Questions on IAS 8
Transcript
00:00Hello there, financial explorers.
00:05Welcome to the fascinating world of accounting policies.
00:08You know those guidelines that businesses use to record and present their financial
00:12information.
00:13Think of them as the secret sauce that makes financial statements understandable and comparable.
00:19Now you might be wondering, why should I care about accounting policies?
00:22Well my friend, they are crucial for painting a clear picture of a company's financial health.
00:27Just like a compass guides a ship, accounting policies guide businesses in navigating the
00:32complex world of financial reporting.
00:35Without these policies, companies could play fast and loose with their numbers, making
00:40it difficult to compare apples to apples.
00:42Imagine trying to understand a foreign film without subtitles.
00:46Chaos.
00:47That's why we need accounting policies, to provide a common language for understanding
00:51a company's financial story.
00:54So buckle up and get ready to dive into the fascinating world of accounting policies.
00:58Trust me, it's more exciting than it sounds.
01:04In the vast universe of accounting, there's a guiding star known as IAS 8, the International
01:10Accounting Standard 8.
01:12It's like the rule book for accounting policies, setting the standards for how companies should
01:16develop and apply these policies.
01:19IAS 8 ensures consistency and transparency in financial reporting across different companies
01:24and countries.
01:26It's like having a universal translator for financial statements.
01:29This standard provides a framework for defining accounting policies, recognising and applying
01:34changes in accounting policies, correcting errors in prior periods.
01:39Think of IAS 8 as the ultimate GPS for navigating the often complex world of accounting policies.
01:46It provides businesses with a clear road map to ensure their financial reporting is
01:50accurate, reliable and comparable.
01:53So whether you're a seasoned financial whiz or just starting, understanding IAS 8 is essential
01:59for deciphering the mysteries of financial statements.
02:03Get ready to unlock the secrets of this powerful accounting standard.
02:09Picture this.
02:10You're comparing two companies in the same industry.
02:13One company's profits are skyrocketing while the other seems to be struggling.
02:17But here's the catch.
02:19They might be using different accounting policies.
02:21That's why understanding these policies is crucial.
02:25Accounting policies directly impact a company's reported financial performance and position.
02:30They can influence key metrics like profitability, how much profit a company makes, assets, what
02:35a company owns, liabilities, what a company owes.
02:40Different accounting policies can lead to different reported numbers even if the underlying
02:44economic reality is the same.
02:47That's why it's like comparing apples to oranges if you don't consider the accounting methods
02:51used.
02:52By understanding accounting policies you can make informed investment decisions, choose
02:57companies with transparent and conservative accounting practices, assess a company's true
03:02financial health, see beyond the surface and understand the underlying profitability and
03:07stability, compare companies fairly, level the playing field by understanding how accounting
03:14choices impact reported numbers.
03:17All right, let's break down the essential principles of IAS 8 that will make you sound
03:24like an accounting whiz.
03:26One, accounting policies should be relevant to the economic decisions of users think useful
03:32information.
03:33One, information should be accurate, complete and free from bias.
03:38No funny business here.
03:40One, you should be able to compare a company's financial statements over time with other
03:44companies.
03:45Consistency is key.
03:46One, information should be presented clearly and concisely.
03:50No need for a PhD in accounting to understand it.
03:54IAS 8 also emphasises the importance of focus on what truly matters.
03:59Minor details that won't impact decisions can be simplified.
04:03Be cautious and don't overstate assets or income.
04:06It's better to under-promise and over-deliver.
04:10Assume the company will continue to operate in the foreseeable future, unless there's
04:14evidence to the contrary, of course.
04:16These principles form the bedrock of sound accounting policies.
04:19They ensure financial statements are reliable, comparable and relevant for decision making.
04:26It's all about painting a true and fair view of a company's financial position.
04:34Section 5.
04:35Judgment Day.
04:36Selecting the right accounting policies.
04:39Choosing the right accounting policies is a bit like picking the perfect outfit for
04:42a special occasion.
04:44You want something that fits well, reflects your style and makes you feel confident.
04:48When selecting accounting policies, companies need to consider the nature of their business.
04:54A tech company might have different accounting needs than a manufacturing giant.
04:59Industry practices.
05:00What are other companies in the same industry doing?
05:03Consistency matters for comparability.
05:05The specific requirements of accounting standards.
05:08IAS 8 provides guidance, but there might be specific rules for certain transactions or
05:13events.
05:14Sometimes there might not be a clear-cut answer in the accounting rulebook.
05:18That's when professional judgment comes into play.
05:21It's like being a financial detective using your knowledge and experience to choose the
05:25most appropriate policy.
05:27But remember, transparency is key.
05:30Companies need to disclose the accounting policies they've chosen so users of financial
05:34statements can understand the decisions made.
05:40Section 6.
05:41Applying accounting policies.
05:43Making it real.
05:45Selecting the right accounting policies is just the first step.
05:48Now comes the action-packed part.
05:51Applying those policies to real-life transactions and events.
05:54This involves identifying the economic substance of transactions and what's really going on.
05:59Don't be fooled by appearances selecting the appropriate accounting treatment.
06:03Which policy best reflects the economic reality of the transaction?
06:07Making necessary estimates and judgments.
06:10Sometimes you need to make educated guesses based on the available information.
06:14Applying accounting policies consistently is crucial.
06:17It ensures that financial statements are comparable over time and that the numbers tell a reliable
06:22story.
06:24Think of it like baking a cake.
06:26You wouldn't use different measurements or ingredients every time you bake the same cake,
06:30right?
06:31Consistency is key to getting the desired result.
06:38Section 7.
06:39Example.
06:40Time.
06:41Bringing accounting policies to life.
06:42Let's say you're a furniture retailer.
06:44You need to decide on an accounting policy for your inventory.
06:47Last in, first out, or FIFO?
06:49This assumes you sell the oldest inventory first.
06:51Last in, first out, or LIFO?
06:53This assumes you sell the newest inventory first.
06:56Weighted average cost.
06:57This calculates the average cost of all your inventory.
07:00The choice of inventory method can impact your reported profit and the value of your
07:05inventory.
07:06For example, during rising prices, FIFO will generally result in a higher profit than LIFO.
07:11That's just one example of how accounting policies can impact financial statements.
07:19Section 8.
07:20Changes on the horizon.
07:22Dealing with accounting policy shifts.
07:24Change is inevitable, even in the world of accounting.
07:27Sometimes companies need to change their accounting policies due to new accounting standards being
07:31issued.
07:32It's like getting a software update.
07:34You've got to keep up with the latest version.
07:37Changes in a company's operations or business environment, such as a merger, acquisition,
07:42or even a global pandemic, can necessitate a policy change.
07:46When a company changes an accounting policy, it needs to do so retrospectively.
07:51This means going back and restating prior period financial statements as if the new
07:56policy had always been in place.
07:59It's like rewinding the clock and adjusting the script to reflect the new reality.
08:02This ensures that financial statements are comparable over time.
08:06Even with a policy change, companies need to disclose the reasons for the change, the
08:11impact on their financial statements, and any significant judgments made.
08:16Transparency is key to maintaining trust and credibility with users of financial information.
08:25Section 9.
08:26The big no-no errors and how to fix them.
08:28Errors in accounting can have serious consequences.
08:31IAS 8 guides on correcting prior period errors.
08:35Errors occur when financial statements don't reflect economic reality.
08:38This could be due to mathematical mistakes.
08:41Fraud or deliberate manipulation is a big no-no.
08:44Errors must be corrected retrospectively.
08:47Restate prior period statements to reflect corrections.
08:50Present a true and fair view, even if it means acknowledging past mistakes.
08:58Section 10 IAS 8.
08:59In action, real-world impact.
09:01IAS 8 might seem like a technical accounting standard, but it has a real-world impact on
09:06businesses and investors alike.
09:08For businesses, IAS 8 provides a clear framework for developing and applying accounting policies,
09:14ensuring consistency and transparency in financial reporting.
09:18For investors, IAS 8 helps investors make informed decisions by providing a level playing
09:23field for comparing companies across different countries and industries.
09:27By promoting comparability and transparency, IAS 8 fosters trust and confidence in the
09:34global capital market.
09:36It's like having a universal language for financial reporting, making it easier for
09:40investors to understand and compare companies from all corners of the world.
09:48Section 11.
09:49Wrapping up why understanding accounting policies rocks.
09:52Congratulations, you've reached the finish line.
09:56You're now well-versed in the world of accounting policies and IAS 8.
10:00Understanding accounting policies helps you make informed investment decisions.
10:04It's like having x-ray vision for financial reporting.
10:07By understanding IAS 8, you can compare companies fairly.
10:11IAS 8 contributes to a more stable and efficient global economy.
10:16Remember the importance of accounting policies and the role of IAS 8.
10:20Now go forth and conquer the world of finance.