Question

The directors of Bodurm plc have decided to adopt a policy of revaluing all its buildings to reflect current fair values. The fair value of the buildings is determined by an independent surveyor to be £2,625,000 as at 30 April 2020. The revaluation does not give rise to a deferred tax liability.

Discuss the requirements of IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” in relation to Bodurm plc’s new accounting policy in relation to the measurement of inventories. Explain why these requirements are necessary.

Answer 1

The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements.

Financial Statements are prepared to portray a true and fair view of the performance and state of affairs of an enterprise. In selecting a policy, alternative accounting policies should be evaluated in that light. In particular, major considerations that govern selection of a particular policy are:

Prudence: In view of uncertainty associated with future events, profits are not anticipated, but losses are provided for as a matter of conservatism.

Substance over form: Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely by their legal form.

Materiality: Financial statements should disclose all ‘material items, i.e. the items the knowledge of which might influence the decisions of the user of the financial statement. Materiality is not always a matter of relative size.

Manner of disclosure: All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.

If the fundamental accounting assumptions, viz. Going concern, Consistency and Accrual are followed in financial statements, specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed. The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods.

Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in a later period should be disclosed. In the case of a change in accounting policies, which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

These discolsures are made to bring true and fair view the financial statements of the entity.