International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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The implementation guidance accompanying the standard provides an example of the
retrospective restatement of errors as follows: [IAS 8.IG1]
Example 3.10: Retrospective restatement of errors
During 2019, Beta Co discovered that some products that had been sold during 2018 were incorrectly included
in inventory at 31 December 2018 at €6,500.
Beta’s accounting records for 2019 show sales of €104,000, cost of goods sold of €86,500 (including €6,500
for the error in opening inventory), and income taxes of €5,250.
In 2018, Beta reported:
€
Sales 73,500
Cost of goods sold
(53,500)
Profit before income taxes
20,000
Income taxes
(6,000)
Profit
14,000
The 2018 opening retained earnings was €20,000 and closing retained earnings was €34,000.
Beta’s income tax rate was 30 per cent for 2019 and 2018. It had no other income or expenses.
Beta had €5,000 of share capital throughout, and no other components of equity except for retained earnings.
Its shares are not publicly traded and it does not disclose earnings per share.
Beta Co
Extract from the statement of comprehensive income
(restated)
2019
2018
€
€
Sales 104,000
73,500
Cost of goods sold
(80,000)
(60,000)
Profit before income taxes
24,000
13,500
Income taxes
(7,200)
(4,050)
Profit
16,800
9,450
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Beta Co
Statement of Changes in Equity
Share
Retained
capital
earnings Total
€
€ €
Balance at 31 December 2017
5,000
20,000
25,000
Profit for the year ended 31 December 2018
–
9,450
9,450
as restated
Balance at 31 December 2018
5,000
29,450
34,450
Profit for the year ended 31 December 2019
–
16,800
16,800
Balance at 31 December 2019
5,000
46,250
51,250
Extracts from the Notes
1. Some products that had been sold in 2019 were incorrectly included in inventory at 31 December 2018
at €6,500. The financial statements of 2018 have been restated to correct this error. The effect of the
restatement on those financial statements is summarised below. There is no effect in 2019.
Effect on 2018
€
(Increase) in cost of goods sold
(6,500)
Decrease in income tax expense
1,950
(Decrease) in profit (4,550)
(Decrease) in inventory
(6,500)
Decrease in income tax payable
1,950
(Decrease) in equity
(4,550)
As is the case for the retrospective application of a change in accounting policy,
retrospective restatement for the correction of prior period material errors is not required
to the extent that it is impracticable to determine either the period-specific effects or the
cumulative effect of the error. [IAS 8.43]. This is discussed further at 4.7 below.
4.7
Impracticability of restatement
As noted at 4.4 and 4.6 above, IAS 8 does not require the restatement of prior periods
following a change in accounting policy or the correction of material errors if such a
restatement is impracticable.
The standard devotes a considerable amount of guidance to discussing what
‘impracticable’ means for these purposes.
The standard states that applying a requirement is impracticable when an entity cannot
apply it after making every reasonable effort to do so. It goes on to note that, for a
particular prior period, it is impracticable to apply a change in an accounting policy
retrospectively or to make a retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are
not determinable;
(b) the retrospective application or retrospective restatement requires assumptions
about what management’s intent would have been in that period; or
Presentation of financial statements and accounting policies 165
(c) the retrospective application or retrospective restatement requires significant
estimates of amounts and it is impossible to distinguish objectively information
about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which
those amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were authorised for issue,
from other information. [IAS 8.5].
An example of a scenario covered by (a) above given by the standard is that in some
circumstances it may impracticable to adjust comparative information for one or more
prior periods to achieve comparability with the current period because data may not
have been collected in the prior period(s) in a way that allows either retrospective
application of a new accounting policy (or its prospective application to prior periods)
or retrospective restatement to correct a prior period error, and it may be impracticable
to recreate the information. [IAS 8.50].
IAS 8 observes that it is frequently necessary to make estimates in applying an
accounting policy and that estimation is inherently subjective, and that estimates may
be developed after the reporting period. Developing estimates is potentially more
difficult when retrospectively applying an accounting policy or making a retrospective
restatement to correct a prior period error, because of the longer period of time that
might have passed since the affected transaction, other event or condition occurred.
However, the objective of estimates related to prior periods remains the same as for
estimates made in the current period, namely, for the estimate to reflect the
circumstances that existed when the transaction, other event or condition occurred.
[IAS 8.51]. Hindsight should not be used when applying a new accounting policy to, or
correcting amounts for, a prior period, either in making assumptions about what
management’s intentions would have been in a prior period or estimating the amounts
recognised, measured or disclosed in a prior period. For example, if an entity corrects a
prior period error in calculating its liability for employees’ accumulated sick leave in
accordance with IAS 19, it would disregard information about an unusually severe
influenza season during the next period that became available after the financial
statements for the prior period were authorised for issue. However, the fact that
significant estimates are frequently required when amending comparative information
presented for prior periods does not prevent reliable adjustment or correction of the
comp
arative information. [IAS 8.53].
Therefore, retrospectively applying a new accounting policy or correcting a prior
period error requires distinguishing information that:
(a) provides evidence of circumstances that existed on the date(s) as at which the
transaction, other event or condition occurred; and
(b) would have been available when the financial statements for that prior period were
authorised for issue,
from other information. The standard states that for some types of estimates (for
example, a fair value measurement that uses significant unobservable inputs), it is
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impracticable to distinguish these types of information. When retrospective application
or retrospective restatement would require making a significant estimate for which it is
impossible to distinguish these two types of information, it is impracticable to apply the
new accounting policy or correct the prior period error retrospectively. [IAS 8.52].
IAS 8 addresses the impracticability of restatement separately (although similarly) for
changes in accounting policy and the correction of material errors.
4.7.1
Impracticability of restatement for a change in accounting policy
When retrospective application of a change in accounting policy is required, the change
in policy should be applied retrospectively except to the extent that it is impracticable
to determine either the period-specific effects or the cumulative effect of the change.
[IAS 8.23]. When an entity applies a new accounting policy retrospectively, the standard
requires it to be applied to comparative information for prior periods as far back as is
practicable. Retrospective application to a prior period is not practicable for these
purposes unless it is practicable to determine the cumulative effect on the amounts in
both the opening and closing statement of financial position for that period. [IAS 8.26].
See also 6.2.2 below regarding the IASB’s plans for amendments in this area.
When it is impracticable to determine the period-specific effects of changing an
accounting policy on comparative information for one or more prior periods presented:
• the new accounting policy should be applied to the carrying amounts of assets and
liabilities as at the beginning of the earliest period for which retrospective
application is practicable; and
• a corresponding adjustment to the opening balance of each affected component of
equity for that period should be made.
The standard notes that this may be the current period. [IAS 8.24].
When 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 standard
requires an adjustment to the comparative information to apply the new accounting
policy prospectively from the earliest date practicable. [IAS 8.25]. Prospective
application is defined by the standard as applying the new accounting policy to
transactions, other events and conditions occurring after the date as at which the
policy is changed. [IAS 8.5]. This means that the portion of the cumulative adjustment
to assets, liabilities and equity arising before that date is disregarded. Changing an
accounting policy is permitted by IAS 8 even if it is impracticable to apply the policy
prospectively for any prior period. [IAS 8.27].
The implementation guidance accompanying the standard illustrates the prospective
application of a change in accounting policy as follows: [IAS 8.IG3]
Example 3.11: Prospective application of a change in accounting policy when
retrospective application is not practicable
During 2019, Delta Co changed its accounting policy for depreciating property, plant and equipment, so as
to apply much more fully a components approach, whilst at the same time adopting the revaluation model.
In years before 2019, Delta’s asset records were not sufficiently detailed to apply a components approach
fully. At the end of 2018, management commissioned an engineering survey, which provided information on
the components held and their fair values, useful lives, estimated residual values and depreciable amounts at
Presentation of financial statements and accounting policies 167
the beginning of 2019. However, the survey did not provide a sufficient basis for reliably estimating the cost
of those components that had not previously been accounted for separately, and the existing records before
the survey did not permit this information to be reconstructed.
Delta’s management considered how to account for each of the two aspects of the accounting change. They
determined that it was not practicable to account for the change to a fuller components approach
retrospectively, or to account for that change prospectively from any earlier date than the start of 2019. Also,
the change from a cost model to a revaluation model is required to be accounted for prospectively (see 4.4
above). Therefore, management concluded that it should apply Delta’s new policy prospectively from the
start of 2019.
Additional information:
Delta’s tax rate is 30 per cent.
€
Property, plant and equipment at the end of 2018:
Cost 25,000
Depreciation (14,000)
Net book value
11,000
Prospective depreciation expense for 2019 (old basis)
1,500
Some results of the engineering survey:
Valuation
17,000
Estimated residual value
3,000
Average remaining asset life (years)
7
Depreciation expense on existing property, plant and equipment
for 2019 (new basis)
2,000
Extract from the Notes
1
From the start of 2019, Delta changed its accounting policy for depreciating property, plant and equipment,
so as to apply much more fully a components approach, whilst at the same time adopting the revaluation
model. Management takes the view that this policy provides reliable and more relevant information because
it deals more accurately with the components of property, plant and equipment and is based on up-to-date
values. The policy has been applied prospectively from the start of 2019 because it was not practicable to
estimate the effects of applying the policy either retrospectively, or prospectively from any earlier date.
Accordingly, the adoption of the new policy has no effect on prior years. The effect on the current year is
to increase the carrying amount of property, plant and equipment at the start of the year by €6,000; increase
the opening deferred tax provision by €1,800; create a revaluation surplus at the start of the year of €4,200;
increase depreciation expense by €500; and reduce tax expense by €150.
4.7.2
Impracticability of restatement for a material error
IAS 8 requires that a prior period error should 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. [IAS 8.43].
When it is impracticable to determine the period-specific effects of an error on comparative
information for one or more prior periods presented, the opening balances of assets,
liabilities and
equity should be restated for the earliest period for which retrospective
restatement is practicable (which the standard notes may be the current period). [IAS 8.44].
When it is impracticable to determine the cumulative effect, at the beginning of the
current period, of an error on all prior periods, the comparative information should be
restated to correct the error prospectively from the earliest date practicable. [IAS 8.45].
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The standard explains that this will mean disregarding the portion of the cumulative
restatement of assets, liabilities and equity arising before that date. [IAS 8.47].
5 DISCLOSURE
REQUIREMENTS
5.1
Disclosures relating to accounting policies
5.1.1
Disclosure of accounting policies
5.1.1.A
Summary of significant accounting policies
IAS 1 makes the valid observation that it is important for users to be informed of the
measurement basis or bases used in the financial statements (for example, historical
cost, current cost, net realisable value, fair value or recoverable amount) because the
basis on which the financial statements are prepared significantly affects their analysis.
[IAS 1.118].
Accordingly, the standard requires disclosure of significant accounting policies
comprising:
(a) the measurement basis (or bases) used in preparing the financial statements;
and
(b) the other accounting policies used that are relevant to an understanding of
the financial statements. [IAS 1.117].
When more than one measurement basis is used in the financial statements, for example
when particular classes of assets are revalued, it is sufficient to provide an indication of
the categories of assets and liabilities to which each measurement basis is applied.
[IAS 1.118]. See also 6.2.4 below regarding the Board’s plans in this area.
It is clearly necessary to apply judgement when deciding on the level of detail
required in the disclosure of accounting policies. Of particular note, is that the