EUROPEAN UNION ACCOUNTING RULE 14 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS

Transcription

1 execution EUROPEAN UNION ACCOUNTING RULE 14 ACCOUNTING POLICIES, CHANGES IN

2 execution Page 2 of 10 I N D E X 1. Objective Scope Definitions Policies Selection and Application of Policies Consistency of Policies Changes in Policies Applying Changes in Policies Disclosures Changes in Estimates for Changes in Estimates Disclosures Errors for Errors Disclosures Effective date Reference to other rules... 10

3 execution Page 3 of Objective The objective of this Rule is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and the corrections of errors. 2. Scope The EU and its consolidated bodies, since they prepare and present financial statements under the accrual basis of accounting, shall apply this accounting rule. This rule shall be applied in selecting and applying accounting policies, and accounting for changes in accounting policies, changes in accounting estimates and corrections of prior period errors. 3. Definitions The following terms are used in this rule with the meanings specified: 1) policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. 2) Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognised under accrual accounting are assets, liabilities, net assets/equity, revenue and expenses. 3) A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors. 4) Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if: a) the effects of the retrospective application or retrospective restatement are not determinable; b) the retrospective application or retrospective restatement requires assumptions about what management s intent would have been in that period; or

4 execution Page 4 of 10 c) the retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: i. provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed; and ii. would have been available when the financial statements for that prior period were authorised for issue from other information. 5) Material Omissions or misstatements of items are material if they could, individually or collectively, influence the decisions or assessments of users made on the basis of the financial statements. Materiality depends on the nature or size of the omission or misstatement judged in the surrounding circumstances. The nature or size of the item, or a combination of both, could be the determining factor. 6) Prior period errors are omissions from, and misstatements in, the entity s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: a) was available when financial statements for those periods were authorised for issue; and b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. 7) Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are: a) applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed; and b) recognising the effect of the change in the accounting estimate in the current and future periods affected by the change. 8) Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. 9) Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

5 execution Page 5 of Policies 4.1 Selection and Application of Policies 1) When an EU accounting rule specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the rule. Management should select and apply accounting policies so that the financial statements comply with all the requirements of each applicable EU accounting rule. Where there is no specific requirement, management should develop policies to ensure that the financial statements provide information that is: (a) Relevant to the decision-making needs of users; and (b) Reliable in that they: (i) represent faithfully the balance sheet and the economic outturn account of the entity; (ii) reflect the economic substance of events and transactions and not merely the legal form; (iii) are neutral, that is free from bias; (iv) are prudent and (v) are complete in all material respects. 2) In the absence of an EU accounting rule this EU accounting rule requires the development of accounting policies to ensure that the financial statements provide information that meets a number of qualitative characteristics. EU accounting rule 2 outlines the qualitative characteristics of financial reporting. 3) In making the judgment management shall refer to, and consider the applicability of, the following sources in descending order: a) the requirements and guidance in EU accounting rules dealing with similar and related issues; and b) the definitions, recognition and measurement criteria for assets, liabilities, revenue and expenses described in other EU accounting rules. 4) Management may also consider the most recent pronouncements of other standard-setting bodies and accepted public or private sector practices to the extent, but only to the extent, that these do not conflict with the sources in the last preceding paragraph. For example, pronouncements of the International Public Sector Standards Board (IPSASB), International Standards Board (IASB), including the Framework for the Preparation and Presentation of Financial Statements, International Financial Reporting Standards and Interpretations issued by the IASB s International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC). 4.2 Consistency of Policies The EU and its consolidated bodies shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless an EU accounting rule specifically requires

6 execution Page 6 of 10 or permits categorisation of items for which different policies may be appropriate. If an EU accounting rule requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. 4.3 Changes in Policies 1) Users need to be able to compare the financial statements of the European Union over a period of time to identify trends in their balance sheet, economic outturn account and cash flow table. Therefore, the same accounting policies are normally adopted in each period. As a minimum, in case of a change in accounting policies, this information should be disclosed. Moreover, changes in accounting policies may have a significant impact on the balance sheet and economic outturn account. Consequently, specific accounting treatments and requirements must be followed to ensure comparability of the financial information where the impact of such a change is material. 2) A change in accounting policy is: A change from one basis of accounting to another basis of accounting; or A change in the accounting treatment, recognition or measurement of a transaction or event within a basis of accounting. 3) A change in accounting policy should be made only if: Required by a financial regulation; or Required by an EU accounting rule; or If the change will result in more relevant or reliable information about the balance sheet, economic outturn account or cash flow table of the European Union. 4) The following are not changes in accounting policies: The adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions; and The adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial. 4.4 Applying Changes in Policies 1) A change in accounting policy should be applied as follows: an entity shall account for a change in accounting policy resulting from the initial application of an EU accounting rule in accordance with the specific transitional provisions, if any, in that rule; or Retrospectively, unless that it is impracticable to determine either the period-specific effects or the cumulative effect of the change; or Prospectively, when the amount of the adjustment to the opening balances cannot be reasonably determined. 2) In the case of retrospective application, any resulting adjustment should be reported as an adjustment to the opening balance of each affected component of net assets/equity for the earliest period presented. Comparative information should be restated for each prior period

7 execution Page 7 of 10 presented unless it is impracticable to do so. The financial statements, including the comparative information for prior periods, are presented as if the new accounting policy had always been in use. Therefore, comparative information is restated in order to reflect the new accounting policy. The amount of the adjustment relating to periods prior to those included in the financial statements is adjusted against the opening balance of accumulated surpluses or deficits of the earliest period presented. Any other information with respect to prior periods, such as historical summaries of financial data, is also restated. 3) When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for one or more prior periods presented, the EU and its consolidated bodies shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of net assets/equity for that period. 4) When it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the EU and its consolidated bodies shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. 4.5 Disclosures When initial application of an EU accounting rule (i) has an effect on the current period or any prior period, (ii) would have such an effect except that it is impracticable to determine the amount of the adjustment, or (iii) might have an effect on future periods, the EU and its consolidated bodies shall disclose: a) the title of the EU accounting rule; b) when applicable, that the change in accounting policy is made in accordance with its transitional provisions; c) the nature of the change in accounting policy; d) when applicable, a description of the transitional provisions; e) when applicable, the transitional provisions that might have an effect on future periods; f) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected; g) the amount of the adjustment relating to periods before those presented, to the extent practicable; and h) if retrospective application required is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. When a voluntary change in accounting policy (i) has an effect on the current period or any prior period, (ii) would have an effect on that period except that it is impracticable to determine the amount of the adjustment, or (iii) might have an effect on future periods, an entity shall disclose: a) the nature of the change in accounting policy;

8 execution Page 8 of 10 b) the reasons why applying the new accounting policy provides reliable and more relevant information; c) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected; d) the amount of the adjustment relating to periods before those presented, to the extent practicable; and e) if retrospective application is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied. Financial statements of subsequent periods need not repeat these disclosures. 5. Changes in Estimates 5.1 for Changes in Estimates Due to the uncertainties inherent in the performance of the European Union's activities (e.g. the receipt of cost statements, information received from Member States) many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. Estimates may be required, for example, for VAT revenues, GNI revenues (see EU accounting rule 4, "Revenue from exchange transactions"), reduction in asset values, inventory obsolescence, or the percentage-of-completion of a transfer. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature, the revision of an estimate does not relate to prior periods and is not the correction of an error. The effect of a change in an accounting estimate, other than a change to which the next paragraph applies, shall be recognised prospectively by including it in surplus or deficit in: a) the period of the change, if the change affects the period only; or b) the period of the change and future periods, if the change affects both. To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of net assets/equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or net assets/equity item in the period of change. Sometimes it is difficult to distinguish between a change in accounting policy and a change in an accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosure. Some examples of changes in accounting estimates are the value reduction calculated for receivables, stocks or the useful life for depreciable assets. Some examples of changes in accounting policies would be a change in the valuation method of assets from the historic cost method, or the update of an EU accounting rule.

9 execution Page 9 of Disclosures The nature and amount of a change in an accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods should be disclosed in the annex to the financial statements, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect. If the amount of the effect in future periods is not disclosed because estimating it is impracticable, the entity shall disclose that fact. 6. Errors 6.1 for Errors Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of financial statements. Potential current period errors discovered in that period are corrected before the financial statements are authorised for issue. On rare occasions, an error has such a significant effect on the financial statements of one or more prior periods that those financial statements can no longer be considered to have been reliable at the date of their issuance. A material prior period error shall be corrected retrospectively in the first set of financial statements authorised for issue after their discovery by: a) restating the comparative amounts for prior period(s) presented in which the error occurred; or b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and net assets/equity for the earliest prior period presented. A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the error. When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the EU and its consolidated bodies shall restate the opening balances of assets, liabilities and net assets/equity for the earliest period for which retrospective restatement is practicable (which may be the current period). When it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the EU and its consolidated bodies shall restate the comparative information to correct the error prospectively from the earliest date practicable. Corrections of errors are distinguished from changes in accounting estimates. estimates by their nature are approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error.

10 execution Page 10 of Disclosures The EU and its consolidated bodies shall disclose the following: a) the nature of the prior period error; b) for each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected; c) the amount of the correction at the beginning of the earliest prior period presented; and d) if retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Financial statements of subsequent periods need not repeat these disclosures. 7. Effective date This rule shall be effective for annual financial statements covering periods beginning on or after 1 January Reference to other rules IPSAS 3 EU accounting rule 2 Policies, Changes in Estimates and Errors Financial Statements