bas 8_ mastofa

8/7/2019 BAS 8_ Mastofa

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BAS 8: Net Profit or Loss for the Period, Fundamental Errors and Changes in

Accounting Policies

Effective Date: January 1, 1995

Objective: The objective of this standard is to enhance comparability of P&L by prescribing

consistent basis or guideline on following items:

Classification and disclosure of extraordinary items;

Disclosure of certain items of P&L within ordinary activities;

Specify accounting treatment for:

Changes in accounting ESTIMATES,

Changes in accounting POLICIES, and

Correction of fundamental errors

Related Standards: BAS 12 for Tax calculation on extraordinary item and BAS 1, BAS 16,

BAS 21.

Para 7 -10: Net Profit and Loss

All items of income and expenses have to be included to determine net profit or loss for

current period unless other BAS require permit otherwise. The practice usually includes:

all items of ordinary activities;

extraordinary items; and

effect of changes in ESTIMATES.

but usually mistakenly excludes two item: effect of changes in POLICIES; and

effect of Fundamental error.

Two items that should not be included here are:

Revaluation surplus (to be complied with BAS 16); and

Profit or loss arising from change in foreign currency rates (to be complied

with BAS 21).

Para 11-15: Extraordinary items

The nature and amount of each extraordinary item should be SEPERATELY disclosed.Extraordinary items do not depend on the frequency, even though it will be usually rare. If

any event or transaction is not expected in course of business of the enterprise, it is classified

as extraordinary item. But, if it is expected in course of its business, then it is not

extraordinary item even if that item is very rare. For example, earthquake claims in an

Insurance business for such event is not an extraordinary item even if such claims are rare.

Usual extraordinary items are:

The Expropriation of assets;

Loss from natural disaster, etc.

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Para 16-22: Items of Ordinary Activities

Any income or expense items within the ordinary activities those are significant in size,

nature or incidence, and are relevant to explain the performance of the enterprise for the

period, should be disclosed SEPERATELY. Those items are relevant which is used by the

user of financial statement to forecast future earnings and financial position of an

enterprise. Some example of such events are- Write-down of Inventories, PPE etc. to NRV, and its reversal

Restructuring of activities, or reversal

Disposal of PPE, or long-term Investment,

Discontinued operation

Litigation settlement

Other reversal of provisions

Para 23-30: Changes in accounting ESTIMATES

Accounting estimates are inevitable because of uncertainties of the future. Hence, change in

estimates is not the change in accounting policies. However, if there arise any CONFUSION(as it does frequently), the situation will be considered as Change in Estimates. And such

event of changing estimates is NOT an extraordinary item.

If this change in estimates has MATERIAL effect in the current period or in subsequent

periods, then the nature and amount of such change is to be disclosed; but if quantification

of effect is impossible, that fact has to be disclosed. The effect of changes has to be included

in the appropriate period in which it affects; that means, in CURRENT period or in the

SUBSEQUENT period or in the both depending on whether it affect the Profit or loss of that

period. The effect in the subsequent future period will be reported in the future at their

appropriate time.

The effect will be shown at the same portion of the income statement where the concerned

account on which the estimate is changed appears. Eg, Estimates on extraordinary item willappear under the Income from Extraordinary Activities category, so is for items from

ordinary activity.

Para 31-40: Fundamental Error

Any revision/error of estimates is NOT fundamental error. The fundamental error can arise

from following items that does not require any approximation (meaning estimates):

Mathematical Mistakes

Mistakes in applying accounting policies

Misinterpretation of fact, fraud or oversights

Fundamental error may have significant effect on the current and prior period for which priorstatements are no longer reliable. There are two ways to correct and report such error:

Benchmark Treatment; and

Allowed Alternative Treatment

Under benchmark treatment, the amount of correction for particular period will be made

for that period. How to do it: the financial statements, including the comparative statements

of prior periods, have to be presented as if the error had been corrected in prior periods when

it was made. The amount of correction for older periods beyond the presented period will be

adjusted against the opening balance of retained earnings in the earliest period presented. This

restated Financial Statements for prior periods may or may not require amendment approval

from the shareholder/regulatory body depending on particular Company Law of the

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country/states. However, if restatement of prior period financial statements is impracticable,

then it is not required; but this fact has to be disclosed.

Under allowed alternative treatment, the amount of correction and of a fundamental error

should be included in the determination of net profit or loss for the CURRENT period.

Comparative information should be presented as reported in prior statements. Additional

column / pro-forma may be presented for comparative information following the Benchmark

Treatment unless it is not impracticable to do so.

Para 41-58: Changes in Accounting POLICIES

Presented in three sections:

General guideline: Para 41-45

Adoption of BAS: 46 - 48

Other changes: 49 - 57

A change in accounting policies should only be made:

If Required by statute;

If Required by a standard setting body;

If the changes result in more appropriate presentation.

Appropriate presentation means more reliable and relevant information about financial

position, Performance and cash flow. The change in policies can be applied

RETROSPECTIVELY or PROSPECTIVELY as defined in para 45 of BAS 8. But, the

Changes In Accounting Policies will not include any adoption of policies for such events or

transaction that:

- differ in substance from previously occurring events or transaction;

- never occurred before;

- relates with revaluation of PPE which will be dealt with BAS 16.

If the changes in accounting policy arise because of adoption of BAS, those changes will beapplied in accordance with the specific transitional provision, if any, provided in the related

BAS. Transitional provision may require retrospective or prospective approach for the

change. If no transitional provision exists for any item, the change in policies will be applied

in accordance with the benchmark treatment or with the allowed alternative treatment.

Either under benchmark treatment or under allowed alternative treatment, a change in

accounting policy other than adoption of BAS will be applied retrospectively unless the

amount of adjustments in prior periods in case of benchmark treatment or the amount to be

included in determining the profit or loss for the Current period in case of allowed alternative

treatment is not reasonably determinable. Otherwise, it will be applied prospectively. The

method of presentation will be similar to those of the effect of fundamental error. The

disclosure requirements are also similar. Here is a graphical illustration of the four available

types of alternative treatment:

RETROSPECTIVE PROSPECTIVE

Benchmark treatment

Calculate effect of new

policies for PRIOR years;

Adjust the effect in their

RESPECTIVE period


policies for CURRENT year;

Adjust the effect in their

RESPECTIVE period

Allowed Alternative

Treatment


policies for PRIOR years;

Adjust the cumulative effect inCURRENT period


policies for CURRENT year;

Adjust the cumulative effectin CURRENT period

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DISCLOSURES (How):

On the face of the P&L:

Profit or loss from ordinary activities;

Extraordinary items as a whole.

In the note or on the face:

Nature and amount of each extraordinary items seperately;

Nature and amount of each items from ordinary activities which is of significant

importance;

Nature and amount of effect of Changes in accounting ESTIMATES if it is material;

if the effect cannot be quantified, that fact has to be disclosed; disclosure has to be

made at proper period and under proper classification in P&L;

UnderBenchmark Treatment for presenting FUNDAMENTAL ERROR, following

items need to be disclosed:

The nature of fundamental error; The amount of correction for current period and for EACH prior period

presented in comparatives;

The amount of correction for periods prior those periods presented in

comparatives; and

The fact that information is restated, or it is impracticable to restate.

Under Allowed Alternative Treatment for presenting FUNDAMENTAL ERROR,

following items need to be disclosed:

The nature of fundamental error;

The amount of correction recognized in net profit or loss for the

CURRENT period;

The amount of correction for each period for which pro forma

information is presented and amount of correction that relates to

periods prior to those included in the pro forma; and

The fact that it is impracticable, if it is so.

Under Benchmark Treatment for presenting CHANGE IN ACCOUNTING

POLICIES, following items need to be disclosed:

The reason for the change;

The amount of adjustments for current period and for EACH prior

period presented in comparatives;

The amount of adjustments for periods prior those periods presented in

comparatives; and The fact that information is restated or it is impracticable to restate.

UnderAllowed Alternative Treatment for presenting CHANGE IN ACCOUNTING

POLICIES, following items need to be disclosed:

The reason for the change;

The amount of adjustments recognized in net profit or loss for the

CURRENT period;

The amount of adjustments for each period for which pro forma

information is presented and amount of correction that relates to

periods prior to those included in the pro forma; and

The fact that it is impracticable, if it is so.

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bas 8_ mastofa

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