Yearly Archives: 2023

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors.

Accounting Policies

IAS 8 defines accounting policies as the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Once an entity has selected its accounting policies, it will apply the selected accounting policies consistently for similar transactions, unless a Standard or an Interpretation requires different policies to be applied.

IAS 8 allows the selection and application of accounting policies:

• If a standard or interpretation deals with a transaction, use that standard or interpretation
• If no standard or interpretation deals with a transaction, judgment should be applied. The following sources should be referred to, to make the judgment:
• Requirements and guidance in other standards/interpretations dealing with similar issues
• Definitions, recognition criteria in the framework
• May use other GAAP that use a similar conceptual framework and/or may consult other industry practice/accounting literature that is not in conflict with standards/interpretations

IAS 8 permits accounting policies to be changed when there is a change in the International Financial Reporting Framework, Change in local legislation, or for true and fair view of financial statements.

Accounting Treatment of Change in Accounting Policy

If change is due to new standard/interpretation, apply transitional provisions. If there are no transitional provisions, apply retrospectively.

When a change is applied retrospectively, the entity shall adjust the opening balances 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 policy has always been applied.

However, when it is impractical to determine period-specific effects or cumulative effects of the change, then retrospectively application to the earliest period that is practicable is permitted.

Disclosure

Refer Paragraphs: IAS 8: 28 – 31

Accounting estimate

A change in an accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with the asset or liability.

When an item of financial statements cannot be measured precisely, it can only be estimated. This is because of:

• Uncertainties inherent in the business;
• Where judgments are involved.

Change in accounting estimates becomes necessary as a result of new information or new development.

Accounting treatment of Change in Accounting Estimate

Change is recognised prospectively in profit or loss in the period of change, if it only affects that period; or period of change and future periods (if applicable).

Disclosure

Refer Paragraph IAS 8: 39 – 40

Errors

Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from failure to use/misuse of reliable information that:

• Was available when the financial statements for that period were issued
• Could have been reasonably expected to be taken into account in those financial statements.

Errors include:

• Mathematical mistakes
• Mistakes in applying accounting policies
• Oversights and misinterpretation of facts

Accounting treatment of Errors

An entity shall correct material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by:

• Restating the comparative amounts for the prior period(s) presented in which the error occurred; or
• If the error occurred before the earliest prior period presented, where practicable, restating the opening balances of assets, liabilities, and equity for the earliest prior period presented.

Disclosure

Refer Paragraph IAS 8: 49

CONTACT

If you have a specific question about the application of IAS 8, please reach out to Ask@projectaccountants.co.uk or visit www.projectaccountants.co.uk.

Preparing first-year accounts is a crucial task for businesses, providing valuable insights into financial health and performance during the initial phase. In this blog, we will explore key considerations when undertaking this task, ensuring accurate and compliant financial reporting.

1.   FamiliariseYourself with Accounting Standards

Before preparing first-year accounts, it is essential to familiarize yourself with the relevant accounting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Understanding these guidelines ensures compliance and consistency in financial reporting, enhancing the credibility of your accounts.

2.  Organize Your Financial Records:

Maintaining well-organized financial records is vital for preparing accurate first-year accounts. By diligently tracking all financial transactions, including sales, expenses, assets, liabilities, and equity, you
create a solid foundation for reliable reporting. Keep separate records for cash flows, invoices, receipts, and bank statements, enabling easy retrieval of information and ensuring data accuracy.

3.   Choose Appropriate Accounting Policies

Selecting the right accounting policies is a crucial step in preparing first-year accounts. Consider factors such as the nature of your business, industry norms, and legal requirements when deciding on the policies to adopt. Consistency in applying these policies ensures accurate and reliable financial reporting, enabling meaningful comparisons and analysis over time.

4.  Prepare a Structured Chart of Accounts

A well-structured chart of accounts is essential for effective financial reporting. Design a framework that reflects the various revenue, expense, asset, liability, and equity categories specific to your business. A carefully crafted chart of accounts not only facilitates accurate recording and classification of transactions but also enables the generation of meaningful financial reports for analysis and decision-making.

5.   Maintain Accurate Inventory Records

If your business involves inventory, maintaining accurate records is critical. Implement an efficient inventory management system to track inventory levels, accurately value your stock, and account for any changes during the financial year. Regularly reconciling physical inventory counts with the
recorded amounts helps identify any discrepancies and ensures the reliability of your financial statements.

6.  Reconcile Bank Statements

Bank statement reconciliation is a crucial step in the preparation of first-year accounts. Regularly compare your bank statements with your financial records to identify any discrepancies, such as missing transactions or errors. By reconciling bank statements, you ensure the accuracy of your accounts,
detect potential issues, and maintain the integrity of your financial information.

7.  Identify Users of Financial Statements

Consider the intended users of your financial statements when preparing first-year accounts. Investors, lenders, regulatory authorities, and internal stakeholders may have specific information needs and objectives. Tailor the presentation and disclosures in your accounts to provide relevant and
meaningful information to support their decision-making processes. By understanding and meeting their requirements, you enhance the usefulness and value of your financial statements.

In Summary

Preparing accurate and reliable first-year accounts requires careful attention to detail and adherence to accounting standards. By familiarizing yourself with relevant guidelines, organizing financial records, choosing appropriate accounting policies, maintaining accurate inventory records, reconciling bank statements, and considering the needs of financial statement users, you can ensure the integrity and usefulness of your financial reporting.

When it comes to specialized support in preparing first-year accounts, trust Project Accountants Ltd. Our team of experienced accountants excels in accurate and compliant financial reporting, providing you with the confidence and peace of mind that your accounts are prepared to the highest standards.
Contact us today to benefit from our expertise and ensure a strong foundation for your financial reporting journey.