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Accounting policies, estimates and errors (Selection of accounting…
Accounting policies, estimates and errors
There are lots of choices in accounting in terms of how to recognise, measure, present and disclose information about any item of economic relevance. Because of these choices it is vital that users of financial statements understand the choices that have been made
Accounting standards have rules around selection and application of accounting policies and their consistent application
Accounts are also full of estimates because not all information will be known about an item at the time the accounts are prepared, usually because uncertain future events may affect the time in question, for example the amount that should be recorded for a debt due to the business as a receivable when there are doubts about the debtor's ability to pay
Accounting standards del with changes in accounting estimates and also correction of prior period error
The main standard dealing with these issues is IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors'
The objective of IAS 8 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 correction of errors
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Correction of errors
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To the extent that errors are discovered before the accounts are approved, they are expected to be corrected before approval
Any material prior period errors discovered after approval should be corrected retrospectively in the first set of financial statements authorised for issue after their discovery by
- restating the comparative amounts for the prior periods presented in which the error occurred or
- if the error occurred before the earliest prior period presented, restating the opening balance of assets, liabilities and equity for the earliest prior period presented
If it is impracticable to allocate the error to the period or periods to which it relates, it can be corrected in the current period financial statements
Disclsoures
The standard requires substantial disclosures around accounting policies, changes in accounting policy and changes in accounting estimates as well as correction of errors
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