May 28, 2022

SB-Accounting

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THE WORD IMPRATICABLE AND IFRS

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Accounting to dictionary.com the world impracticable means a particular event or activity can not be adapted for use or action and it is not sensible or unrealistic. it also means a particular event or activity is impossible.

Impracticable can mean that in practice, an event or activity is not possible to handle. This is the view of the Oxford dictionary.

However, people say that nothing is impossible. How true is this? Let us reason this out logically. If you are a religious person, say a Christan and a devoted one, some things are impossible for you to do. You do not want to do this thing because it will amount to sin against God.

For example, you do not want to steal because they are impractical to do so. You will not fornicate because it will result to sin against God, therefore you will say this mission is impossible. It is impossible not that you can not do them but because it is against your faith.

Therefore, as a professional in the field of accounting, we provide reports for users of financial statements. The information you provide is not for you but for them. It is provided to them to make informed economic decisions.

This public, are the actual and potential stakeholders in the entity’s final accounts that you want to prepare. Therefore, care must be taken so that you will not mislead them.

Therefore, when the word impracticable is used in the international reporting standards, it does not generally mean that a particular transaction is not possible to carry out but means recording such transaction(s) in the financial statements will mislead and misguide the public and will make them make wrong decisions.

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Furthermore,  IAS 1 paragraph 7(3), says applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so.

This implies that if the accountant applied such a requirement, based on any available standard, it may deceive and misinform the user in making economic decisions. In such a case, the accountant will not need to apply such a requirement.

To help us understand when a particular event or condition is impracticable, we have to explain the following terms as used in IAS 8 (Accounting policies, changes in accounting estimates, and prior period error).

DEFINITION OF TERMS

ACCOUNTING POLICIES

Accounting policies are those specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
Accounting principles are the generally accepted accounting practices (GAAP) that businesses follow when preparing financial statements. An example of this is the double-entry principle.

Accounting bases are the bases on which the financial statements of a business are prepared. There are cash bases and accrual bases.

Accounting conventions are conventions that are designed to help accountants solve a particular problem that arises from the preparation of financial statements. Examples of the convention are materiality and conservatism.

Accounting rules are the does and does not in the preparation of financial statements Example of rules is the U.S standards.

Accounting practices are the regular ways in which the day-to-day financial activities of businesses are collected and recorded.

CHANGE IN ACCOUNTING ESTIMATE

A change in accounting estimate is the adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset (depreciation) 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 in international financial reporting standards (IFRS) and, accordingly, are not corrections of errors.

PRIOR PERIOD ERRORS

Prior period errors are omissions from, and misstatements in, the business’s financial statements for one or more prior (earlier) periods arising from a failure to use, or misuse of, reliable information that:

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(a) was available when financial statements for those periods were authorized 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.

RETROSPECTIVE APPLICATION

Retrospective application is applying a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.

RETROSPECTIVE RESTATEMENT

Retrospective restatement is correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior (earlier) period error had never occurred.

IMPRACTICABLE IN CHANCE OF ACCOUNTING POLICY, ACCOUNTING POLICIES, AND ERROR

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

(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 recognized, measured, or disclosed; and

(ii) would have been available when the financial statements for that prior period were authorized for the issue from other information.

IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE APPLICATION AND RETROSPECTIVE RESTATEMENT

 

  •  In some circumstances, it is impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period. For example, data may not have been collected in the prior period(s) in a way that allows either retrospective application of a new accounting policy or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.
  • Estimations are inherently subjective, and estimates may be developed after the reporting period. Developing estimates is potentially more difficult when retrospectively applying an accounting policy or making a retrospective restatement to correct a prior period error, because of the longer period that might have passed since the affected transaction, another event, or condition occurred. Therefore, performing such retrospective restatement becomes impracticable.
  • Also, retrospective application of a new accounting policy or correcting a prior period error requires distinguishing information that
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(a) provides evidence of circumstances that existed on the date(s) as at which the transaction other event or condition occurred, and

(b) would have been available when the financial statements for that prior period were authorized for the issue from other information. For some types of estimates eg an estimate of fair value not based on an observable price or observable inputs, it is impracticable to distinguish these types of information.

  • When a retrospective application or retrospective restatement would require making a significant estimate for which it is impossible to distinguish these two types of information, it is impracticable to apply the new accounting policy or correct the prior period error retrospectively.
  • It is impracticable to use Hindsight (that is understanding a particular event or condition after they have occurred should not be used when applying a new accounting policy to, or correcting amounts for, a prior period, either in making assumptions about what management’s intentions would have been in a prior period or estimating the amounts recognized measured or disclosed in a prior period.

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