Enhancing Transparency: Recent Amendments to Ind AS 1 and Ind AS 8

Overview of Changes

The recent amendments to Ind AS 1 (Presentation of Financial Statements) and Ind AS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) primarily focus on improving the definition and application of materiality in financial reporting. These changes are intended to help companies make better judgments about what information should be included in their financial statements, enhancing the relevance and clarity of financial disclosures.

Key Amendments

1. Updated Definition of Materiality:

?? The amendments refine the definition of materiality to ensure that only information that is reasonably expected to influence the decisions of the primary users of financial statements is included. This introduces a more judgment-based approach, requiring preparers to consider the perspective of the users of financial statements.

??Further, the revised definition emphasizes the importance of considering both quantitative and qualitative factors when assessing materiality.

Understanding Quantitative and Qualitative Factors:

?? Quantitative Factors: This refers to the numerical aspects of materiality, such as the size of the omission or misstatement relative to the overall financial statements. It involves setting thresholds or benchmarks for what constitutes material amounts.

?? Qualitative Factors: This involves considering the nature or characteristics of the information. For example, information about a company's compliance with regulations might be material due to its potential impact on the company's reputation or legal standing, even if the amounts involved are not large.

2. Clarification on Aggregation and Disaggregation:

?? Companies are required to consider whether the presentation and disclosure of information can be made more useful by aggregating or disaggregating items. This aims to avoid obscuring material information with immaterial details and to provide a clearer picture of the entity’s financial position and performance.

What exactly are aggregation or disaggregation?

?? Aggregation: Combining immaterial items could obscure material information. For instance, aggregating small expenses that are individually immaterial but significant in aggregate might mislead users.

?? Disaggregation: Breaking down items into more detailed subcategories can provide clearer insights. For example, disaggregating revenue by product line or geographical segment can provide a more transparent view of a company's performance.

3. Inclusion of Explanatory Notes:

?? Ind AS 1 now mandates companies to include explanatory notes on the judgments made about materiality, particularly when certain items are not disclosed because they are considered immaterial. This transparency helps users understand the basis for excluding specific information.

4. Selection and Application of Accounting Policies:

?? The amendments provide clearer guidance on the selection and application of accounting policies, emphasizing that entities cannot correct inappropriate accounting policies merely through disclosure.

5. Updated Definition of Accounting Estimates:

?? Previously, accounting estimates were not explicitly defined, leading to inconsistencies in their application. Now the amendments provide a clear definition of accounting estimates as "monetary amounts in financial statements that are subject to measurement uncertainty."

6. Guidance on Estimation Techniques:

?? The amendments include guidance on how to develop accounting estimates, emphasizing the use of judgment and the need to consider both historical data and forward-looking information.

?7. Proper documentation and disclosure of Changes in Accounting Estimates:

?? The amendments have reinforced the need for proper documentation and disclosure of changes in accounting estimates, particularly those that have a significant risk of resulting in material adjustments to the carrying amounts of assets and liabilities within the next financial year.

8. Clarification on Distinguishing Changes in Accounting Policies from Changes in Accounting Estimates:

?? Accounting estimates by their nature are approximations that may need revision as additional information becomes known. Amendment explains by giving an example that the gain or loss recognised on the outcome of a contingency is not the correction of an error.

?? Distinction Criteria: The amendments clarify that a change in accounting policy results from applying a different principle, whereas a change in estimate arises from new information or developments. This distinction helps ensure that users can better understand the nature and impact of changes reported in financial statements.

Changes in depreciation methods, useful lives, and residual values now need to be treated as changes in accounting estimates rather than changes in accounting policies. There is no ambiguity now after amendment.

9. Key Changes in Error Correction:

?? Earlier errors were broadly defined without specific guidance on what constituted an error.? Errors are now explicitly defined as “omissions or misstatements in the financial statements resulting from a failure to use, or misuse of, reliable information that was available when the financial statements were authorized for issue. This includes mathematical mistakes, mistakes in applying accounting policies, oversights, or misinterpretations of facts, and fraud”.

The amendments have added clarity on how to present corrections of error, ensuring they are clearly distinguished from changes in accounting policies and estimates.

Conclusion

The 2023 amendments to Ind AS 1 and Ind AS 8 have introduced several clarifications and enhancements to ensure greater transparency, consistency, and clarity in financial reporting. These changes reinforce the importance of clear presentation and detailed disclosures, particularly concerning the assumptions and uncertainties that can affect the financial statements.