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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://ie.frs102.com/members/premium-toolkit/section-10/” type=”big” color=”red”] Return to Section 10 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Section 10 – Accounting Policies, Estimates and Errors
Section 10 provides 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.
Selection and application of accounting policies
Extract from FRS 102 – Section 10.2-10.6
10.2 Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
10.3 If an FRS or FRC Abstract specifically addresses a transaction, other event or condition, an entity shall apply that FRS or FRC Abstract. However, the entity need not follow a requirement in an FRS or FRC Abstract if the effect of doing so would not be material.
10.4 If an FRS or FRC Abstract does not specifically address a transaction, other event or condition, an entity’s management shall use its judgement in developing and applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; 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 the legal form;
(iii) are neutral i.e. free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
10.5 In making the judgement described in paragraph 10.4, management shall refer to and consider the applicability of the following sources in descending order:
(a) the requirements and guidance in an FRS or FRC Abstract dealing with similar and related issues;
(b) where an entity’s financial statements are within the scope of a Statement of Recommended Practice (SORP) the requirements and guidance in that SORP dealing with similar and related issues; and
(c) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles.
10.6 In making the judgement described in paragraph 10.4, management may also consider the requirements and guidance in EU-adopted IFRS dealing with similar and related issues. Paragraphs 1.4 to 1.7 require certain entities to apply IAS 33 Earnings per Share (as adopted in the EU) IFRS 8 Operating Segments (as adopted in the EU) or IFRS 6 Exploration for and Evaluation of Mineral Resources.
OmniPro comment
It is clear from Section 10.3 that it is not necessary to apply the policies required by FRS 102 if the effect of applying them is immaterial. That said an entity should not just dis-apply a policy requirement so as to show a desired result.
Appendix I of FRS 102 defines material as ‘Omissions or misstatements of items if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of omission or misstatement judged in the surrounding circumstances. The size and nature of the item, or a combination of both, could be the determining factor’.
When assessing materiality, it is based on the specific entity as an omission of a policy might be considered material for one entity because of the size of the entity and immaterial for another as the entity is larger.
Section 8 of this website provides detailed examples of accounting policy notes to be included in the financial statements.
Section 10.5 provides a hierarchy of guidance for accounting for an item which is not dealt specifically within FRS 102, this lists the sources of information that should be consulted by order of priority:
- Any guidance issued by the FRC on the issue
- Any guidance contained in statements of recommended practice issued
- The definition, recognition and measurement criteria contained in Section 2 detailing the fundamental concepts of FRS 102
- Any guidance in EU adopted IFRS. Note an entity does not have to follow IFRS guidance but it can choose to do so. However the exception to this rule applies to:
- Entities whose shares or debt instruments are publically traded
- Entities applying FRS 103 Insurance contracts to insurance contracts and any financial instruments with discretionary participation features that it issues.
In the above two cases these entities must apply EU adopted IFRS to:
- the application of IAS 33 Earnings per Share (as adopted in the EU); or
- IFRS 8 Operating Segments (as adopted in the EU); or
- IFRS 6 Exploration for and Evaluation of Mineral Resources.
Section 10 does not state that an entity may refer to any GAAP other than EU adopted IFRS, however it would not be unreasonable to refer to old GAAP for the accounting policy applied previously as long as the entity has went through the above hierarchy and it results in relevant information being provided.
Consistency of accounting policies
Extract from FRS 102- Section 10.7
10.7 An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless an FRS or FRC Abstract specifically requires or permits categorisation of items for which different policies may be appropriate.
If an FRS or FRC Abstract requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.
OmniPro comment
FRS 102 requires consistency in application of accounting policies. Where a change in accounting policy is made this requires a prior year adjustment to restate the prior year figures so as to allow for comparability. This is discussed further below. A change can only be made on the basis that it results in providing more reliable information to the readers of the financial statements.
However Section 9.17 makes it clear that a group does not have to have a consistent accounting policy, instead the individual financial statements of each subsidiary can decide on its own accounting policy as long as the reason for departure has a good business reason. The only requirement is that when consolidated financial statements are being prepared the subsidiaries results, assets and liabilities must be adjusted so as to adhere to the group accounting policies.
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