STANDARDS: IAS 8
NET PROFIT OR LOSS FOR THE PERIOD, FUNDAMENTAL ERRORS AND CHANGES IN ACCOUNTING POLICIES
From the desk of M.Iftykhar Alam ..::: :::..
HISTORY OF IAS 8
October 1976 / Exposure Draft E8, The Treatment in the Income Statement of Unusual Items and Changes in Accounting Estimates and Accounting Policies
February 1978 / IAS 8, Unusual and Prior Period Items and Changes in Accounting Policies
July 1992 / Exposure Draft E46, Extraordinary Items, Findamental Errors and Changes in Accounting Policies
December 1993 / IAS 8 (1993), Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised as part of the 'Comparability of Financial Statements' project based on E32)
1 January 1995 / Effective Date of IAS 8 (1993)
AMENDMENTS UNDER CONSIDERATION BY IASB
Improvements to IFRS
Reporting Performance
SUMMARY OF IAS 8
Objective of IAS 8
The objective of IAS 8 is to prescribe the classification, disclosure and accounting treatment of certain items in the income statement so that all enterprises prepare and present an income statement on a consistent basis.
Standards in IAS 8
IAS 8 specifies the presentation in the income statement of profit or loss from ordinary activities and extraordinary items, as well as the accounting for fundamental errors and changes in accounting policy and changes in estimates. [IAS 8.1]
All items of income and expense recognised in a period must be included in net profit or loss for the period unless another IAS requires or permits otherwise. [IAS 8.7] Examples of items of income and expense excluded from net profit or loss when recognised under other IAS include:
  • foreign exchange differences on a monetary item that forms part of an enterprise's net investment in a foreign entity are reported in equity until the investment is sold, under IAS 21
  • gains and losses from changes in fair values of available for sale financial assets under IAS 39
  • changes in fair value of property, plant, and equipment carried at revalued amounts under IAS 16
Two other examples of items of income or expense items that arise in a period but that, in certain circumstances, are excluded from net profit or loss for that period are:
  • corrections of fundamental errors; and
  • the prior-period effect of a change in accounting policy.
Both of these are dealt with in IAS 1 and are Discussed Below.
Results of Ordinary Activities
The net profit or loss for the period includes the following two components, which must be disclosed separately on the face of the income statement: [IAS 8.10]
  • profit or loss from ordinary activities; and
  • extraordinary items.
Ordinary activities are the ongoing activities undertaken by an enterprise as part of its business. Ordinary activities include activities that are incidental to but related to the ongoing business activities.
Extraordinary Items
Extraordinary items arise from events that are clearly distinct from the ordinary activities of the company and therefore are not expected to recur frequently or regularly. The only examples given are the expropriation of assets or an earthquake or other natural disaster. These are rare events that are beyond the control of the management of the enterprise. The nature and amount of extraordinary items should be separately disclosed (total on the face of the income statement, analysis in the notes). [IAS 8.11]
Items of Unusual Size, Nature, or Incidence
In addition, disclosure is required of items within profit or loss from ordinary activities of such size, nature or incidence that their disclosure is relevant to explain the performance for the period. The nature and amount of such items should be separately disclosed (usually in the notes). [IAS 8.16]
Fundamental Errors
Fundamental errors are defined as errors of such significance that the financial statements of one or more prior periods can no longer be considered to have been reliable at the date of their issue. The benchmark treatment is to treat the correction of a fundamental accounting error as an adjustment of the opening balance of retained earnings and to restate comparative information. [IAS 8.34]
As an allowed alternative treatment, the amount of the correction may be included in the current period's results and comparative information presented as previously reported. [IAS 8.38] If this alternative is selected, additional pro forma information reflecting the effect as if the benchmark treatment had been adopted is required to be disclosed, unless it is impracticable to do so. [IAS 8.40]
If the benchmark treatment is followed (restatement), IAS 8.37 requires the following disclosures:
  • description of the error,
  • the amount of the error attributable to the current period and to each prior period presented in the financial statements,
  • the amount of the error relating to periods prior to those for which financial statements are presented,
  • the fact that comparative prior period information has been restated or the fact that restatement is not practicable.
If the allowed alternative treatment is followed (inclusion in current net profit or loss plus pro forma information), IAS 8.41 requires the following disclosures:
  • description of the error,
  • the amount of the error correction recognised in net profit or loss for the current period,
  • the amount of the correction included in each period for which pro forma information is presented and the amount attributable to periods prior to those covered by the pro forma information. If it is impracticable to present pro forma information, that fact must be disclosed.
Change in Accounting Policy
Accounting policies are the principles, bases, conventions, rules, and practices that an enterprise adopts in preparing and presenting its financial statements. To illustrate: depreciation of the cost of an asset, less its estimated residual value, over its estimated useful life is an accounting policy. The straight line method of depreciation is also an accounting policy. However, the estimate of the useful life and the estimate of the amount of the residual value are not accounting policies. Rather, they are accounting estimates.
A change in accounting policy should only be made if required by statute or by a standard-setting body or so as to give a more appropriate presentation. [IAS 8.42]
  • A change made on the basis of a new IAS should be accounted for in accordance with the transitional provisions specified in the new Standard. [IAS 8.46]
  • Under the benchmark treatment, changes other than those arising on the implementation of a new IAS should be applied retrospectively, with an adjustment to the opening balance of retained earnings. Comparative information should be restated, where practicable. [IAS 8.49]
  • The allowed alternative treatment for non-mandated changes is that the effect of the retrospective application of the accounting policy may be included in the current period's results and comparative information presented as previously reported. If this alternative is selected, additional pro forma information reflecting the effect as if the benchmark treatment had been adopted is required to be disclosed, unless it is impracticable to do so. [IAS 8.54]
  • A change in accounting policy should be applied prospectively when the adjustment to opening retained earnings cannot be reasonably determined. [IAS 8.52 and 8.56]
A NOTE ON IFRS 1, FIRST-TIME ADOPTION OF IFRS
The allowed alternative treatment in IAS 8.54 -- including the cumulative effect of the change in net profit or loss in the period of change -- is not applicable in the case of first time adoption of IFRS as the primary basis of accounting. In this case IFRS 1 requires that the Standards and Interpretations that are in effect for the period of first-time application of IFRS should generally be applied retrospectively.
IAS 8 requires certain disclosures about any material change in accounting policy. A change in accounting policy is deemd material if it has a material effect in the period of change or in any prior periods presented, or is expected to materially affect future periods. The required disclosures depend on whether the benchmark treatment (restatement) or the allowed alternative treatment (cumulative effect in net profit or loss plus pro forma information) is followed.
Disclosures under the benchmark treatment are: [IAS 8.53]
  • the reasons for the change (including a description of the change),
  • the monetary effect of the change on the current period and on each prior period presented,
  • the aggregate monetary effect of the change relating to periods prior to those for which financial statements are presented,
  • the fact that prior period information has been restated or that it has been impracticable to do so.
Disclosures under the allowed alternative treatment are: [IAS 8.57]
  • the reasons for the change (including a description of the change),
  • the monetary effect of the change recognised in net profit or loss for the current period,
  • the monetary effect of the change included in each period for which pro forma information is presented and the amount attributable to periods prior to those covered by the pro forma information. If it is impracticable to present pro forma information, that fact must be disclosed.
Change in Estimate
The effect of a change in accounting estimate should be included in net profit or loss in the period of change and any affected future periods. Examples include changes in estimated amounts of bad debts and changes in depreciation method, useful life, or residual value. The nature and amount of a change in accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods should be disclosed. If it is impracticable to quantify the effect, that fact should be disclosed. [IAS 8.26-30]
When a change in estimate is made, the effect of the change should be included in the same income statement category as had been used previously for the estimate. [IAS 8.28]