With reference to IPSAS 3: Accounting Policies, Changes in Estimates and Errors;
i) Explain the guiding principles for formulating accounting policy. (2 marks)
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When management is formulating accounting policy the guiding principle is that the policy should results in information that is:
- Relevant to the decision-making needs of users.
- Reliable, in that the financial statements:
** Represent faithfully 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, i.e., free from bias
** Are prudent
** Are complete in all material aspects
** Consistent
ii) The conditions that mandate a change in accounting policy. (2 marks)
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IPSAS 3 insists on ensuring consistency of accounting policy. However, a change in accounting policy may occur under two accepted conditions:
- When the change is required by an IPSAS, or
- When the change is made by management on the grounds that it results in reliable and more relevant information.
iii) The treatment of changes in accounting policy required by IPSAS 3. (2 marks)
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- If a change in accounting policy is required by an IPSAS, follow that pronouncement’s transition requirements.
- If none is specified, or if the change is voluntary, apply the new accounting policy retrospectively by restating prior periods.
- If restatement is impracticable, include the cumulative effect of the change in net assets/equity.
- If the cumulative effect cannot be determined, apply the new policy prospectively.