6.2 Accounting Policies, Changes in Accounting Estimates and Errors

Accounting policies, changes in accounting estimates, and errors are important concepts in financial reporting that influence how a company presents its financial information. Here’s an overview of each concept:

1. Accounting Policies: Accounting policies are the specific principles, bases, conventions, rules, and practices that an entity selects and applies to prepare and present its financial statements. These policies determine how various transactions and events are recognized, measured, and presented. Accounting policies should be consistent, applied across reporting periods, and selected based on the most appropriate treatment prescribed by applicable accounting standards. They are disclosed in the notes to the financial statements.

   When there are different acceptable accounting policies for a particular item, an entity should choose the policy that is most relevant and reliable for providing a true and fair view of its financial position and performance.

2. Changes in Accounting Estimates: Estimates are an inherent part of financial reporting, as certain items cannot be measured with precision. Changes in accounting estimates occur when new information becomes available or when a company’s judgment about the future changes, leading to revisions in the estimates used in preparing the financial statements. Changes in estimates are generally recognized in the period in which the change occurs and in future periods, if applicable.

   Examples of estimates include provisions for doubtful debts, useful lives of assets, and fair value measurements.

3. Errors: Errors are unintentional mistakes in recognizing, measuring, or presenting items in the financial statements. Errors can arise from mathematical mistakes, misunderstandings of accounting standards, oversight, or misapplication of accounting policies. Errors can have material impacts on financial statements.
   • Correction of Material Errors: If a material error is identified in a prior period, it should be corrected by restating the comparative amounts in the financial statements of the current period. The correction is made to opening retained earnings (or other equity components), and the reason for the correction should be disclosed.
   • Immaterial Errors: Immaterial errors might be corrected by adjusting the current period’s financial statements without restating the prior period.

   When an error is discovered, the financial statements should be corrected and the impact on each affected line item should be disclosed.