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 IInd AS 8
Accounting Policies, Changes in Accounting
Estimates and Errors

INTRODUCTION

The purpose of this Standard is to provide the criteria for selecting and changing accounting policies,
po as well as
accounting treatment and disclosures for changes in accounting policies, changes in estimates and correction of
errors.

ACCOUNTING POLICIES

Accounting concepts do not in themselves provide sufficient guidance as to how they should be applied. This
requires the specification of accounting bases. Accounting bases are the various methods which have
hav been
developed for applying fundamental accounting concepts to financial transactions and to items in financial
statements.

An entity is required to value the inventory at the end of each reporting period, so that, following the accrual
concept, such inventory
nventory items can be matched with the sale proceeds from those items in the future reporting
period. An entity also needs to provide depreciation for its property, plant and equipment. There are, however, a
number of alternative methods of valuing invento
inventory
ry or for providing depreciation and these are accounting bases.

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There are several accounting bases which could be applied to a particular item or transaction. Each entity has to
choose that basis, which is more appropriate to circumstances pertaining to tthat
hat entity. These are referred to as
accounting policies.

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in
preparing and presenting financial statements.

EXAMPLE 1

The initial measurement of property, plant and equipment is at cost, but subsequent measurement can be
done on the basis of two measurement bases - cost model or the revaluation model. An entity might choose
either of these two accounting models as its accounting policy.

SELECTION
ON AND APPLICATION OF ACCOUNTING POLICIES

The selection and application of accounting policies should be determined from the following hierarchy:

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If there is a particular Ind AS that applies to a specific transaction, event or condition, then the accounting policy or
policies to that item should be determined by applying that Ind AS only.

The standards have some appendices for assistance in applying the requirements. These appendices provide
implementation guidance. Some of these appendices are an internal part of the standard and, therefore, are
mandatory.

In the absence of a standard or interpretation, an entity should use judgment in developing and applying an
accounting policy that results in information that is relevant and reliable.

Management should also refer to and consider the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting.

The pronouncement by other standard setting bodies that have similar framework for developing accounting
standards, other accounting literature and accepted industry practices, could also be considered, provided they do
not conflict with the Conceptual Framework for Financial Reporting, standards and interpretations of Ind AS .

CONSISTENCY OF ACCOUNTING POLICIES

An entity should select and apply its accounting policies consistently for similar transactions, events or conditions in
order to enable users of financial statements to compare the financial statements of an entity, over time, to judge
its performance and identify trends.

If categorisation is permitted or required by an Ind AS, then an appropriate accounting policy can be selected and
applied consistently to a category.

EXAMPLE 2

Ind AS 16 Property, Plant and Equipment allows an entity to choose either the cost model or the revaluation
model as its accounting policy and it should be applied to an entire class/category of property, plant and
equipment.

A class of property, plant and equipment is basically grouping of assets of similar nature and use in an entity’s
operations, such as land, land and building, machinery, motor vehicles etc.

Therefore, an entity can choose revaluation model for land, and land and buildings category whereas apply cost
model to machinery and motor vehicles. But once chosen, an entity should be consistent in applying those
policies.

CHANGES IN ACCOUNTING POLICIES

A change in an accounting policy means that an entity has exchanged one accounting policy for another.

EXAMPLE 3

A change in inventory valuation as per Ind AS 2 Inventories from FIFO to Weighted Average would be a change
in accounting policy.

A change in accounting for borrowing costs as per Ind AS 23 Borrowing Costs from capitalisation to immediate
expensing is also a change in accounting policy.
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In the preparation of financial statements, there is an underlying presumption that an accounting policy, once
adopted, should not be changed, but rather should be uniformly applied in accounting for events, transactions or
conditions of a similar type. This presumption may be overcome, only, if the entity justifies the use of an alternative
acceptable accounting policy on the basis, that it is preferable under certain circumstances.

A change in accounting policy should be made only if either of the following is satisfied :

 It is required by an Ind AS; or

 The change results in the financial statements providing more reliable and relevant information about the
effects of transactions, other events or conditions on financial position, performance and cash flows.

It should be ensured that the following are not changes in accounting policies:
 The application of an accounting policy for transactions, other events or conditions that differ in substance
from those previously occurring;

EXAMPLE 4

ABC Ltd had acquired a machine under a lease and, therefore, Ind AS 116 Leases was applicable.

The company purchased another machine, leased it to another party for considerable period and then leased it
back from that party for a lesser time period. In such a case, the entity has entered into a series of transactions
that involves the legal form of a lease.

and

 The application of a new accounting policy for transactions, events or conditions that did not occur previously or
were immaterial.

EXAMPLE 5

ABC Ltd generally purchases property such as land, building, motor vehicle etc outright and, therefore, applies
Ind AS 16 Property, Plant and Equipment.

Now, the company has decided to acquire the right to use a building through leasing and, therefore, Ind AS 116
Leases becomes applicable.

This is a new transaction different from previously occurring ones and, therefore, application of a particular
accounting policy is not a change in accounting policy.

EXAMPLE 6

ABC Ltd had a building which it used for its business purposes and a small part of it was sublet. But since it was
not a significant part, the company applied Ind AS 16 Property, Plant and Equipment to that entire building.

Later the company acquired another huge property which was let out and, therefore, Ind AS 40 Investment
Property became applicable and even the small part of the other building that was sublet previously, is also
covered under this standard.

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 The initial application of a policy to revalue property, plant and equipment as well as intangible assets is a change in
accounting policy. However it would be dealt with as per the revaluation model of Ind AS 16 Property, Plant and
Equipment and Ind AS 38 Intangible Assets respectively, and not according to this Standard. Therefore, though a
change from cost model to revaluation model is a change in accounting policy, no retrospective application is
required in case of initial application of a revaluation model.

EXAMPLE 7

ABC Ltd had been following cost model for its land valuation for 10 years.

Then, it decided to change its accounting policy for the measurement of land to revaluation model. The
company appointed an independent valuer, to determine the fair value of the land.

Though, the company has changed its accounting policy from cost to revaluation model for land, it is exempt
from any kind of retrospective application.

A change in accounting policy, which is made on the adoption of an Ind AS standard, should be accounted for as per
the following:

 in accordance with the specific transitional provisions in that standard;

EXAMPLE 8

In previous example, when ABC Ltd first applies the standard Ind AS 40 Investment Property, it follows the
transitional provisions of that standard.

or

 if no transitional provisions are provided then the change should be accounted for retrospectively.

However, it should be kept in mind that early application of an Ind AS (before it has become effective) is not a
voluntary change in accounting policy.

EXAMPLE 9

In most of the cases, standards are issued first but they become effective at a later date.

However, there is always a provision, whereby an entity can go for early application of that standard. In that
case, it is not a voluntary change in accounting policy and, therefore, comparative figures need not be
presented.

A voluntary change in accounting policy should be applied retrospectively. Retrospective application is applying a
new accounting policy to transactions, other events and conditions, as if that policy had always been applied.

In retrospective application, an entity should adjust:

 the opening balance of each affected component of equity for the earliest prior period presented; and
 the other comparative amounts disclosed for each prior period presented;

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as if the new accounting policy had always been applied.

EXAMPLE 10

ABC Ltd provided the following information : (₹)

Year 20x5 20x4 20x3 20x2

Revenue 15,000 12,000 9,000 6,000
Cost of goods sold 9,000 7,000 6,000 4,000
Share Capital 10,000
Borrowing cost 800 600 500 500
Operating expenses 600 700 450 550

The company was producing an item that would take 4 years to get ready for its sale and, therefore, it decided
to capitalise the related borrowing cost. The inventory cost incurred in 20x2 – ₹ 5,000; 20x3 – ₹ 1,000; 20x4 –
₹ 1,000; and 20x5 – ₹ 1,000. Then, company decided to go for immediate expensing from 20x5. Thus, there is a
change in accounting policy.

The applicable tax rate is 30% and the opening cash balance was ₹ 10,000 in 20x2.

First, the Statement of Profit and Loss of 20x2 and 20x3 (prior periods) when borrowing costs were capitalised
are prepared.

Statement of Profit and Loss (₹)

Year 20x3 20x2
Revenue 9,000 6,000
Less: Cost of goods sold 6,000 4,000
Gross profit 3,000 2,000
Operating expenses 450 550
Operating profit 2,550 1,450
Finance costs – –
Accounting profit 2,550 1,450
Tax expense:
Current tax expense 615 285
Deferred tax expense
150* 150*
765 435
Profit for the period 1,785 1,015

*Since borrowing cost was capitalised, there was a deferred tax of ₹ 500 x 30% = ₹ 150.

Then, the financial statements of 20x4 and 20x5 are prepared.

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 Statement of Profit and Loss
(₹)
Year 20x5 20x4
Restated
Revenue 15,000 12,000
Less: Cost of goods sold 9,000 7,000
Gross profit 6,000 5,000
Operating expenses 600 700
Operating profit 5,400 4,300
Finance costs 800 600*
Accounting profit 4,600 3,700
Tax expense (@30%) 1,380 1,110
Profit for the period 3,220 2,590

*Borrowing costs was capitalised, but here they are restated as if they have been expensed.

Balance of Retained earnings on 1 April 20x3 ₹ 1,015 + ₹ 1,785 = ₹ 2,800.

Effect of change in accounting policy from capitalisation to immediate expensing of borrowing cost [(₹ 500 + ₹
500) x 70%] = ₹ 700.
Deferred tax reversed through equity [(₹ 500 + ₹ 500) x 30%] = ₹ 300.

Statement of Changes in Equity

( ₹)
Particulars Share Capital Retained earnings Total
Balance on 1 April 20x3 10,000 2,800
Effect of change in accounting policy from (700)
capitalisation to immediate expensing of borrowing
cost
Profit 2,590
Balance on 31 March 20x4 10,000 4,690 14,690
Profit 3,220 3,220
Balance on 31 March 20x5 10,000 7,910 17,910

Balance Sheet
(₹)
Year 20x5 20x4 20x3 20x2
Restated
Assets
Current
8,000 7,000 7,000 5,500
Inventory
Cash and cash equivalents 11,290 8,800 6,715 5,950
Total assets 19,290 15,800 13,715 11,450

Equity and liabilities

Equity attributable to owners
Share capital 10,000 10,000 10,000 10,000
Retained earnings 7,910 4,690 2,800 1,015
Total equity 17,910 14,690 12,800 11,015

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 Liabilities
Non-current
Deferred tax liabilities – – 300 150
Current
Current tax liabilities 1,380 1,110 615 285
Total liabilities 1,380 1,110 915 435
Total equity and liabilities 19,290 15,800 13,715 11,450

Inventories
20x2 ₹ 5,000 + ₹ 500 = ₹ 5,500
,500 (borrowing cost capitalised);
20x3 ₹ 5,500 + ₹ 500 + ₹ 1,000 = ₹ 7,000 (borrowing cost capitalised);
20x4 ₹ 7,000 – ₹ 1,000 + ₹ 1,000 = ₹ 7,000
,000 (borrowing cost that was capitalised earlier is reduced –
effect of retrospective application)
20x5 ₹ 7,000 + ₹ 1,000 = ₹ 8,000.

Cash and cash equivalents

20x2 Opening balance + Accounting profit – Borrowing cost (paid in cash) – cost of inventory
= ₹ 10,000 + ₹ 1,450 – ₹ 500 – ₹ 5,000 = ₹ 5,950.
20x3 Opening balance + Accounting Profit – Borrowing cost – Current tax (previous year) – Cost of inventory
= ₹ 5,950 + ₹ 2,550 – ₹ 500 – ₹ 285 – ₹ 1,000 = ₹ 6,715.
20x4 ₹ 6,715 + ₹ 3,700 (accounting
accounting profit with borrowing cost expensed
expensed) – ₹ 615 – ₹ 1,000 = ₹ 8,800
20x5 ₹ 8,800 + ₹ 4,600 – ₹ 1,110 – ₹ 1,000 = ₹ 11,290.

Applying a requirement is impracticable

impracticable, when the entity cannot apply it, after making reasonable efforts to do
so. For a particular prior period, it is impracticable to apply a cchange
hange retrospectively because of the following:

Therefore, in cases, where it is impracticable to ascertain the period

period-specific
specific effects or the cumulative effect of
change, the entity should alter the comparative information to apply the new accounting policy p to the carrying
amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is
practicable, which may be the current period, and should make a corresponding adjustment to the opening
balance of each
h affected component of equity for that period.

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EXAMPLE 11

ABC Ltd had been charging borrowing cost as an expense and now it decides to change its accounting policy to
capitalising borrowing costs. There was a fire in the company’s office building 4 years ago, as a result, all data
prior to that is unavailable. Therefore, adjustments are limited to the last 4 years, since it is impracticable to
adjust the opening balance of the effective component of equity for the earliest prior period.

Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a
new accounting policy to all prior periods, the entity should adjust the comparative information to apply the new
accounting policy prospectively from the earliest date practicable.

Initial application of an Ind Voluntary change in New Ind AS issued not yet
AS accounting policy effective and not applied

DISCLOSURE
Under 3 circumstances

ACCOUNTING ESTIMATES

An estimate is an educated guess at the size of something. An estimate often comes out a little larger or a little
smaller than the actual size. In accounting, it is a judgment of the value of a quantity which cannot accurately be
determined. Estimate is an integral part of accounting.

Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.

An accounting policy may require items in financial statements to be measured in a way that involves measurement
uncertainty—that is, the accounting policy may require such items to be measured at monetary amounts that
cannot be observed directly and must instead be estimated. In such a case, an entity develops an accounting
estimate to achieve the objective set out by the accounting policy. Developing accounting estimates involves the
use of judgements or assumptions based on the latest available, reliable information. Examples of accounting
estimates include:

a) a loss allowance for expected credit losses, applying Ind AS 109, Financial Instruments;
[A loss allowance for expected credit losses is a probability-weighted estimate of credit losses (ie, the expected
value of all cash short falls) over the expected life of the financial instrument.]
b) the net realisable value of an item of inventory, applying Ind AS 2 Inventories;
[Net realisable value (entity-specific value) refers to the net amount that an entity expects to realise from the
sale of inventory in the ordinary course of business.]
c) the fair value of an asset or liability, applying Ind AS 113, Fair Value Measurement;

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 [The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell an
asset or to transfer a liability would take place between market participants at the measurement date under
current market conditions. A fair value measurement requires an entity to determine the particular asset or
liability that is subject of measurement.]
d) the depreciation expense for an item of property, plant and equipment, applying Ind AS 16;
[Given the concept of depreciation as a cost allocation technique, the depreciable amount of an item of PPE
shall be allocated on a systematic basis over its useful life]
e) a provision for warranty obligations, applying Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.
[Where the provision for warranty obligations being measured involves a large population of items, the
obligation is estimated by applying the expected value method ie, by weighting all possible outcomes by their
associated probabilities.]

An entity uses measurement techniques and inputs to develop an accounting estimate. Measurement techniques
1
include estimation techniques (for example, techniques used to measure a loss allowance for expected credit
2
losses applying Ind AS 109) and valuation techniques (for example, techniques used to measure the fair value of
an asset or liability applying Ind AS 113).

1
It is known as provision matrix, which is based on its historical observed default rates over the expected life of a
financial instrument and is adjusted for forward-looking estimates.
2
An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value of an asset or liability, maximising the use of relevant observable inputs and
minimising the use of unobservable inputs. Three widely used valuation techniques are the market approach, cost
approach and the income approach.

The term ‘estimate’ in Ind AS sometimes refers to an estimate that is not an accounting estimate as defined in this
Standard. For example, it sometimes refers to an input used in developing accounting estimates.

The use of reasonable estimates is an essential part of the preparation of financial statements and does not
undermine their reliability.

CHANGES IN ACCOUNTING ESTIMATES

An entity may need to change an accounting estimate if changes occur in the circumstances on which the
accounting estimate was based or as a result of new information, new developments or more experience. By its
nature, a change in an accounting estimate does not relate to prior periods and is not the correction of an error.

The effects on an accounting estimate of a change in an input or a change in a measurement technique are changes
in accounting estimates unless they result from the correction of prior period errors.

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.

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APPLYING CHANGES IN ACCOUNTING ESTIMATES

The effect of change in an accounting estimate, other than a change to which the following paragraph
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.

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.

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 that change. 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 a loss allowance for expected credit losses 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.

EXAMPLE 12

ABC Ltd has a building whose present carrying amount is ₹ 1,000 and its remaining useful life is 5 years. Its
receivables are standing at ₹ 500 and provision for doubtful debt is ₹ 25. Now, with new information available,
ABC Ltd decides to keep its provision for doubtful debt at 10% for the current year. The company also decides
to change the estimate of useful life of its building from 5 to 8 years.

Now, let us look at the implications of these changes in estimates.

Provision for doubtful debts (previous carrying amount) ₹ 25

After change in estimate, Provision is 10% of receivables 10 % x ₹ 500 = ₹ 50

Journal
Other expenses 25
Provision for doubtful debts 25

Next year, the company would again decide whether to keep the provision at 10% or change it. So, this change
in estimate affects only the current period’s profit and loss and therefore is recognised in the current period
only.
The building had a carrying amount of ₹ 1,000 and remaining useful life 5 years, so depreciation should have
been ₹ 1,000 ÷ 5 = ₹ 200.

But due to change in estimate of the useful life to 8 years, the new depreciation charge for the present as well
as the future periods would be ₹ 1,000 ÷ 8 = ₹ 125. Thus a change in the estimated useful life, has changed the

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 expected pattern of consumption of the future economic benefits embodied in, affecting the depreciation
expense for the current period and for each future period during the asset’s remaining useful life.

In both cases, however, the effect of change relating to the current period is recognised as expense in the
current period and the effect on future periods is recognised in those future periods.

If a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it
is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of change.

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.

EXAMPLE 13

ABC Ltd provided the following information:

(₹)
Year 20x5 20x4 20x3
Revenue 15,00,000 12,00,000 10,00,000
Cost of goods sold 9,00,000 7,00,000 5,50,000
Share capital 10,00,000
Cost Useful life (years) Revised useful life (years)
Building 1,50,000 15 20
Plant and machinery 1,00,000 10 7
Furniture and fixture 35,000 7 5

The useful lives of the assets are revised on 1 January 20x5 and the applicable tax rate is 30%.

Accumulated depreciation schedule: (₹)

Plant and Furniture and
Particulars Building Total
machinery fixture
Balance on 1 January 20x3 – – – –
Depreciation expense 10,000 10,000 5,000 25,000
Balance on 31 December 20x3 10,000 10,000 5,000 25,000
Depreciation expense 10,000 10,000 5,000 25,000
Balance on 31 December 20x4 20,000 20,000 10,000 50,000
Depreciation expense 6,500* 11,429** 5,000*** 22,929
Balance on 31 December 20x5 26,500 31,429 15,000 72,929

* (₹ 1,50,000 – ₹ 20,000) ÷ 20 years = ₹ 6,500

** (₹ 1,00,000 – ₹ 20,000) ÷ 7 years = ₹ 11,429
*** (₹ 35,000 – ₹ 10,000) ÷ 5 years = ₹ 5,000

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 Statement of Profit and Loss
(₹)
Year 20x5 20x4 20x3
Revenue 15,00,000 12,00,000 10,00,000
Less: Cost of goods sold 9,00,000 7,00,000 5,50,000
Gross profit 6,00,000 5,00,000 4,50,000
Depreciation 22,929 25,000 25,000
Accounting profit 5,77,071 4,75,000 4,25,000
Tax expense
Current tax expense 1,72,500 1,42,500 1,27,500
Deferred tax expense 621* 1,73,121 – 1,42,500 – 1,27,500
Profit for the period 4,03,950 3,32,500 2,97,500

*Difference in depreciation charged ₹ 25,000 – ₹ 22,929 = ₹ 2,071

Therefore, corresponding deferred tax ₹ 2,071 x 30% = ₹ 621

Balance Sheet
(₹)
Year 20x5 20x4 20x3
Assets
Non-current
Property, plant and equipment 2,12,071 2,35,000 2,60,000
Current
Cash and cash equivalents 19,95,000 15,37,500 11,65,000
Total assets 22,07,071 17,72,500 14,25,000

Equity and liabilities

Share capital 10,00,000 10,00,000 10,00,000
Retained earnings 10,33,950 6,30,000 2,97,500
Total equity 20,33,950 16,30,000 12,97,500

Liabilities
Non-current
Deferred tax liabilities 621 – –
Current
Current tax liabilities 1,72,500 1,42,500 1,27,500
Total liabilities 1,73,121 1,42,500 1,27,500
Total equity and liabilities 22,07,071 17,72,500 14,25,000

Cash and cash equivalents

20x3 ₹ 10,00,000 – ₹ 2,85,000 (Cost of PPE) + ₹ 4,50,000 = ₹ 11,65,000
20x4 ₹ 11,65,000 – ₹ 1,27,500 (Previous year tax paid) + ₹ 5,00,000 = ₹ 15,37,500
20x5 ₹ 15,37,500 – ₹ 1,42,500 + ₹ 6,00,000 = ₹ 19,95,000

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EXAMPLE 14

ABC Ltd provided the following information :

(₹)
Year 20x5 20x4 20x3
Revenue 1,50,000 1,20,000 1,00,000
Cost of goods sold 90,000 70,000 55,000
Share capital 1,00,000
Cost Useful life (Year) Scrap value
Plant and machinery 1,00,000 10 10,000

On 1 January 20x5, it was found that the revised scrap value of the plant and machinery is ₹ 25,000 (Tax rate
30%).

Depreciation

20x3 (₹ 1,00,000 – ₹ 10,000) ÷ 10 = ₹ 9,000

20x4 (₹ 1,00,000 – ₹ 10,000) ÷ 10 = ₹ 9,000
20x5 ((₹ 1,00,000 – ₹ 18,000) – ₹ 25,000) ÷ 8 = ₹ 7,125

Statement of Profit and Loss

(₹)
Year 20x5 20x4 20x3
Revenue 1,50,000 1,20,000 1,00,000
Less: Cost of goods sold 90,000 70,000 55,000
Gross profit 60,000 50,000 45,000
Depreciation 7,125 9,000 9,000
Accounting profit 52,875 41,000 36,000
Tax expense
Current tax expense 15,300.00 12,300 10,800
Deferred tax expense 562.50 15,862.50 – 12,300 – 10,800
Profit for the period 37,012.50 28,700 25,200

Balance Sheet
(₹)
Year 20x5 20x4 20x3
Assets
Non-current
Property, plant and equipment 74,875 82,000 91,000
Current
Cash and cash equivalents 1,31,900 84,200 45,000
Total assets 2,06,775 1,66,200 1,36,000

Equity and liabilities

Share capital 1,00,000 1,00,000 1,00,000
Retained earnings 90,912.50 53,900 25,200
Total equity 1,90,912.50 1,53,900 1,25,200

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 Liabilities
Non-current
Deferred tax liabilities 562.50 – –
Current
Current tax liabilities 15,300 12,300 10,800
Total liabilities 15,862.50 12,300 10,800
Total equity and liabilities 2,06,775 1,66,200 1,36,000

As mentioned earlier,, it might be difficult to distinguish between changes in accounting policies and changes in
accounting estimates. A change, in the measurement basis applied, is a change in an accounting policy (such as
cost or revaluation model) and is not a change in an accounting estimate. In such cases of confusion, the change is
treated as a change in estimate.

An entity
ty should disclose the nature and the amount of change in accounting estimates that has a material effect
in the period and potentially subsequent periods when it is impracticable to estimate the impact and also the
reasons for non-disclosure.

ERRORS

Errors are unintentional misstatements or omissions or disclosures in financial statements. They include mistakes
in gathering, processing of data or accounting of data from which the financial statements are prepared. Errors
can also result from incorrect accounting estimates arising from oversight or misinterpretation of facts and
mistakes in the application of accounting principles relating to accounting classification, manner of presentation
or disclosure.

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The general principle in this standard is that an entity must correct all 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 last period(s) presented in which the error occurred;

EXAMPLE 15

It was found while auditing that the travelling expenses were inflated hugely by producing fabricated bills in the
last financial year. The comparative figures must be then restated to correct this error.

or
 if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.

LIMITATIONS ON RETROSPECTIVE RESTATEMENT

A prior period error shall 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.

When it is impracticable to determine the period-specific effects of an error on comparative information for one or
more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the
earliest period for which retrospective restatement is practicable (which may be the current period).

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 restate the comparative information to correct the error prospectively from the
earliest date practicable.

The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.
Any information presented about prior periods, including any historical summaries of financial data, is restated as
far back as is practicable.

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 the above, restates the comparative information prospectively from
the earliest date practicable. It, therefore, disregards the portion of the cumulative restatement of assets, liabilities
and equity arising before that date.

Corrections of errors are distinguished from changes in accounting estimates. Accounting estimates by their nature
are approximations that may need changing 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.

EXAMPLE 16

In 20x5, it was found that in 20x1 the company had purchased a machine, but recorded it as revenue expense
instead of a non-current asset. The machine had a useful life of 10 years. The company has to restate the
opening balances of assets, liabilities and equity for the earliest period presented and adjustments thereafter.

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However, if it is impracticable to determine the period
period-specific
specific effects of an error on comparative information for
one or more prior periods presented, the entity should restate the opening balances of assets, liabilities and items
of equity for the earliest period for
or which retrospective restatement is possible (which might be the current period).

Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error
on all prior periods, the entity should restate the comparative information to correct the error prospectively from
the earliest date practicable.

EXAMPLE 17

ABC Ltd has been selling investments and recording it under sale for the last 10 years. When the error was
identified, it was found that information for the last 5 years is only available and therefore rectification of error
could be done only for the last 5 years.

Correction of errors should be distinguished from changes in accounting estimates.

•Mistakes
Errors •Needs to be corrected whenever
identified

•Approximations
Estimates •Needs to be updated with new
information or development

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