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IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS Accounting polices are defined in IAS 8 the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Normally, an appropriate accounting standard or law must be used when deciding on accounting policy and attention is paid to their interpretations. However, in their absence, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. Accounting Estimate Where there is an asset or expense which has to be adjusted to reflect a reassessment of the future benefits or liabilities related to that asset or expense then a there is a change in an accounting estimate. Materiality Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the economic decisions of users of the financial statements. Consistency Management should select and apply its accounting policies consistently for similar transactions, events and conditions, unless a Standard or an Interpretation specifically requires or permits different policies may be appropriate which must then be applied. Changes in Polices An entity is permitted to change an accounting policy only if the change: · is required by a standard or interpretation; or · results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows. Unless the standard requiring the change specifies otherwise, such changes in polices must be applied retroactively and the earliest prior year’s financial statements that are presented should be adjusted accordingly. But if it is impracticable to determine either the cumulative or specific effect of an earlier period adjustment then it is not obligatory. Accounting Errors The general principle in IAS 8 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 prior period(s) presented in which the error occurred. Disclosure If it is a new law, standard or interpretation that causes the change then the title, nature and monetary effect of the change have to be disclosed. If there is a voluntary change in accounting policy then the nature of the change and the reasons why the change provides more relevant and reliable information have to be disclosed. Similarly, errors have to be described and the affect of their correction has on the financial statements. Relevance for Diamond Companies A sightholder with a factory in Namibia would value it on the basis of a useful life of 20 years and depreciate it accordingly. But if the contract with NamDeb is not renewed then the factory would most probably be valued at its net realisable value. This would have to be disclosed accordingly and the prior years’ numbers restated. |
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