IFRSs set out accounting policies that the IASB has concluded result in financial statements containing relevant and reliable information about the transactions, other events and conditions to which they apply. Those policies need not be applied when the effect of applying them is immaterial. However, it is inappropriate to make, or leave uncorrected, immaterial departures from IFRSs to achieve a particular presentation of an entity's financial position, financial performance or cash flows.
IFRSs are accompanied by guidance to assist entities in applying their requirements. All such guidance states whether it is an integral part of IFRSs. Guidance that is an integral part of the IFRSs is mandatory. Guidance that is not an integral part of the IFRSs does not contain requirements for financial statements.
In the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing
and applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
2 IASC's Framework for the Preparation and Presentation of Financial Statements was adopted by the IASB in
2001. In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting. Paragraph 25 was superseded by Chapter 3 of the Conceptual Framework.
reliable, in 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, ie free from bias;
are prudent; and
are complete in all material respects.
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 Framework.3
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.
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for
similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If an IFRS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.
Changes in accounting policies
An entity shall change an accounting policy only if the change:
is required by an IFRS; 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 flows.
Users of financial statements need to be able to compare the financial statements of an entity over time to identify trends in its financial position, financial performance and cash flows. Therefore, the same accounting policies are applied within each period and from one period to the next unless a change in accounting policy meets one of the criteria in paragraph 14.
In September 2010 the IASB replaced the Framework with the Conceptual Framework for Financial Reporting.
The following are not changes in accounting policies:
the application of an accounting policy for transactions, other
events or conditions that differ in substance from those previously
occurring; and
the application of a new accounting policy for transactions, other
events or conditions that did not occur previously or were immaterial.
The initial application of a policy to revalue assets in accordance with IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets is a
change in an accounting policy to be dealt with as a revaluation in accordance with IAS 16 or IAS 38, rather than in accordance with this Standard.
Paragraphs 19-31 do not apply to the change in accounting policy described in paragraph 17.
Applying changes in accounting policies
Subject to paragraph 23:
an entity shall account for a change in accounting policy resulting from the initial application of an IFRS in accordance with the
specific transitional provisions, if any, in that IFRS; and
when an entity changes an accounting policy upon initial application of an IFRS that does not include specific transitional provisions applying to that change, or changes an accounting
policy voluntarily, it shall apply the change retrospectively.
For the purpose of this Standard, early application of an IFRS is not a voluntary change in accounting policy.
In the absence of an IFRS that specifically applies to a transaction, other event or condition, management may, in accordance with paragraph 12, apply an accounting policy from the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards. If, following an amendment of such a pronouncement, the entity chooses to change an accounting policy, that change is accounted for and disclosed as a voluntary change in accounting policy.
Retrospective application
Subject to paragraph 23, when a change in accounting policy is applied retrospectively in accordance with paragraph 19(a) or (b), the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
Limitations on retrospective application
When retrospective application is required by paragraph 19(a) or (b), a change in accounting policy shall be applied retrospectively except to the
extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period.
When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.
When an entity applies a new accounting policy retrospectively, it applies the new accounting policy to comparative information for prior periods as far back as is practicable. Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the opening and closing statements of financial position for that period. The amount of the resulting adjustment relating to periods before those presented in the financial statements is made to the opening balance of each affected component of equity of the earliest prior period presented. Usually the adjustment is made to retained earnings. However, the adjustment may be made to another component of equity (for example, to comply with an IFRS). Any other information about prior periods, such as historical summaries of financial data, is also adjusted as far back as is practicable.
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, in accordance with paragraph 25, applies 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. Paragraphs 50-53 provide guidance on when it is
impracticable to apply a new accounting policy to one or more prior periods.
Disclosure
When initial application of an IFRS has an effect on the current period or any prior period, would have such an effect except that it is impracticable to determine the amount of the adjustment, or might have an effect on
future periods, an entity shall disclose:
(a) the title of the IFRS
(b) when applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
(c) the nature of the change in accounting policy
when applicable, a description of the transitional provisions;
when applicable, the transitional provisions that might have an
effect on future periods;
for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
(for each financial statement line item affected; and
(if IAS 33 Earnings per Share applies to the entity, for basic
and diluted earnings per share;
the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
if retrospective application required by paragraph 19(a) or (b) is
impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these disclosures.
When a voluntary change in accounting policy has an effect on the current period or any prior period, would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall
disclose:
the nature of the change in accounting policy;
the reasons why applying the new accounting policy provides
reliable and more relevant information;
for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
(for each financial statement line item affected; and
(if IAS 33 applies to the entity, for basic and diluted earnings
per share;
the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
if retrospective application is impracticable for a particular prior
period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these disclosures.
When an entity has not applied a new IFRS that has been issued but is not
yet effective, the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing
the possible impact that application of the new IFRS will have on the entity's financial statements in the period of initial application.
31 In complying with paragraph 30, an entity considers disclosing:
the title of the new IFRS;
the nature of the impending change or changes in accounting policy;
the date by which application of the IFRS is required;
the date as at which it plans to apply the IFRS initially; and
either:
(a discussion of the impact that initial application of the IFRS is
expected to have on the entity's financial statements; or
(if that impact is not known or reasonably estimable, a statement
to that effect.
Changes in accounting estimates
As a result of the uncertainties inherent in business activities, many items in
financial statements cannot be measured with precision but can only be estimated. Estimation involves judgements based on the latest available,
reliable information. For example, estimates may be required of
bad debts;
inventory obsolescence;
the fair value of financial assets or financial liabilities;
the useful lives of, or expected pattern of consumption of the future
economic benefits embodied in, depreciable assets; and
warranty obligations.
The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.
An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error.
A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate. When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.
The effect of a change in an accounting estimate, other than a change to which paragraph 37 applies, shall be recognised prospectively by
including it in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects
both.
Errors
To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.
Prospective recognition of the effect of a change in an accounting estimate means that the change is applied to transactions, other events and conditions from the date of the change in estimate. A change in an accounting estimate may affect only the current period's profit or loss, or the profit or loss of both the current period and future periods. For example, a change in the estimate of the amount of bad debts affects only the current period's profit or loss and therefore is recognised in the current period. However, a change in the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the asset's remaining useful life. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised as income or expense in those future periods.
Disclosure
An entity shall disclose the nature and amount of a change in an
accounting estimate that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect.
If the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact.
Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Financial statements do not comply with IFRSs if they contain either material errors or immaterial errors made intentionally to achieve a particular presentation of an entity's financial position, financial performance or cash flows. Potential current period errors discovered in that period are corrected before the financial statements are authorised for issue. However, material errors are sometimes not discovered until a subsequent period, and these prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period (see paragraphs 42-47).
Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorised
for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s)
presented in which the error occurred; or
(b) 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.
Limitations on retrospective restatement
A prior period error shall be corrected by retrospective restatement
except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error.
When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which may be the current period).
When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable.
The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered. Any information presented about prior periods, including any historical summaries of financial data, is restated as far back as is practicable.
When it is impracticable to determine the amount of an error (eg a mistake in applying an accounting policy) for all prior periods, the entity, in accordance with paragraph 45, restates the comparative information prospectively from the earliest date practicable. It therefore disregards the portion of the cumulative restatement of assets, liabilities and equity arising before that date. Paragraphs 50-53 provide guidance on when it is impracticable to correct an error for one or more prior periods.
Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error.
Disclosure of prior period errors
In applying paragraph 42, an entity shall disclose the following:
(a) the nature of the prior period error
(b) for each prior period presented, to the extent practicable, the
amount of the correction:
(for each financial statement line item affected; and
(if IAS 33 applies to the entity, for basic and diluted earnings
per share;
(c) the amount of the correction at the beginning of the earliest prior
period presented; and