Business compliance keeping you awake?
Cleartax's wide range of compliance services is here for you
Explore Now

Indian Accounting Standard-8; (Ind AS-8)

Updated on: May 3rd, 2022

|

7 min read

social iconssocial iconssocial iconssocial icons

Indian Accounting standards primarily are issued to help entities prepare and present the financial statements accurately. Indian accounting standards bring about uniformity in the presentation of financial statements across entities. They intend to cover such areas that present challenges to all entities.

Indian Accounting standard 8 is intended to enhance the reliability and relevance of an organization’s financial statements. It also aims to make them more comparable over time within the entity and also with financial statements of other entities.

What is Indian Accounting standard 8?

This standard prescribes the guidelines for selecting and modifying accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of error. To understand the standard, we must first understand the following terms:

  • Accounting principles are the specific principles, rules, bases, conventions and practices followed by an organization in preparing and presenting financial statements.

Example of accounting principle is the accrual and matching concept which requires the entity to record the expenses and income in the period in which it is incurred. Accounting principles form the very basis of accounting for transactions and presenting them.

  • A change in accounting estimate is a modification of the carrying amount of a liability or an asset or the life of the asset, that results from the evaluation of the current status of, and expected future advantages and obligations linked with, assets and liabilities. Changes in accounting estimates arise due to new findings or new developments and, hence, are not corrections of errors.

Example of a change in accounting estimate is the change in depreciation owing to change in the estimation of the useful life of the asset.

  • Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior period refers to such errors that have occurred due to failure to use or misuse relevant information that was available when the statements were approved for the issue and could have been taken into account then.

Such errors include the outcomes of mathematical mistakes, errors in applying accounting policies, oversights or misinterpretations of facts, and fraud.

How are accounting policies selected and applied?

First of all the entity must assess if an Ind AS specifically applies to a transaction, other event or condition if it applies then, the accounting policy or policies to be applied shall be determined by applying Ind AS If the Ind AS does not apply then the management shall use its judgement in formulating and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users; and reliable, in that the financial statements:

  • represent accurately the financial position, financial performance and cash flows of the entity;
  • reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
  • are neutral, ie free from bias;
  • are prudent; and
  • are complete in all material respects.

An entity must apply the accounting policies consistently for similar transactions, other events and conditions unless otherwise mentioned in Ind AS.

When can an entity change its accounting policies?

An organization shall change an accounting policy only if the change:

(a) is ordained by an Ind AS; or

(b) results in the financial statements providing accurate and more relevant information about the effects of transactions, other events or conditions on the entity’s financial performance, financial position or cash flows.

When a change in accounting policy is required by an Ind AS, an entity shall apply it in the following manner

Change resulting from first time application of an Ind ASTransitional provisions as provided in the AS
Change resulting from first time application, but no transitional provision prescribed  Or Changes are voluntary  Retrospective application 

What is a retrospective application?

A retrospective application shall be applied retrospectively except to the extent that it is impracticable to determine the prior period effect or cumulative effect. In case it is impracticable to determine the prior period effect then an entity can make changes to the carrying amount of assets and liabilities for the earliest period possible which could be the current period and make changes to the opening balances. If that is also difficult to determine then the entity can apply the changes prospectively.

How are changes in accounting estimates to be treated? There are many components in the accounting statements that are estimated because they cannot be measured with precision. One of the items is bad debts. When such estimates are made there will be circumstances when they would have to be modified owing to new information. Such changes are not errors and are referred to as changes in accounting estimates. The effect of change in an accounting estimate, which does not give rise to a change in assets and liabilities, shall be recognised prospectively by including it in profit or loss in the following manner :

Change affects only that period To be recognised in that period only
Change affects that period and future To be recognised in both periods

To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.

How are errors to be treated?

Errors can arise in respect of the identification, measurement, presentation or disclosure of elements of financial statements. An entity shall rectify material prior period errors retrospectively unless impracticable, after the finding of errors in the first set of financial statements:

(a) for the prior period(s) presented in which the error occurred by restating the comparative amounts; or

(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. The standard also prescribes disclosure requirements in the case of changes in accounting policy, estimates and prior period errors.

inline CTA
File your returns in just 3 minutes
100% pre-fill. No manual data entry
CONTENTS

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption