AASB 108 - Accounting Policies, Changes in Accounting Estimates and Errors

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AASB 108 - Accounting Policies, Changes in Accounting Estimates and Errors

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Text of the Standard
Summary
AIFRS compared to IFRS and old AGAAP
Interpretations and guidance
Questions and answers
Articles

Comparison between AASB 108 and IAS 8
Comparison by Jeffrey Knapp

Background

AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ is the Australian equivalent to IAS 8 of the same name. It was made by the AASB on 15 July 2004 as part the AASB’s program to adopt International Financial Reporting Standards by 2005.

AASB 108 Compared to IAS 8

Additions

Paragraph Description

Aus 2.1 Which entities AASB 108 applies to, ie. reporting entities and general purpose financial reports and non-reporting entities that are required to prepare Corporations Act financial reports

Aus 2.2 The application date of AASB 108, ie. annual reporting periods beginning 1 January 2005.

Aus 2.3 Prohibits early application of AASB 108.

Aus 2.4 Makes the requirements of AASB 108 subject to AASB 1031 ‘Materiality’.

Aus 2.5 Explains which Australian Standards have been superseded by AASB 108.

Aus 2.6 Clarifies that the superseded Australian Standards remain in force until AASB 108 applies.

Aus 2.7 Notice of the new Standard published on 22 July 2004.

Aus 2.8 Clarifies that a requirement in an Australian Accounting Standard to restate comparative information does not mean that the original financial report for the preceding period must be replaced.

Deletions

Paragraph Description

54 Effective date of IAS 8.

55 Reference to superseded IAS 8.

56 Reference to superseded SIC Interpretations – SICs 2 and 18.

Differences Between AASB 108 and AASB 1001
Comparison from the Australian Accounting Standards Board

This section identifies differences between AASB 1001 Accounting Policies and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors under the following headings.

A: Incompatibilities between AASB 1001 and AASB 108
B: AASB 1001 is more detailed or restrictive
C: AASB 108 is more detailed or restrictive
D: AASB 1001 disclosures are more extensive
E: AASB 108 disclosures are more extensive

The analysis of differences should not be taken as providing an exhaustive list of differences.

Introduction

AASB 108 prescribes 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 correction of errors. Disclosure requirements for accounting policies, except those for changes in accounting policies, are set out in AASB 101 Presentation of Financial Statements. In contrast, accounting policies are the sole focus of AASB 1001, while changes in accounting estimates are dealt with in AASB 1018 Statement of Financial Performance and correction of errors is dealt with in AASB 1018 and AASB 1040 Statement of Financial Position. The relevant sections of AASB 108 and AASB 1001 provide a framework to guide the selection, application and disclosure of accounting policies that will enable the financial report to present fairly the financial position, financial performance and cash flows of the entity.

Differences

A. Incompatibilities between AASB 1001 and AASB 108

A.1 Voluntary change in accounting policy

AASB 108.19(b) requires a voluntary change in an accounting policy to be accounted for retrospectively by adjusting the opening balance of retained earnings for the earliest period presented and restating comparative information. When it is impracticable to determine the effects of changing an accounting policy on comparative information, AASB 108.24 requires an entity to 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. In contrast, AASB 1001.6.3 requires the effect of voluntary changes in an accounting policy to be recognised as revenues or expenses in the reporting period in which the change is made, and requires the retrospective effect to be disclosed in the notes in the financial report. In circumstances where 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, AASB 108.25 requires an entity to apply the new policy prospectively from the start of the earliest period practicable. In contrast, AASB 1001.6.5 requires the new accounting policy to be applied prospectively from the beginning of the current annual financial reporting.

A.2 Correction of errors

AASB 108 does not distinguish between fundamental errors and other material errors. AASB 108 requires all errors that relate to prior reporting periods to be corrected by adjusting the opening balance of retained earnings and restating comparative information. In contrast, AASB 1018 and AASB 1040 make a distinction between fundamental errors and other material errors, and require additional disclosure where a fundamental error occurs. Under AASB 1018 and AASB 1040, the correction of errors can be achieved by selecting one of two options. The first option (AASB 1018.7.2 and AASB 1040.6.2) allows the entity to reissue a financial report relating to the preceding reporting period. This reflects an option available under the Corporations Act 2001. The second option (AASB 1018.7.1 and AASB 1040.6.1) requires the amount of the correction of an error to be included in the determination of net profit or loss for the current reporting period if it affects revenues or expenses, or by adjusting the statement of financial position for the current reporting period if any of the affected assets, liabilities or equity are still recognised at the reporting date. Comparative information is presented as reported in the financial report of the prior reporting period.

A.3 Prudence

AASB 108.10 requires management, in the absence of a specific requirement in an Australian Accounting Standard, to develop accounting policies that will ensure that the financial report provides information that is both relevant and reliable. For information to be deemed reliable, it must satisfy certain attributes including prudence (AASB 108.10(a)(iv)). Historically, the use of the principle of prudence has resulted in the preparation of financial reports that understate assets and overstate liabilities. In contrast, AASB 1001.9.1 excludes prudence from its definition of reliability. Therefore, it is arguable that financial reports that understate assets and overstate liabilities are more likely to occur when applying AASB 108 than would be the case when applying AASB 1001.

B. AASB 1001 is more detailed or restrictive

B.1 Presentation of changes in accounting estimate

AASB 1018.6.2 requires the effect of a revision of an accounting estimate to be included in the same category within the statement of financial performance as was used for the estimate in the equivalent preceding reporting period. In contrast, AASB 108 does not contain an equivalent requirement.

B.2 Criteria for use in selection and application of accounting policies

AASB 1001 (Section 4) prescribes criteria for use in the selection and application of accounting policies. AASB 1001.4.1.3 and 4.1.5-4.1.14 contain a detailed discussion of the qualitative characteristics of financial information: relevance, faithful representation and substance. AASB 108.8 states that Australian Accounting Standards set out accounting policies that the AASB has concluded result in a financial report containing relevant and reliable information about the transactions, other events or conditions to which they apply. In the absence of an Australian Accounting Standard that specifically applies to a transaction, other event or condition, AASB 108.10 prescribes criteria for use in the selection and application of accounting policies that, although similar to AASB 1001, do not contain the same level of explanation.

C. AASB 108 is more detailed or restrictive

C.1 Consistency of accounting policies

AASB 108.13 clarifies that if more than one accounting policy is permitted under an Australian Accounting Standard, the entity must choose and apply consistently one of those policies, unless the Australian Accounting Standard specifically requires or permits categorisation of items for which different policies may be appropriate. In contrast, AASB 1001.5.1 requires that accounting policies be applied in a manner that ensures the resulting financial information is comparable and understandable.

C.2 Circumstances that would not require a change in accounting policy

AASB 108.14 and AASB 1001.6.1 identify a common set of circumstances that would require a change in accounting policy. In addition, AASB 108.16 notes circumstances that would not require a change in accounting policy. They are:

the adoption 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.

AASB 1001 does not comment on circumstances that would not require a change in accounting policy.

D. AASB 1001 disclosures are more extensive

D.1 Changes in accounting policy

In circumstances where a change in an accounting policy, made in the preceding financial year, did not have a material effect in the financial year but has a material effect in the current financial year, AASB 1001.8.5 requires disclosure of:

the nature of a change in accounting policy (i.e. an explanation of how the accounting policy has changed);
the reasons for the change;
that the change was made in the preceding financial year; and
the financial effect of the change in the current financial year.

AASB 108 does not contain an equivalent disclosure requirement.

E. AASB 108 disclosures are more extensive

E.1 Future implementation of a new Australian Accounting Standard

Where an entity chooses not to early-adopt a new Australian Accounting Standard, AASB 108.30 requires disclosure of known and reasonably estimable information relevant to assessing the possible impact that application of the new standard will have on the entity’s financial report in the period of initial application. AASB 108.31 outlines a number of disclosures that an entity should consider in complying with AASB 108.30, such as the title of the Australian Accounting Standard, the nature of a future change in accounting policy, the planned date of adoption and when the Australian Accounting Standard is required to be applied and an estimate of the effect of the change on the entity’s financial report. In contrast, AASB 1001.6.2.1 encourages disclosure, when an entity chooses not to early adopt a new Accounting Standard, of the nature of the future change in accounting policy and an estimate of the effect of the change on the entity’s financial performance and position.

E.2 Errors

As noted in A.2, AASB 1018 and AASB 1040 distinguish between fundamental errors and other material errors. AASB 1018.7.3 and AASB 1040.6.3 require specific disclosures to be made in relation to fundamental errors which are similar to the disclosure requirements in AASB 108.49. However, the requirements in AASB 108.49 are applicable to all errors.

E.3 Earnings per share

In relation to a change in accounting policy, AASB 108.28(f)(ii) requires an entity to disclose, for the current period and each prior period presented, the amount of the adjustment to basic and diluted earnings per share (if AASB 133 Earnings per Share applies to the entity). In addition, AASB 108.49(b)(ii) requires an entity to disclose, in relation to a correction of an error, for each prior period presented, the amount of the correction to basic and diluted earnings per share (if AASB 133 applies to the entity). AASB 1001 does not contain similar disclosure requirements.