Section 9: Accounting Policies, Estimates and Errors (AASB1061_04-26)

This section provides requirements and guidance for selecting and applying the accounting policies used in preparing financial statements. It also covers changes in accounting estimates and corrections of errors in prior period financial statements.

Accounting policies are the specific principles and practices applied by an entity in preparing and presenting financial statements.

If this Standard specifically addresses a transaction, other event or condition, an entity shall apply this Standard. However, the entity need not follow a requirement in this Standard if the effect of doing so would be immaterial.

If this Standard does not specifically address a transaction, other event or condition and paragraphs 1.5(a)–(g) do not apply, management shall use its judgement in developing and applying an accounting policy that results in information that is: 

(a) relevant to the information needs of users of financial statements; and 

(b) reliable, in that the financial statements: 

(i) represent faithfully the financial position, financial performance and cash flows of the entity; 

(ii) reflect the economic substance of transactions, other events and conditions, and not merely their legal form; 

(iii) are neutral, ie free from bias; 

(iv) are prudent; and 

(v) are complete in all material respects.

In making the judgement described in paragraph 9.4, management shall refer to, and consider the applicability of, the following sources in descending order: 

(a) the requirements and guidance in this Standard dealing with similar and related issues; and 

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. 

In making this judgement, management may also consider the requirements and guidance in other Australian Accounting Standards dealing with similar and related issues, to the extent that those requirements and guidance do not conflict with this Standard.

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless this Standard specifically requires or permits categorisation of items for which different policies may be appropriate. If this Standard requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.

An entity shall change an accounting policy only if the change: 

(a) is required by this Standard; or 

(b) 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.

Except as noted in paragraphs 4.4 and 5.5, where this Standard allows a choice of accounting treatment (including the measurement basis) for a specified transaction, other event or condition and an entity changes its choice, that is a change in an accounting policy. A change to applying the cost model when a reliable measure of fair value is no longer available, or reverting to applying the revaluation model when a reliable measure of fair value once again becomes available, for an asset that this Standard would otherwise require or permit to be measured at fair value is not a change in an accounting policy.

An entity shall account for: 

(a) a change in an accounting policy resulting from a change in the requirements of this Standard in accordance with the transitional provisions, if any, applying to that change; and 

(b) all other changes in accounting policies retrospectively, using the modified retrospective approach specified in paragraphs 9.10–9.11. This applies to voluntary changes in accounting policies and changes in accounting policies resulting from a change in the requirements of this Standard without accompanying specified transitional provisions.

When a change in an accounting policy is applied retrospectively in accordance with paragraph 9.9, the entity shall record the cumulative effect of the new accounting policy at the beginning of the current reporting period, as if the new accounting policy had always been applied and without restating information presented in prior periods (a ‘modified retrospective approach’). The entity shall, as at the beginning of the current reporting period: 

(a) adjust the opening balance of each affected asset and liability for the cumulative effect of applying the new accounting policy; and 

(b) make a corresponding adjustment to the opening balance of each affected component of equity (eg retained earnings). 

The effects of the change in accounting policy pertaining to prior periods presented are not included in profit or loss of the current reporting period.

Notwithstanding paragraph 9.10, when it is impracticable to determine the cumulative effect, as at the beginning of the current period, of applying a new accounting policy retrospectively to all prior periods, the entity shall: 

(a) adjust the opening balances of the current reporting period for affected assets, liabilities and items of equity to reflect application of the new accounting policy prospectively from the start of the earliest date practicable; and 

(b) disregard the portion of the cumulative adjustment to assets, liabilities and items of equity arising before the date in (a).

The initial application of a policy to revalue assets in accordance with Section 15 or Section 16 is a change in an accounting policy to be dealt with as a revaluation in accordance with Section 15 or Section 16. Consequently, a change from the cost model to the revaluation model for a class of property, plant and equipment or intangible assets shall be accounted for prospectively, instead of in accordance with paragraphs 9.10–9.11.

When an amendment to this Standard or a voluntary change in an accounting policy affects the opening balances of assets, liabilities or items of equity for the current period or other amounts recorded for the current period, an entity shall disclose the following: 

(a) the nature of the change in accounting policy; 

(b) the amounts of the adjustments to the opening balances for the current period, to the extent practicable; and 

(c) for all other effects on the assets, liabilities, income and expenses for the current period, the amount of the adjustment for each financial statement line item affected. 

When a modified retrospective approach applies to a change in an accounting policy, the entity’s note disclosing the material accounting policies used (see paragraph 7.3(a)) shall disclose that fact and that the comparative information presented for prior periods was not adjusted.

When a voluntary change in an accounting policy affects the opening balances of assets, liabilities or items of equity for the current period or other amounts recorded for the current period, an entity shall disclose the reasons why applying the new accounting policy provides reliable and more relevant information.

The disclosures made in accordance with paragraph 9.13 or 9.14 need not be repeated in financial statements of subsequent periods.

Some items in financial statements are subject to measurement uncertainty – that is, under the measurement basis applied, their amounts cannot be observed directly and must instead be estimated using judgements or assumptions about such matters as the fair value of infrequently sold assets, amounts recoverable from overdue receivables or old inventory and the remaining useful lives of items of property, plant and equipment.

An entity may need to change an accounting estimate if changes occur in the circumstances on which the accounting estimate was based or as a result of new information, new developments or more experience. The revision of an accounting estimate does not relate to prior periods and is not a correction of an error.

An entity shall record the effect of a change in an accounting estimate, other than a change to which paragraph 9.21 applies, prospectively from the date of the change in estimate by including it in profit or loss in: 

(a) the period of the change, if the change affects that period only; or 

(b) the period of the change and future periods, if the change affects both.

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, the entity shall record it by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

An entity shall disclose the nature of any change in an accounting estimate and the effect of the change on assets, liabilities, income and expenses for the current period.

Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: 

(a) was available when financial statements for those periods were authorised for issue; and 

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Potential errors identified during the reporting period shall be corrected before the financial statements are authorised for issue. To the extent practicable, an entity shall correct a material prior period error retrospectively in the first set of financial statements authorised for issue after its discovery by: 

(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or 

(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

When it is impracticable to determine the effects of an error on comparative information for one or more prior periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for which retrospective restatement is practicable (which might be the current period).

An entity shall disclose the following about each prior period error: 

(a) a description of the error; 

(b) for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected; 

(c) to the extent practicable, the amount of the correction at the beginning of the earliest prior period presented; and 

(d) an explanation if it is not practicable to determine the amounts to be disclosed in (b) or (c). 

These disclosures need not be repeated in financial statements of subsequent periods.