CAF-1 · Chapter 10

IAS 8 Accounting Policies, Estimates and Errors MCQs with Answers

15 multiple-choice questions on IAS 8 Accounting Policies, Estimates and Errors for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Under IAS 8, which of the following situations qualifies as a valid reason to voluntarily change an accounting policy?

   • A) The change will make the preparation of financial statements less time-consuming.
   • B) The change will result in higher reported profits to satisfy shareholders.
   • C) The change results in the financial statements providing reliable and more relevant information.
   • D) A major competitor recently made a similar error.
   Show answer & explanation

   Answer: C) The change results in the financial statements providing reliable and more relevant information.

   An entity shall change an accounting policy voluntarily only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions.

2. Question 2

   How should an entity account for a change in the depreciation method of a machine from straight-line to reducing balance?

   • A) Retrospectively, as a change in accounting policy.
   • B) Prospectively, as a change in accounting estimate.
   • C) Retrospectively, as a correction of a prior period error.
   • D) Prospectively, by restating the opening balance of retained earnings.
   Show answer & explanation

   Answer: B) Prospectively, as a change in accounting estimate.

   A change in depreciation method is treated as a change in an accounting estimate, which must be recognized prospectively by including it in the profit or loss of the current and future periods.

3. Question 3

   Sigma Ltd discovers a material error in its inventory valuation for the previous financial year. How must this be corrected under IAS 8?

   • A) By adjusting the current year's profit or loss only.
   • B) By correcting it prospectively from the date of discovery.
   • C) By retrospectively restating the comparative amounts for the prior period in which the error occurred.
   • D) By deferring the correction over the next 5 years.
   Show answer & explanation

   Answer: C) By retrospectively restating the comparative amounts for the prior period in which the error occurred.

   Material prior period errors are corrected retrospectively by restating the comparative amounts for the prior periods in which the error occurred.

4. Question 4

   If it is 'impracticable' to determine the period-specific effects of a change in accounting policy on comparative information, what should the entity do?

   • A) Apply the new policy prospectively from the start of the earliest period practicable.
   • B) Discard the new accounting policy and stick to the old one.
   • C) Write off the difference directly to the statement of profit or loss.
   • D) Create a general reserve for the unknown amount.
   Show answer & explanation

   Answer: A) Apply the new policy prospectively from the start of the earliest period practicable.

   When it is impracticable to determine period-specific effects, the entity applies the new policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable.

5. Question 5

   Which of the following is considered a 'change in accounting policy' rather than a 'change in estimate'?

   • A) Changing the allowance for doubtful debts from 2% to 5% of receivables.
   • B) Changing the useful life of a delivery van from 5 years to 3 years.
   • C) Changing the inventory cost formula from FIFO to Weighted Average.
   • D) Changing the provision for warranty claims based on new historical data.
   Show answer & explanation

   Answer: C) Changing the inventory cost formula from FIFO to Weighted Average.

   Changing the cost formula for measurement of inventory (e.g., FIFO to weighted average) is a change in measurement basis and constitutes a change in accounting policy.

6. Question 6

   When an entity applies an accounting policy retrospectively, what additional requirement must it fulfill regarding the presentation of financial statements?

   • A) It must present a third statement of financial position as at the beginning of the preceding period.
   • B) It must file a special disclosure with the tax authorities.
   • C) It must present five years of comparative profit or loss statements.
   • D) It must suspend dividend payments for the current year.
   Show answer & explanation

   Answer: A) It must present a third statement of financial position as at the beginning of the preceding period.

   An additional (third) statement of financial position as at the beginning of the preceding period is required when an entity applies an accounting policy retrospectively.

7. Question 7

   Theta Corp applies an IFRS for the first time, and the standard contains specific transitional provisions. How should Theta apply this new standard?

   • A) It must always apply the change retrospectively, ignoring the provisions.
   • B) It must account for the change in accordance with those specific transitional provisions.
   • C) It must apply the change prospectively in all cases.
   • D) It must restate only the current year's opening equity.
   Show answer & explanation

   Answer: B) It must account for the change in accordance with those specific transitional provisions.

   When a change in accounting policy is required by an IFRS and that IFRS prescribes transitional provisions, the entity must account for the change in accordance with those specific transitional provisions.

8. Question 8

   Which of the following events is NOT considered a change in accounting policy?

   • A) Changing the measurement of investment property from the cost model to the fair value model.
   • B) Application of a new accounting policy for a transaction that did not occur previously.
   • C) Changing the classification of government grants in the statement of financial position.
   • D) A voluntary shift from weighted average to FIFO for inventory valuation.
   Show answer & explanation

   Answer: B) Application of a new accounting policy for a transaction that did not occur previously.

   The application of a new accounting policy for transactions and events that did not occur previously, or were immaterial, is explicitly excluded from being classified as a change in accounting policy.

9. Question 9

   In the absence of a specifically applicable IFRS, management must use judgement to develop an accounting policy. Which of the following is the FIRST source management should refer to?

   • A) Tax laws of the local jurisdiction.
   • B) Guidelines from competing companies.
   • C) IFRSs dealing with similar and related issues.
   • D) Local generally accepted accounting principles (GAAP).
   Show answer & explanation

   Answer: C) IFRSs dealing with similar and related issues.

   In making such judgement, management should first consider the requirements in IFRSs dealing with similar and related issues, followed by the Conceptual Framework.

10. Question 10

    Epsilon Ltd revalues its property from the cost model to the revaluation model for the first time. How is this change handled under IAS 8?

    • A) It is treated as a standard change in accounting policy and applied retrospectively.
    • B) It is treated as a prior period error.
    • C) It is dealt with as a revaluation in accordance with IAS 16, not as a retrospective policy change under IAS 8.
    • D) It is applied prospectively but requires a restatement of opening retained earnings.
    Show answer & explanation

    Answer: C) It is dealt with as a revaluation in accordance with IAS 16, not as a retrospective policy change under IAS 8.

    The initial application of a policy to revalue assets (from cost model) is an exception and is dealt with in accordance with IAS 16, not retrospectively under IAS 8.

11. Question 11

    When a company finds it difficult to distinguish whether a change is a change in accounting policy or a change in accounting estimate, how must it treat the change?

    • A) As a change in accounting policy.
    • B) As a change in accounting estimate.
    • C) As a correction of a prior period error.
    • D) It must appeal to the IASB for a ruling.
    Show answer & explanation

    Answer: B) As a change in accounting estimate.

    IAS 8 explicitly states that when it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate, the change is treated as a change in an accounting estimate.

12. Question 12

    Which of the following describes 'prospective application'?

    • A) Adjusting opening retained earnings for past periods.
    • B) Applying the new accounting policy to transactions occurring after the date of the change.
    • C) Publishing three years of comparative financial statements.
    • D) Restating comparatives to show what would have happened had the error not occurred.
    Show answer & explanation

    Answer: B) Applying the new accounting policy to transactions occurring after the date of the change.

    Prospective application means applying the new accounting policy or estimate only to transactions and events occurring after the date of the change, without altering past records.

13. Question 13

    If a change in accounting estimate gives rise to changes in assets, liabilities, or equity, when should this adjustment be recognized?

    • A) By adjusting the carrying amount in the period of the change.
    • B) By spreading the adjustment equally over the next 3 years.
    • C) By restating the prior year's comparative figures.
    • D) By recording it in Other Comprehensive Income only.
    Show answer & explanation

    Answer: A) By adjusting the carrying amount in the period of the change.

    To the extent a change in an accounting estimate affects assets, liabilities, or equity, it shall be recognized by adjusting the carrying amount of the related item in the period of the change.

14. Question 14

    Which of the following details must be disclosed when a voluntary change in accounting policy is made?

    • A) The exact names of the management team who authorized it.
    • B) The reasons why the new policy provides reliable and more relevant information.
    • C) The impact the change will have 10 years into the future.
    • D) A guarantee that the policy will never be changed again.
    Show answer & explanation

    Answer: B) The reasons why the new policy provides reliable and more relevant information.

    For a voluntary change in accounting policy, IAS 8 requires disclosure of the nature of the change and the reasons why the new policy provides reliable and more relevant information.

15. Question 15

    During the current year, a company discovers that it accidentally completely omitted a material sales invoice from the previous year's records. This is categorized as:

    • A) A change in accounting estimate.
    • B) A change in accounting policy.
    • C) A material prior period error.
    • D) An adjusting event after the reporting period for the current year.
    Show answer & explanation

    Answer: C) A material prior period error.

    Omissions or misstatements of financial information from past periods are classified as prior period errors and must be corrected retrospectively.