International Accounting Standards

IAS 8 Net Profit or Loss for the Period:

Fundamental Errors and Changes in
Accounting Policies

Preview
the content and presentation of the income
statement and
the treatment of fundamental errors and
changes in accounting estimates and
accounting policies.

Objective
To explain the basic building blocks:

revenues,
expenses,
extraordinary items,
fundamental errors and
accounting policies.

Scope
IAS 8 prescribes the
classification,
disclosure and
accounting treatment of items in the
income statement.

Continued-Scope
It also specifies the
treatment of changes in accounting estimates,
fundamental errors, and
changes in accounting policies.

Tax effects of extraordinary items,

fundamental errors and changes in
accounting policies are accounted for and
disclosed in IAS 12 Income Taxes

Net profit or loss for the period

All items of income and expenses recognised in
the period should be included in the
determination of net profit or loss. The only
exception is if another standard requires or
permits otherwise, eg,
correction of fundamental errors (IAS 8.34),
effects of changes in accounting policies (IAS 8.49),
revaluation surpluses (IAS 16.37-38 and 38.76-77),

Continued-Net Profit or...

gains and losses on the translation of the financial
statements of a foreign entity (IAS 21.30),
share issue costs (SIC17.6), and
revaluation of available-for-sale financial assets
(IAS 39.103b).

Net profit consists of profit or loss from

(1) ordinary activities and (2) extraordinary
items. These two items must be separately
disclosed on the face of the income statement.

Key Principles
Ordinary Activities - are activities that are
undertaken by an enterprise as part of its
business, and such related activities in
which the enterprise engages.
Example
Insurance claims resulting from a natural
disaster would be part of an insurance
companys ordinary activities.

Continued-Key Principles
Extraordinary items - are income or expenses
that arise from events or transactions that
are clearly distinct from the ordinary
activities of the enterprise and therefore are
not expected to recur frequently or regularly.
Examples
the expropriation of assets or the consequences
of a natural disaster.

Examples
A loss resulting from an earthquake or hurricane
may be extraordinary for many enterprises, but
it is ordinary for an insurance company that
insures against risks.
The nature and amount of each extraordinary
item must be disclosed separately.
The total amount must be shown on the face of
the income statement, while the nature can be
described in the notes

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Exceptional Items
Any item of income or expense that is not
extraordinary should be disclosed if such
disclosure is necessary to explain the profit or
loss from ordinary activities.
Examples of events that may require separate
disclosure are:
the write-down of inventories to net realisable value
or property, plant and equipment to recoverable
amount, as well as the reversal of such write-downs

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Continued-Exceptional Items
a restructuring of the activities of an enterprise
and the reversal of any provisions for the costs
of restructuring
disposals of items of property, plant and
equipment
disposals of long-term investments
litigation settlements
other reversals of provisions

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Changes in accounting estimates

The estimation of certain items is necessary.
Examples are:
estimation of bad debts,
useful lives,
expected pattern of economic benefits of
depreciable assets and
inventory obsolescence.

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Continued-Changing in...
An estimate may have to change if:
there are changes regarding the circumstances on
which the estimate was based or
as a result of new information, more experience or
subsequent developments.

It is sometimes difficult to distinguish between a

change in an accounting estimate and accounting
policy. For example, changes in estimates of
useful lives and depreciation methods are
changes in accounting estimates.

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Continued-Changing in...
If it is not possible to determine whether a
change is a change in an estimate or policy,
the change should be treated as a change in
accounting estimate
A change in an accounting estimate should be
accounted for prospectively, ie, not with a
retroactive effect. Information for prior
periods should not be restated.
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Continued-Changing in...
The effect of a change in an accounting estimate
should be included in the determination of net
profit or loss in:
1) the period of change, if the change effects the period
only (eg, a change in an estimate of the amount of bad
debts affects only the current period), or
2) the period of change and future periods, if the change
affects both (eg, a change in estimated useful life of an
asset affects the depreciation expense in both the
current period and in each period during the remaining
useful life of the asset).

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Continued-Changing in...
The effect of a change in an accounting estimate
should be included in the same income statement
classification as was used previously for the
estimate
The nature and amount of a change in an accounting
estimate that has a material effect in the current
period or which is expected to have a material
effect in subsequent periods should be disclosed.
If it is impracticable to quantify the amount, it
should also be disclosed.

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Accounting Policies
Accounting policies are the:

specific principles,
bases,
conventions,
rules and practices adopted by an enterprise in
preparing and presenting financial statements.

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Changes in Accounting Policies

A change in an accounting policy can only be made if:
Required by statute.
Required by an accounting standard setting body (ie,
IASC).
The change will result in a more appropriate presentation
of events or transactions in the financial statements

IAS 8 allows a change in accounting policy to (1) be

applied retrospectively, or (2) to be applied
prospectively.

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Continued-Changes in...
Retrospective application.
The new accounting policy is applied to events
and transactions as if the policy had always
been in use.
The accounting policy is applied to events and
transactions from the date of origin of such
items.

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Continued-Changes in...
Prospective application
The new accounting policy is applied only to
the events and transactions occurring after the
date of the change.
No adjustments relating to prior periods are
made.
The new policy is only applied to existing
balances as from the date of the change.

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Continued-Changes in...
Changes in policies are accounted for in
accordance with either the
(1) the benchmark treatment, or
(2) the allowed alternative treatment.

The change should be applied retrospectively,

unless the amounts relating to prior periods
cannot be reasonably determined.

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Other Changes in Accounting Policies

IAS 8 includes a benchmark and an allowed

alternative treatment for other changes in
accounting policies.

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Benchmark
Unless impracticable, the change in accounting policy is
applied retrospectively, with any resulting adjustment
reported as an adjustment to opening retained earnings.
Comparative information should be restated (unless, it is
impracticable to do so).
If the amount of adjustment to the opening balance of
retained earnings cannot be reasonably determined, the
change in accounting policy should be applied
prospectively (i.e., the new policy will only apply from
the date of change of policy).

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Continued-Benchmark
When a change in accounting policy has a material effect
on the current period or any prior period presented, or
may have a material effect in subsequent periods, an
enterprise should disclose the following information:
the reasons for the change;
the amount of the adjustment for the current period and for
each period presented;
the amount of the adjustment relating to periods prior to
those included in the comparative information, and
the fact that comparative information has been restated (or
that it is impracticable to do so).

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Allowed Alternative
The change in accounting policy should be applied
retrospectively, unless the amount of any resulting
adjustment relating to prior periods is not
reasonably determinable
The adjustment resulting from the retrospective
application should be included in the determination
of the net profit or loss for the current period.
Comparative information should be presented as
reported in the financial statements of the prior
period, ie, not be restated

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Continued-Allowed Alternative
Additional
pro
forma
comparative
information, prepared in accordance with the
requirements under the benchmark treatment,
should be presented unless it is impracticable
to do so.
A change in accounting policy should be
applied prospectively when the amount to be
included in net profit or loss for the current
period cannot be reasonably determined.

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Continued-Allowed Alternative
When a change in accounting policy has a material effect on
the current period or any prior period presented, or may
have a material effect in subsequent periods, an enterprise
should disclose the following information:
the reason for the change;
the amount of the adjustment recognized in net profit or loss in
the current period;
the amount of the adjustment included in each period for which
proforma information is presented, and the amount of the
adjustment relating to periods prior to those included in the
financial statements.
The fact that it is impracticable to present pro forma information.

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Continued-Allowed Alternative
SIC18 : Consistency
accounting policies:

Alternative

an enterprise has to choose either of the

benchmark treatment or allowed alternative
treatment when accounting for changes in
accounting polices. The same method has to be
applied consistently.

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Changes in accounting policies:

Adoption of an IAS
A change in accounting policy which is made
on the (initial) adoption of an IAS should be
accounted for in accordance with the specific
transitional provisions in that IAS.
If there are no transitional provisions in the
standards, the change in accounting policy
should be applied in accordance with the
benchmark treatment or the allowed
alternative treatment in IAS 8.
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Continued-Changes in...
When an enterprise has not adopted a new
IAS which has been published but which
has not yet come into effect, the enterprise
is encouraged to disclose the nature of the
future change in accounting policy and an
estimate of the effect of the change on its
net profit or loss and financial position.
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Fundamental Errors
Fundamental errors - errors discovered in the
current period that are of such significance
that the financial statements of one or more
prior periods can no longer be considered to
have been reliable at the date of their issue

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Continued-Fundamental Errors
Examples:

mathematical mistakes,
mistakes in applying accounting policies,
misinterpretation of facts,
fraud or
oversights.

Fundamental errors may also stem from major

breakdowns in internal reporting systems
making reported numbers wrong.

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Continued-Fundamental Errors
The fundamental error must be reported
retrospectively, otherwise the financial
statements will continue to be in error.
Fundamental errors can be presented in
accordance with (1) the benchmark
treatment, or (2) the allowed alternative
treatment.

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Benchmark Treatment
According to the benchmark treatment, the
financial
statements,
including
the
comparative information for prior periods, are
presented as if the fundamental error had been
corrected in the period in which it was made.
Therefore, the financial statements are restated
so that the amount of the correction that
relates to each period presented is included in
the net profit or loss for that period.

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Continued-Benchmark...
The amount of the correction relating to periods
prior to those included in the comparative
information in the financial statements is
adjusted against the opening balance of
retained earnings in the earliest period
presented.
Any other information reported with respect to
prior periods, such as historical summaries of
financial data, should also be restated.
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Continued-Benchmark...
Disclosure requirements under the benchmark
treatment:
the nature of the fundamental error,
the amount of the correction for the current period
and for each prior period presented,
the amount of the correction relating to periods
prior to those included in the comparative
information, and
the fact that comparative information has been
restated or that it is impracticable to do so.
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Allowed Alternative Treatment

The amount of the correction of a fundamental error under
the allowed alternative treatment should be included in
the determination of the net profit or loss for the current
period.
Comparative information should be presented as reported
in the financial statements of the prior period. It should
not be restated.
Additional pro forma comparative information, prepared
in accordance with the requirements under the
benchmark treatment, should be presented unless it is
impracticable to do so.

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Continued-Allowed Alternative...
The disclosure requirements are as follows:
the nature of the fundamental error,
the amount of the correction recognised in net profit
or loss for the current period, and
the amount of the correction included in each period
for which pro forma information is presented and
the amount of the correction relating to periods
prior to those included in the pro forma information.
If it is impracticable to present pro forma
information, this fact should be disclosed.

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SIC8: First-Time Application of IASs.

In the period when IASs are applied in full for
the first time the financial statements of an
enterprise should be prepared and presented
as if the financial statements had always
been prepared in accordance with IASs and
SICs effective for the period of first-time
application
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Continued-SIC 8: First...
IASs and SICs effective for the period of firsttime application should be applied
retrospectively, except when:
individual IASs or SICs require or permit a
different transitional treatment (eg, IAS 37
Provisions, Contingent Liabilities and Contingent
Assets and IAS 38 Intangible Assets), or
the amount of the adjustment relating to prior
periods cannot be reasonably determined.

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Continued-SIC 8: First...
Comparative information (including notes)
should be prepared and presented in
accordance with IASs.
Any adjustment resulting from the transition
to IASs should be treated as an adjustment
to the opening balance of retained earnings
of the earliest period presented in
accordance with IASs.

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Continued-SIC 8: First...
Financial statements can be described as
complying with IASs even if the amount of
the adjustment of the opening balance of
retained earnings relating to prior periods
cannot be reasonably determined or if
restatement of comparative information is
impracticable, provided that the appropriate
disclosure is made.

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Continued-SIC 8: First...
When IASs are applied in full for the first time as the
primary accounting basis, the disclosure requirements
are as follows:
where the amount of the adjustment to the opening balance of
retained earnings cannot be reasonably determined, that fact,
where it is impracticable to provide comparative information,
that fact, and
for each IAS that permits a choice of transitional accounting
policies, the policy selected.
Enterprises are encouraged to disclose the fact that IASs are being applied in
full for the first time

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