Username:
Password:
Forgot Password?

AASB 108 - Accounting Policies, Changes in Accounting Estimates and Errors
Print this Article Print this Article
Email this Article

Currency of material  
This material was last updated when this standard was released in July 2004.  
 
A list of the omnibus amending standards issued up until July 2007 that have affected this standard since this date is included in the following table. The table also contains the date when the relevant changes become operative. 
 
Omnibus amending standards are available on the AASB website as are compiled standards incorporating omnibus amendments as soon as they are completed by the AASB. 
 
Details of the changes made by each omnibus are summarised in ANT and Charter’s “The Panel” as they are released. For a quick overview of the new material applying at 30 June 2007 click here.  

 
Text of the Standard 
Summary 
AIFRS compared to IFRS and old AGAAP 
Interpretations and guidance 
Questions and answers 
Articles 
 
 
Summary of AASB 108 
 
1. International Standards and Australian Standards 
 
  • International Financial Reporting Standard (IFRS)IAS 8 
    ‘Accounting Policies, Changes in Accounting Estimates and Errors’ 
  • International Public Sector Accounting Standard (IPSAS) 
    IPSAS 1 ‘Presentation of Financial Statements’ 
    IPSAS 3 ‘Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies’ 
  • 2005 Australian Equivalents to IFRS(Sector neutral) 
    AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ 
     
  • Pre-2005 Australian Accounting Standards 
    AASB 1001 ‘Accounting Policies’ 
    AASB 1018 ‘Statement of Financial Performance’ 
    AASB 1040 ‘Statement of Financial Position’ 
    AAS 6 ‘Accounting Policies’ 
    AAS 36 ‘Statement of Financial Position’
 
 
2. Main features of AASB 108 
 
2.1 Application 
 
AASB 108 applies to all companies and other entities that must prepare and lodge Corporations Act financial reports. It also applies to the general-purpose financial reports of reporting entities in both the for-profit sector and not-for profit sector, which includes the public sector. (para Aus 1.1). 
 
2.2 Scope 
 
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial reports (para 5). 
 
AASB 108 deals with each of the following: 
  • the selection and application of accounting policies;  
  • accounting for changes in accounting policies; 
  • changes in accounting estimates; and 
  • corrections of prior period errors.
 
2.3 Selection and Application of Accounting Policies: Covered by Standards 
 
The accounting policy/policies applied to a transaction, other event or condition must be in accordance with an Australian Accounting Standard that specifically applies to that item. Any relevant Implementation Guidance issued by the AASB for such an Australian Accounting Standard must also be considered when determining the accounting policy/policies (para 7). 
 
If an Australian Accounting Standard specifically applies to a transaction, other event or condition, then the AASB has determined the accounting policy/policies applying to that item to ensure that the resulting financial information satisfies the concepts of relevance and reliability (para 8). 
 
2.4 Selection and Application of Accounting Policies: Not Covered by Standards 
 
In the absence of an Australian Accounting Standard that specifically applies to a transaction, other event or condition, management must use its judgment to develop and apply accounting policy/policies that result in financial information that is relevant and reliable (para 10). 
 
Relevance goes to the economic decision-making needs of users. Reliability goes to faithful representation, substance over form, neutrality, prudence and completeness (para 10). 
 
In making its judgments about accounting policies management must refer to and consider the applicability of the following: 
  • firstly, the requirements and guidance in Australian Accounting Standards dealing with similar and related issues; and  
  • secondly, the definitions, recognition criteria and measurement concepts in the Framework.(para 11)
After the two overriding sources mentioned above, management may also refer to and consider the following: 
  • the most recent pronouncements of other conceptually consistent standard setting bodies; 
  • other accounting literature; and 
  • accepted industry practices.(para 12)
Accounting policies must be selected and applied consistently to similar transactions, other events and conditions (para 13) 
 
2.5 Changes in Accounting Policies 
 
As a general principle, the same accounting policies are applied to the same transactions, other events or conditions within each period and from one period to the next. 
 
A change in an accounting policy must only be made if 
  • required by Australian Accounting Standard; or 
  • the change will result in the financial report providing reliable and more relevant information about the financial performance, financial position and cash flows of the entity.(para 14)
A mandatory change in accounting policy resulting from the initial application of an Australian Accounting Standard must be accounted for in accordance with the specific transitional provisions of that Standard or retrospectively if no such provisions exist (para 19). 
 
A voluntary change in accounting policy must be applied retrospectively except to the extent that it is impracticable (para 19). Retrospective application means applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied in prior periods (para 5).  
 
The opening balance of each component of equity affected (usually retained profits) and other comparative amounts disclosed for prior periods must be presented on the basis of the new accounting policy (para 22). The required approach with comparative financial information is to apply the new accounting policy to any prior periods presented as far back as is practicable (para 24). 
 
If it is impracticable to determine the cumulative effect of applying a new accounting policy at the beginning of the current period, then the new accounting policy is applied to the earliest prior period that is practicable (para 25). 
 
2.6 Errors 
 
A material prior period error must 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 (para 43). 
 
Retrospective restatement means correcting the recognition, measurement and disclosure of the amounts of the elements of the financial statements as if the prior period error had never occurred (para 5). Accordingly when a material prior period error is discovered it must be corrected in the next financial report authorised for issue by restating the comparative amounts for the prior periods presented in which the error occurred. If the error occurred before the earliest prior period presented, then it must be corrected by restating the opening balances of assets, liabilities and equity for the earliest prior period presented (para 42). 
 
The required approach with comparative financial information is to correct the error in any prior periods presented as far back as is practicable (para 44).  
 
If it is impracticable to determine the cumulative effect of the error at the beginning of the current period, then the error is corrected prospectively from the earliest date that is practicable (para 45). 
 
2.7 Meaning of Impracticable 
 
Applying a requirement is impracticable only after making every possible attempt to do so. For a particular period, it is impracticable to apply a change in accounting policy retrospectively or correct an error by retrospective restatement only if one of the following conditions apply: 
  • the financial effects are not determinable  
  • assumptions are required about what management’s intent would have been in that period; or 
  • significant estimates of amounts are required and it is impossible to distinguish objectively the information needed for these estimates from other information.(para 5)
Financial effects would not be determinable if relevant data was not collected in the prior period and cannot be recreated (para 50). 
 
The need for estimation does not by itself make a requirement impracticable. However, estimates must be made in relation to prior periods based on the circumstances that existed when the transaction, other event or condition occurred and hindsight must not be used (para’s 51 and 53). It must be possible to objectively distinguish information about the circumstances that existed on the date(s) at which estimated amounts are to be recognised, measured and disclosed and which would have been available before the financial report for that prior period was authorised for issue (para 5). For some types of estimates it is impracticable to distinguish this information, for example, an estimate of fair value not based on observable prices or observable inputs (para 52). 
 
2.8 Changes in Accounting Estimates 
 
Many items in a financial report cannot be measured with precision but must be estimated based on the latest available information. Examples include bad debts, inventory obsolescence, fair values, useful lives of depreciable assets and warranty obligations. 
 
By nature, changes in accounting estimates must be recognised with changes in the circumstances on which estimates are based, the emergence of new information or the benefit of additional experience. 
 
To the extent that a change in an accounting estimate gives rise to changes in assets, liabilities or relates to an item of equity it must be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change (para 37).  
 
The net effect of the change in accounting estimate must be recognised prospectively by including it in the profit or loss in: 
  • the period of change, if the change affects only that period – e.g. a change in the estimate for the allowance for bad debts or provision for warranty; or 
  • the period of the change and future periods, if the change affects both – e.g. a change in estimated useful life of a depreciable asset.(para’s 36 and 37)
2.9 Disclosures – Changes in Accounting Policies 
 
Disclosures for changes in accounting policies are required in two circumstances: 
  • when the initial application of an Australian Accounting Standard has an effect on the current period or any prior period or might have an effect on future periods; and 
  • when a voluntary change in accounting policy has an effect on the current period or any prior period or might have an effect on future periods.(para’s 28 and 29)
The required disclosures are set out in the document table attached below: 
 
When a new Australian Accounting Standard has been issued but is not yet effective this fact must be disclosed together with the known or reasonably estimable information relevant to assessing the possible impact of the new Standard on the financial report upon initial application (para 30). 
 
2.10 Disclosures – Other 
 
Disclosure must be made of 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 (para 39). If the estimation of the future effect is impracticable, then it is not required but that fact must be disclosed (para’s 39 and 40). 
 
Disclosures in relation to prior period errors include: 
  • the nature of the prior period error; 
  • the amount of the correction for each line item affected and the impact on earnings per share for each prior period presented to the extent practicable;(para 49)
When retrospective restatement of an error is impracticable for a particular period the required disclosures are as follows: 
  • the circumstances that led to the existence of the condition; 
  • a description of how and from when the error has been corrected;(para 49)
When an error occurred before the earliest prior period presented disclosure is required of the amount of the correction at the beginning of the earliest prior period that is presented (para 49) 
 
3. Australian Guidance 
 
Implementation guidance developed by the IASB and adopted by the AASB accompanies but is not part of the Standard. The implementation guidance contains three worked examples. 
 
The first example illustrates the retrospective restatement of comparative amounts required for an error made in the calculation of closing inventory in the immediately prior reporting period. 
 
The second example illustrates retrospective adjustment of comparative amounts upon changing accounting policy for borrowing costs from capitalisation where related to qualifying assets to all recognised as expense. 
 
The third example illustrates prospective application of a change in accounting policy when retrospective application is not practicable because of the absence of accounting records. 
 
4. Australian Interpretations 
 
None. 
 
5. AASB 108 Compared to IAS 8 
 
5.1 Additions 
 
Paragraph / Description 
 
Aus 2.1 Which entities AASB 108 applies to. 
 
Aus 2.2 The application date of AASB 108, ie. annual 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 Standards have been superseded by AASB 108. 
 
Aus 2.6 Clarifies that the superseded Standards apply until AASB 108 applies. 
 
Aus 2.7 Notice of Standard published as required 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. 
 
5.2 Deletions 
 
Paragraph / Description 
 
54 Effective date of IAS 8 not relevant to Australia 
 
55 Reference to superseded IAS 8 
 
56 Reference to superseded SIC 2 ‘Consistency – Capitalisation of Borrowing Costs’ and SIC 18 ‘Consistency – Alternative Methods’ 
 
Appendix Sets out consequential amendments made to other International Standards, which are relevant to the version of IAS 8 applicable to 2005. 
 
6. AASB 108 Compared to AASB 1001 
 
6.1 Wider Application 
 
AASB 108 is a sector neutral standard applying to both the for-profit and not-for-profit sectors whereas AASB 1001 is a for-profit standard that applies generally to the private sector only. 
 
AASB 108 applies to all entities that must lodge a financial reports with ASIC whereas the application of AASB 1001 was limited to reporting entities and general-purpose financial reports. 
 
6.2 Specific About Materiality 
 
AASB 108 includes a specific materiality paragraph that requires reference to the guidelines in AASB 1031 ‘Materiality’ 
 
6.3 Retrospective Application for Voluntary Change in Accounting Policy 
 
AASB 108 requires that a voluntary change in accounting policy be recognised by retrospective application whereby comparative information is restated and (usually) the opening balance of retained profits for the earliest period presented is adjusted. In effect, the financial position shown at the beginning of the reporting period is as if the new accounting policy had always applied 
 
By contrast, AASB 1001 requires the cumulative financial effect of a voluntary change in accounting policy to be recognised as revenue or expense in the net profit or loss in the financial period that the change is made. This approach is known as the ‘retroactive approach’ whereby the full amount of the adjustment is made in the current reporting period to ensure that the financial position shown at the end of the reporting period is as if the new accounting policy had always applied. 
 
6.4 Retrospective Restatement of Errors 
 
AASB 108 requires all errors that relate to prior reporting periods to be corrected by restating comparative information and (usually) the opening balance of retained profits for the earliest period presented is adjusted. AASB 108 does not distinguish one type of material error from another. 
 
AASB 1001 did not address the correction of errors rather this topic was covered in AASB 1018 and AASB 1040. Together these two Standards required that errors to be corrected by either: 
  • reissuing the financial report relating to the preceding reporting period; or 
  • adjusting the relevant asset, liability or equity items at reporting date and including the net effect in the determination of the net profit or loss of the current reporting period.
AASB 1018 and AASB 1040 also make a distinction between fundamental errors (so bad as to make the financial report unreliable) and other material errors. Where the financial report is not reissued for fundamental errors additional disclosures are required.  
 
6.5 Going Concern Issues to Another Standard 
 
AASB 108 does not address going concern issues rather they are addressed in IAS 1 ‘Presentation of Financial Statements’ and its Australian equivalent for 2005, AASB 101 ‘Presentation of Financial Statements’. 
 
AASB 1001 dealt with the application of the going concern basis in the preparation of the financial report and requires disclosure of any material uncertainty related to an event or a condition casting doubt upon an entity’s ability to continue as a going concern. AASB 101 also requires certain specific disclosures in relation financial reports that are prepared on other than a going concern basis including that fact, the reasons thereof and the alternative basis that has been used. 
 
6.6 Additional Disclosure re Future Implementation of a New Australian Accounting Standard 
 
AASB 108 requires disclosure of known and reasonably estimable information relevant to assessing the initial impact of a new Australian Accounting Standard that is on issue but not yet effective or applied early by the entity. 
 
7. Future Standard Setting Developments 
 
None.