decision as to whether to disclose a policy should not just be a function of the
magnitude of the sums involved. The standard states that an accounting policy may
be significant because of the nature of the entity’s operations even if amounts for
current and prior periods are not material. It is also appropriate to disclose each
significant accounting policy that is not specifically required by IFRS, but is selected
and applied in accordance with IAS 8 (discussed at 4.3 above). [IAS 1.121]. Moreover,
the relevance of the disclosure of accounting policies is improved if it specifically
addresses how the entity has applied the requirements of IFRS, rather than a giving
summary of those requirements.
In deciding whether a particular accounting policy should be disclosed, IAS 1
requires consideration of whether disclosure would assist users in understanding
how transactions, other events and conditions are reflected in the reported
financial performance and financial position. In doing so, each entity should
consider the nature of its operations and the policies that the users of its financial
statements would expect to be disclosed for that type of entity. Disclosure of
particular accounting policies is especially useful to users when those policies are
selected from alternatives allowed in standards and interpretations. An example is
Presentation of financial statements and accounting policies 169
disclosure of the choice between the cost and fair value models in IAS 40 –
Investment Property.
Some standards specifically require disclosure of particular accounting policies,
including choices made by management between different policies they allow. For
example IAS 16 requires disclosure of the measurement bases used for classes of
property, plant and equipment (discussed in Chapter 18 at 8). [IAS 1.119].
5.1.1.B
Judgements made in applying accounting policies
The process of applying an entity’s accounting policies requires various
judgements, apart from those involving estimations, that can significantly affect the
amounts recognised in the financial statements. For example, judgements are
required in determining:
(a) when substantially all the significant risks and rewards of ownership of financial
assets and, for lessors, assets are transferred to other entities;
(b) whether, in substance, particular sales of goods are financing arrangements and
therefore do not give rise to revenue; and
(c) whether the contractual terms of a financial asset give rise on specified dates to
cash flows that are solely payments of principal and interest on the principal
amount outstanding. [IAS 1.123].
IAS 1 requires disclosure, along with its significant accounting policies or other notes,
of the judgements (apart from those involving estimations, see 5.2.1 below)
management has made in the process of applying the entity’s accounting policies that
have the most significant effect on the amounts recognised in the financial statements.
[IAS 1.122].
Some of these disclosures are required by other standards. For example:
• IFRS 12 – Disclosure of Interests in Other Entities, requires disclosure of the
judgements made in determining if control is present; and
• IAS 40 requires disclosure of the criteria developed by the entity to distinguish
investment property from owner-occupied property and from property held for
sale in the ordinary course of business, when classification of the property is
difficult. [IAS 1.124].
• IFRS 15 requires disclosures of the judgments made in applying the standard that
significantly affect the determination of the amount and timing of revenue from
contracts with customers. [IFRS 15.123].
5.1.2
Disclosure of changes in accounting policies
IAS 8 distinguishes between accounting policy changes made pursuant to the initial
application of an IFRS and voluntary changes in accounting policy (discussed at 4.4
above). It sets out different disclosure requirements for each, as set out in 5.1.2.A and
5.1.2.B below. Also, if an IFRS is in issue but is not yet effective and has not been
applied certain disclosures of its likely impact are required. These are set out
in 5.1.2.C below.
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5.1.2.A
Accounting policy changes pursuant to the initial application of an IFRS
When initial application of an IFRS has an effect on the current period or any prior period,
would have such an effect except that it is impracticable to determine the amount of the
adjustment, or might have an effect on future periods, an entity should disclose:
(a) the title of the IFRS;
(b) when applicable, that the change in accounting policy is made in accordance with
its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have an effect on future periods;
(f) for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if
IAS
33
– Earnings per Share – applies to the entity, for basic and diluted
earnings per share;
(g) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(h) if retrospective application required by IAS 8 is impracticable for a particular prior
period, or for periods before those presented, the circumstances that led to the
existence of that condition and a description of how and from when the change in
accounting policy has been applied.
Impracticability of restatement is discussed at 4.7 above. Financial statements of
subsequent periods need not repeat these disclosures. [IAS 8.28].
5.1.2.B
Voluntary changes in accounting policy
When a voluntary change in accounting policy has an effect on the current period or
any prior period, would have an effect on that period except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future periods, an
entity should disclose:
(a) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy provides reliable and more
relevant information;
(c) for the current period and each prior period presented, to the extent practicable,
the amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if IAS 33 applies to the entity, for basic and diluted earnings per share;
(d) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(e) if retrospective application is impracticable for a particular prior period, or for
periods before those presented, the circumstances that led to the existence of that
condition and a description of how and from when the change in accounting policy
has been applied.
Presentation of financial statements and accounting policies 171
Financial stateme
nts of subsequent periods need not repeat these disclosures. [IAS 8.29].
Impracticability of restatement is discussed at 4.7 above. Example 3.11 therein illustrates
the above disclosure requirements.
5.1.2.C
Future impact of a new IFRS
When an entity has not applied a new IFRS that has been issued but is not yet effective,
it should disclose:
(a) that
fact;
and
(b) known or reasonably estimable information relevant to assessing the possible
impact that application of the new IFRS will have on the financial statements in
the period of initial application. [IAS 8.30].
In producing the above disclosure, the standard requires that an entity should consider
disclosing:
(a) the title of the new IFRS;
(b) the nature of the impending change or changes in accounting policy;
(c) the date by which application of the IFRS is required;
(d) the date as at which it plans to apply the IFRS initially; and
(e) either:
(i) a discussion of the impact that initial application of the IFRS is expected to
have on the entity’s financial statements; or
(ii) if that impact is not known or reasonably estimable, a statement to that effect.
[IAS 8.31].
5.2
Disclosure of estimation uncertainty and changes in estimates
5.2.1
Sources of estimation uncertainty
Determining the carrying amounts of some assets and liabilities requires estimation of
the effects of uncertain future events on those assets and liabilities at the end of the
reporting period. Examples given by IAS 1 are that (in the absence of fair values in an
active market for identical items used to measure them) the following assets and
liabilities require future-oriented estimates to measure them:
• the recoverable amount of classes of property, plant and equipment;
• the effect of technological obsolescence on inventories;
• provisions subject to the future outcome of litigation in progress; and
• long-term employee benefit liabilities such as pension obligations.
These estimates involve assumptions about such items as the risk adjustment to cash
flows or discount rates used, future changes in salaries and future changes in prices
affecting other costs. [IAS 1.126].
In light of this, IAS 1 requires disclosure of information about the assumptions
concerning the future, and other major sources of estimation uncertainty at the end of
the reporting period, that have a significant risk of resulting in a material adjustment to
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the carrying amounts of assets and liabilities within the next financial year. In respect of
those assets and liabilities, the notes must include details of:
(a) their
nature;
and
(b) their carrying amount as at the end of the reporting period. [IAS 1.125].
IAS 1 goes on to observe that these assumptions and other sources of estimation
uncertainty relate to the estimates that require management’s most difficult, subjective
or complex judgements. As the number of variables and assumptions affecting the
possible future resolution of the uncertainties increases, those judgements become
more subjective and complex, and the potential for a consequential material adjustment
to the carrying amounts of assets and liabilities normally increases accordingly. [IAS 1.127].
The disclosures are required to be presented in a manner that helps users of financial
statements to understand the judgements management makes about the future and about
other key sources of estimation uncertainty. The nature and extent of the information
provided will vary according to the nature of the assumption and other circumstances.
Examples given by the standard of the types of disclosures to be made are:
(a) the nature of the assumption or other estimation uncertainty;
(b) the sensitivity of carrying amounts to the methods, assumptions and estimates
underlying their calculation, including the reasons for the sensitivity;
(c) the
expected
resolution
of an uncertainty and the range of reasonably possible
outcomes within the next financial year in respect of the carrying amounts of the
assets and liabilities affected; and
(d) an explanation of changes made to past assumptions concerning those assets and
liabilities, if the uncertainty remains unresolved. [IAS 1.129].
The disclosure of some of these key assumptions is required by other standards. IAS 1
notes the following examples:
• IAS 37 requires disclosure, in specified circumstances, of major assumptions
concerning future events affecting classes of provisions; and
• IFRS 13 – Fair Value Measurement – requires disclosure of significant assumptions
(including the valuation technique(s) and inputs) used when measuring the fair values
of assets and liabilities (not just financial ones) that are carried at fair value. [IAS 1.133].
Other examples would include:
• IAS 19 requires disclosure of actuarial assumptions;
• IFRS 2 – Share-based Payment – requires disclosure, in certain circumstances, of:
the option pricing model used, and the method used and the assumptions made to
incorporate the effects of early exercise; and
• IAS 36 – Impairment of Assets – requires disclosure, in certain circumstances, of
each key assumption on which management has based its cash flow projections.
These assumptions and other sources of estimation uncertainty are not required to be
disclosed for assets and liabilities with a significant risk that their carrying amounts
might change materially within the next financial year if, at the end of the reporting
period, they are measured at fair value based on a quoted price in an active market for
an identical asset or liability. [IAS 1.128].
Presentation of financial statements and accounting policies 173
Also, it is not necessary to disclose budget information or forecasts in making the
disclosures. [IAS 1.130]. Furthermore, the disclosures of particular judgements management
made in the process of applying the entity’s accounting policies (discussed at 5.1.1.B above)
do not relate to the disclosures of sources of estimation uncertainty. [IAS 1.132].
When it is impracticable to disclose the extent of the possible effects of an assumption
or another source of estimation uncertainty at the end of the reporting period, the entity
should disclose that it is reasonably possible, based on existing knowledge, that
outcomes within the next financial year that are different from assumptions could
require a material adjustment to the carrying amount of the asset or liability affected. In
all cases, the entity should disclose the nature and carrying amount of the specific asset
or liability (or class of assets or liabilities) affected by the assumption. [IAS 1.131].
In our view, these requirements of IAS 1 represent potentially highly onerous
disclosures. The extensive judgements required in deciding the level of detail to be
given has resulted in a wide variety of disclosure in practice. The Basis for Conclusions
to the standard reveals that the Board was aware that the requirement could potentially
require quite extensive disclosures and explains its attempt to limit this as follows. ‘IAS 1
limits the scope of the disclosures to items that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next
financial year. The longer the future period to which the disclosures relate, the greater
the range of items that would qualify for disclosure, and the less specific are the
disclosures that could be made about particular assets or liabilities. A period longer than
the next financial year might obscure the most relevant information with other
disclosures.’ [IAS 1.BC84]. Careful judgement will be required to provide useful and
compliant information without reducing the understandability of the financial statement
by obscuring material information with immaterial information.
5.2.2
Changes in accounting estimates
IAS 8 requires disclosure of the nature and amount of a change in an accounting
estimate that has an effect in the current period or is expected to have an effect in future
periods, except for the disclosure of the effect on future periods when it is impracticable
to estimate that effect. [IAS 8.39]. If the amount of the effect in future periods is not
disclosed because estimating it is impracticable, that fact should be disclosed. [IAS 8.40].
5.3
Disclosure of prior period errors
When correction has been made for a material prior period error, IAS 8 requires
disclosure of the following:
(a) the nature of the prior period error;
(b) for each prior period presented, to the extent practicable, the amount of the correction:
(i) for each financial statement line item affected; and
(ii) if IAS 33 applies to the entity, for basic and diluted earnings per share;
(c) the amount of the correction at the beginning of the earliest prior period presented; and
(d) if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of how
and from when the error has been corrected.
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Financial statements of subsequent periods need not repeat these disclosures. [IAS 8.49].
Example 3.10 at 4.6 above illustrates these disclosure requirements.
5.4
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