presented.
|
Adjust opening retained earnings (or other relevant equity component) and restate comparative figures as if the error had never occurred. |
| Retrospective Restatement Impracticable |
Restate the opening balances for assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). |
Must disclose why determining the period-specific effects or the cumulative effect of the error is impracticable. |
Disclosure Requirements for Material Errors:
The nature of the prior period error.
For each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected.
The amount of the correction at the beginning of the earliest prior period presented.
If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the impracticability and a description of how the error has been corrected.
When selecting a policy in the absence of a specific IFRS, management considers the following sources in descending order:
Requirements and guidance in IFRS standards and interpretations dealing with similar and related issues.
The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Conceptual Framework for Financial Reporting.
Management may also consider (but is not required to):
Most recent pronouncements of other standard-setting bodies that use a similar conceptual framework (e.g., US GAAP, UK GAAP).
Other accounting literature and accepted industry practices, to the extent they do not conflict with sources higher in the hierarchy.
Change in Accounting Policy:
Nature and reason for the change.
Title of the IFRS standard causing the change (if applicable).
Description of transitional provisions (or fact if none).
Amount of the adjustment for the current period and each prior period presented.
Adjustment relating to periods before those presented.
Explanation if retrospective application is impracticable.
Change in Accounting Estimate:
Nature and amount of the change that affects the current period or is expected to affect future periods.
If estimating the future effect is impracticable, disclose that fact.
Prior Period Errors:
Amount of correction for each prior period presented, for each line item affected.
Amount of correction at the beginning of the earliest prior period.
Explanation if retrospective restatement is impracticable.
