Reference no: EM132941847
Due to the complexity of International Financial Reporting Standards (IFRS), often judgments used at the time of transition to IFRS have resulted in prior period adjustments and changes in estimates being disclosed in financial statements. The selection of accounting policy and estimation techniques is intended to aid comparability and consistency in financial statements. However, IFRS also place particular emphasis on the need to take into account qualitative characteristics and the use of professional judgment when preparing the financial statements. Although IFRS may appear prescriptive, the achievement of all the objectives for a set of financial statements will rely on the skills of the preparer. Entities should follow the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting or changing accounting policies, changing estimation techniques, and correcting errors.
However, the application of IAS 8 is additionally often dependent upon the application of materiality analysis to identify issues and guide reporting. Entities also often consider the acceptability of the use of hindsight in their reporting.
Required:
Problem I. Discuss, using relevant examples, how judgment and materiality play a significant part in the selection of an entity's accounting policies.
Problem II. Discuss, using relevant examples, the circumstances where an entity may change its accounting policies, setting out how a change of accounting policy is applied and the difficulties faced by entities where a change in accounting policy is made.
Problem III. Discuss, using relevant examples, why the current treatment of prior period errors could lead to earnings management by companies, together with any further arguments against the current treatment.