Exposure Draft
Accounting Standard (AS) 8
Accounting Policies, Changes in Accounting Estimates
and Errors
Last date for the comments: 7th December, 2015
Issued by
Accounting Standards Board
The Institute of Chartered Accountants of India
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Exposure Draft
Accounting Standard (AS) 8, Accounting Policies, Changes in Accounting
Estimates and Errors
(The Indian Accounting Standards (Ind AS), as notified by the Ministry of Corporate Affairs
in February, 2015, have been applicable to the specified class of companies. For other class
of companies, i.e., primarily the unlisted entities having net worth less than Rs. 250 crores,
Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, has
been applicable. However, the Ministry of Corporate Affairs has requested the Accounting
Standards Board of The Institute of Chartered Accountants of India (ICAI) to upgrade
Accounting Standards, as notified under Companies (Accounting Standards) Rules, 2006, to
bring them nearer to Indian Accounting Standards. Accordingly, the Accounting Standards
Board, ICAI, initiated to upgrade these standards which will be applicable to all companies
having net-worth less than Rs. 250 crores including non-corporate entities. While
formulating these Accounting Standards, the Accounting Standards Board, ICAI, decided to
maintain the consistency with the paragraph numbers and with the numbering of Standards
of the Indian Accounting Standards).
In this direction, following is the Exposure Draft of the upgraded Accounting Standard (AS)
8, Accounting Policies, Changes in Accounting Estimates and Errors, issued by the
Accounting Standards Board of the ICAI, for comments. The Board invites comments on any
aspect of this Exposure Draft. Comments are most helpful if they indicate the specific
paragraph or group of paragraphs to which they relate, contain a clear rationale and, where
applicable, provide a suggestion for alternative wording.
Comments can be submitted using one of the following methods so as to receive not later than
December 07, 2015:
1. Electronically: click on http://www.icai.org/comments/asb/ to submit comments
online
2. Email: Comments can be sent at commentsasb@icai.in
3. Postal: Deputy Director, Accounting Standards Board, The Institute of Chartered
Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New
Delhi 110 002
Further clarifications on any aspect of this Exposure Draft may be sought by e-mail to
geetanshu.bansal@icai.in.
(This Accounting Standard includes paragraphs set in bold type and plain type, which have
equal authority. Paragraphs in bold type indicate the main principles.)
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Accounting Standard ( AS) 8
Accounting Policies, Changes in Accounting Estimates
and Errors
(This Accounting Standard includes paragraphs set in bold type and plain type, which have
equal authority. Paragraphs in bold type indicate the main principles.)
Objective
1 The objective of this Standard 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. 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.
2 Disclosure requirements for accounting policies, except those for changes in
accounting policies, are set out in AS 1, Presentation of Financial Statements.
Scope
3 This Standard shall be applied in selecting and applying accounting policies,
and accounting for changes in accounting policies, changes in accounting
estimates and corrections of prior period errors.
4 [Refer Appendix 1].
Definitions
5 The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
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
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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 errors.
(i) Accounting Standards (ASs): for companies, the Accounting Standards
other than Indian Accounting Standards prescribed under the
Companies Act2013 ; and
(ii) for entities other than companies, the accounting standards issued by
the Institute of Chartered Accountants of India(ICAI).
Material 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.
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:
(a) was available when financial statements for those periods were
approved for issue; and
(b) 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.
Retrospective computation is calculating the impact of a new accounting policy
to transactions, other events and conditions as if that policy had always been
applied.
Impracticable Applying a requirement is impracticable when the entity
cannot apply it after making every reasonable effort to do so. For a
particular prior period, it is impracticable to calculate the impact of a
change in an accounting policy retrospectively or to make a retrospective
computation to correct an error if:
(a) the effects of the retrospective computation are not determinable;
(b) the retrospective computation requires assumptions about what
management's intent would have been in that period; or
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(c) the retrospective computation requires significant estimates of amounts
and it is impossible to distinguish objectively information about those
estimates that:
(i) provides evidence of circumstances that existed on the date(s)
as at which those amounts are to be recognised, measured or
disclosed; and
(ii) would have been available when the financial statements for
that prior period were approved for issue from other
information.
Prospective application of a change in accounting policy and of recognising
the effect of a change in an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed;
and
(b) recognising the effect of the change in the accounting estimate in the
current and future periods affected by the change.
6 Assessing whether an omission or misstatement could influence economic
decisions of users, and so be material, requires consideration of the characteristics of
those users. The Framework for the Preparation and Presentation of Financial
Statements in accordance with Accounting Standards issued by the Institute
of Chartered Accountants of India states in paragraph 26 that `users are assumed to
have a reasonable knowledge of business and economic activities and accounting
and study the information with reasonable diligence.' Therefore, the assessment
needs to take into account how users with such attributes could reasonably be
expected to be influenced in making economic decisions.
Accounting policies
Selection and application of accounting policies
7 When an 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 AS.
8 ASs set out accounting policies that 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 ASs to achieve a particular presentation of
an entity's financial position, financial performance or cash flows.
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9 Some ASs are accompanied by application guidance that is integral part of AS
to assist entities in applying their requirements. Such application guidance is
mandatory.
10 In the absence of an AS 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
(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, ie free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
11 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 ASs dealing with similar and related issues;
and
(b) the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework.
12 In making the judgement described in paragraph 10, management may also
first consider the guidance given in Indian Accounting Standards (Ind AS).
In absence thereof, the management consider the following in the following
order:
(i) most recent pronouncements of the Institute of Chartered Accountants of
India and
(ii) most recent pronouncement of the International Accounting
Standards Board and
(iii) those of the other standard-setting bodies that use a similar conceptual
framework to develop accounting standards,
(iv) other accounting literature and accepted industry practices, to the
extent that these do not conflict with the sources in paragraph 11.
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Consistency of accounting policies
13 An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions, unless an AS specifically requires or
permits categorisation of items for which different policies may be
appropriate. If an AS requires or permits such categorisation, an appropriate
accounting policy shall be selected and applied consistently to each category.
Changes in accounting policies
14 An entity shall change an accounting policy only if the change:
(a) is required by an AS or by any statute or pronouncement specified in
paragraph 12; or
(b) 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.
15 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.
16 The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or
conditions that differ in substance from those previously occurring; and
(b) the application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial.
17 The initial application of a policy to revalue assets in accordance with other
Accounting Standards, such as AS 16, Property, Plant and Equipment, or, is
a change in an accounting policy to be dealt with as a revaluation in accordance
with that AS, rather than in accordance with this Standard.
18 Paragraphs 1923 and 27- 28 do not apply to the change in accounting policy
described in paragraph 17.
Accounting for changes in accounting policies
19 Subject to paragraph 23:
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(a) an entity shall account for a change in accounting policy resulting from the
initial application of an AS or a statute or a pronouncement specified in
paragraph 12 in accordance with the specific transitional provisions, if any, in
that AS or the statute or a pronouncement specified in paragraph 12, as the
case may be; and
(b) when an entity changes an accounting policy upon initial application of an
AS or a statute or a pronouncement specified in paragraph 12 that does not
include specific transitional provisions applying to that change, or changes
an accounting policy voluntarily, it shall compute the effect of the change
retrospectively.
20 For the purpose of this Standard, early application of an AS is not a voluntary
change in accounting policy.
21 [Refer Appendix 1].
Retrospective computation
22 Subject to paragraph 23, when the retrospective computation is made in
accordance with any change in accounting policy , its impact on transactions,
other events and conditions is computed in accordance with the new policy
retrospectively as if the new accounting policy had always been applied. The
deficit or surplus arising from the retrospective computation is recognised in the
statement of profit and loss in the year in which the accounting policy is changed
Limitations on retrospective computation
23 When retrospective accounting is required by paragraph 19(a) or (b), effect of
change in accounting policy shall be computed retrospectively except to the
extent that it is impracticable to determine the the cumulative effect of
the change.
24-26 [Refer Appendix 1]
27 When it is impracticable for an entity to compute the effect of a new
accounting policy retrospectively, because it cannot determine the cumulative effect
of applying the policy to all prior periods, the entity, , 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 account for the policy prospectively for any prior period. Paragraphs
5053 provide guidance on when it is impracticable to account for a new accounting
policy to one or more prior periods.
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Disclosure
28 An entity shall disclose:
( a ) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy provides reliable and
more relevant information where change is made in accordance with
paragraph 19(b);
(c) impact of, and the adjustments resulting from change in accounting policy
which has material effect, in the financial statements of the period in which
such change is made, to reflect the effect of such change. If a change is made in
the accounting policies which has no material effect on the financial statements
for the current period but which is reasonably expected to have a material
effect in later periods, the fact of such change shall be appropriately disclosed
in the period in which the change is adopted unless it is impracticable to
estrimate the effect of the changes in accounting policy. In the latter case, the
fact shall be disclosed.
(d) if retrospective computation 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 computed.
Financial statements of subsequent periods need not repeat these disclosures.
29-31 [Refer Appendix 1]
Changes in accounting estimates
32 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:
(a) bad debts;
(b) inventory obsolescence;
(c) [Refer Appendix 1];
(d) the useful lives of, or expected pattern of consumption of the future economic
benefits embodied in, depreciable assets; and
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(e) warranty obligations.
33 The use of reasonable estimates is an essential part of the preparation of financial
statements and does not undermine their reliability.
34 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.
35 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.
36 The effect of 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.
37 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.
38 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
39 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
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in future periods, except for the disclosure of the effect on future periods when
it is impracticable to estimate that effect.
40 If the amount of the effect in future periods is not disclosed because estimating
it is impracticable, an entity shall disclose that fact.
Errors
41 Errors can arise in respect of the recognition, measurement, presentation or
disclosure of elements of financial statements. Financial statements do not comply
with ASs 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 approved for issue.
However, material errors are sometimes not discovered until a subsequent period,
and these prior period errors are corrected in the financial statements for that
subsequent period (see paragraphs 42).
41A However, the errors which have effect on the presentation or disclosure are
disclosed in the notes.
42 Subject to paragraph 43, an entity shall correct material prior period errors
retrospectively by recognizing the same in the first set of financial statements
approved for issue after their discovery by.
Limitations on retrospective computation
43 A prior period error shall be corrected by retrospective computation except
to the extent that it is impracticable to determine the cumulative effect of the
error.
[Refer Appendix 1]
45 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 compute the
effect of the correction of the error prospectively from the earliest date
practicable.
46 [Refer Appendix 1]
47 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, computes the amount prospectively from the earliest date
practicable. It therefore disregards the portion of the cumulative effect arising
before that date. Paragraphs 5053 provide guidance on when it is impracticable to
correct an error for one or more prior periods.
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48 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
49 In applying paragraph 42, an entity shall disclose the following:
(a) the nature of the prior period error;
(b) the amount of the correction made to each financial statement line item:
(i) for each financial statement line item affected; and
(ii) if Ind AS 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
(d) if retrospective computation is impracticable for a particular prior
period, the circumstances that led to the existence of that condition and a
description of how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.
Impracticability in respect of retrospective computation
50 In some circumstances, it is impracticable to compute retrospectively the effect of a
change in accounting policy or a correction of an error. For example, data may not
have been collected in the prior period(s) in a way that allows retrospective
computation of a new accounting policy and it may be impracticable to recreate
the information.
51 It is frequently necessary to make estimates in applying an accounting policy to
elements of financial statements recognised or disclosed in respect of transactions,
other events or conditions. Estimation is inherently subjective, and estimates may
be developed after the reporting period. Developing estimates is potentially more
difficult when retrospectively computing the effect of an accounting policy or to
correct a prior period error, because of the longer period of time that might
have passed since the affected transaction, other event or condition occurred.
However, the objective of estimates related to prior periods remains the same as for
estimates made in the current period, namely, for the estimate to reflect the
circumstances that existed when the transaction, other event or condition occurred.
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52 Therefore, retrospectively computing a new accounting policy or correcting a
prior period error requires distinguishing information that
(a) provides evidence of circumstances that existed on the date(s) as at which the
transaction, other event or condition occurred, and
(b) would have been available when the financial statements for that prior period
were approved for issue
from other information. For some types of estimates, it is impracticable to
distinguish these types of information. When retrospective computation would
require making a significant estimate for which it is impossible to distinguish these
two types of information, it is impracticable to compute the effect of a new
accounting policy or correct the prior period error retrospectively.
53 Hindsight should not be used when computing the effect of a new accounting
policy to, or correcting amounts for, a prior period, either in making assumptions
about what management's intentions would have been in a prior period or
estimating the amounts recognised, measured or disclosed in a prior period. For
example, when an entity corrects a prior period error in calculating its liability for
employees' accumulated sick leave in accordance with AS 19, Employee Benefits, it
disregards information about an unusually severe influenza season during the next
period that became available after the financial statements for the prior period were
approved for issue. The fact that significant estimates are frequently required when
amending comparative information presented for prior periods does not prevent
reliable computation of the amounts retrospectively..
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Appendix A
References to matters contained in other Accounting
Standards
This Appendix is an integral part of the AS.
Appendix B, Liabilities arising from Participating in a Specific Market-- Waste
Electrical and Electronic Equipment, contained in AS 37, Provisions, Contingent
Liabilities and Contingent Assets, makes reference to ( AS) 8.
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Appendix 1
Note: This Appendix is not a part of the Accounting Standard. The purpose of this
Appendix is only to bring out the major differences, if any, between Accounting Standard ( AS) 8
and the corresponding Indian Accounting Standard (Ind AS) 8, Accounting Policies,
Changes in Accounting Estimates and Errors.
Comparison with Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors
1. Paragraph 4 of Ind AS 8 dealing with the tax effects of corrections of prior period
errors and retrospective adjustments has been deleted in AS 8 since it has been decided
to cover such provisions in AS 12, Income Taxes.
2. Ind AS 8 defines Indian Accounting Standards in paragraph 5, however in paragraph
5, the definition of AS is given.
3. Ind AS 8 deals with retrospective application, retrospective restatement of changes in
accounting policy and estimate and errors. However, it is felt that for non Ind AS
compliant entities, it is too onerous to apply retrospective application and retrospective
restatement and, accordingly, the following paragraphs dealing with them have been
deleted in AS 8. AS 8, requires the impact of changes in accounting policy to be
retrospectively computed-
(i) definition of retrospective computation is included in paragraph 5.
(ii) in order to maintain consistency with paragraph numbers of Ind AS, following
paragraph numbers have been retained in AS 8:
(a) Paragraph 24
(b) Paragraph 26
(c) Paragraph 46
(iii) Following paragraphs have been modified:
(a) Definition of `impracticable in paragraph 5
(b) Heading above paragraph 19 is changed as Accounting for changes in
accounting policies.
(c) Paragraph 19(b)
(d) Paragraphs 22-23
(e) Paragraphs 25
(f) Paragraphs 27
(g) Paragraph 41- 42
(h) Paragraph 49
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(i) Paragraphs 50-53
5. Paragraph 6 is modified as per the Framework for the Preparation and Presentation
of Financial Statements of the existing Accounting Standards applicable to non Ind
AS compliant entities.
6. In paragraph 9, the guidance is referred to as `application guidance as it appears to be
more appropriate.
7. In paragraph 12 of Ind AS 8, it is mentioned that in absence of an Ind AS,
management may first consider the most recent pronouncements of International
Accounting Standards Board In AS 8, paragraph 12 is modified as management
should first consider the guidance given in Ind AS and in absence thereof the most
recent pronouncement of the Institute of Chartered Accountants of India and in
absence thereof most recent pronouncement of the International Accounting Standards
Board.
8. In paragraph 14 of AS 8, it is mentioned that an entity shall change an accounting
policy if change is required by statute. Paragraph 19 (a) is also modified accordingly.
Ind AS 8 does not mention so .
9. Paragraph 21 has been deleted as the requirements specified therein have been added
in paragraph 19(a) and 19(b).
10 AS 8 requires less disclosures since it is considered to be too onerous for non Ind AS
compliant entities to disclose the provisions contained in Ind AS 8.Accordingly,
paragraphs 28 and 49 are modified and paragraph 29-31 are deleted. Howwever, in
order to maintain consistency with Ind AS 8, paragraph numbers have been retained
in AS 8
11. Paragraph 32(c) of Ind AS 8 gives the example of the fair value of financial assets or
financial liabilities for the estimates required . AS 8 does not contains the same.
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