On 21 November 2019, the International Accounting Standards Board issued a Guide to Selecting and Applying Accounting Policies – IAS 8 (Guide). The Guide provides a step-by-step walk through of the requirements of the ‘hierarchy’ for selecting and applying accounting policies laid out in paragraphs 10-12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
The following flowchart has been extracted from the Guide and summarises the steps for selecting and applying accounting policies for a transaction, event or other condition (transaction).
If there is an IFRS Standard (including Interpretations) that specifically applies to a transaction, other event or condition, the Guide notes that the requirements of that Standard are followed, even if those requirements do not align with the Conceptual Framework for Financial Reporting (Conceptual Framework).
The Guide illustrates this point by using two examples:
Where there are no specific IFRS Standards dealing with a transaction, event or other condition, the Guide notes that the ‘hierarchy’ listed in paragraph 11 of IAS 8 requires preparers to consider IFRS Standards dealing with similar and related issues before consulting the Conceptual Framework for guidance.
The Guide uses an example of back-to-back commodity loans to illustrate this point.
The Conceptual Framework is only consulted if both of the following apply, i.e.:
The Guide uses an example of an entity that pays a tax deposit to a tax authority during a tax dispute to illustrate this point. If the outcome of the tax dispute is such that an additional payment is required by the entity, the tax deposit will be used to offset any additional tax liability. If the tax dispute settles in the entity’s favour, the entity will receive a refund from the tax authority. As there are no IFRS Standards that specifically apply to the transaction, nor dealing with similar and related issues, the entity refers to the Conceptual Framework in developing a policy to account for the tax deposit paid.
In addition to the process outlined in the diagram above, the Guide notes that management is also permitted to consider the most recent pronouncements of other standard-setting bodies (e.g. US GAAP) when selecting and applying accounting policies, but only if all the following apply:
The Guide highlights that if an entity develops an accounting policy by reference to IFRS Standards dealing with similar and related issues, they also need to consider all the requirements dealing with those issues, including the disclosure requirements.
Disclosure of these transactions is also necessary in order to meet the general presentation and disclosure requirements in IAS 1 Presentation of Financial Statements, including:
The Guide can be downloaded from the International Accounting Standards Board web site.