The Financial Reporting Standard 8 (FRS 8) prescribes the requirements for choosing and altering accounting policies and gives guidelines on how to deal with disclosures of the variations in the accounting policies, price quotes, and correction of mistakes (Also see How to Reduce Accounting Errors in Your Business).
The purpose of this financial reporting standard is to enhance the dependability and the relevance of your business’s financial statements whether it is Balance Sheet or Profit and Loss. It is also much easier for you to make a comparison between the financial statements over time.
The FRS 8 needs you, as the company owner, to choose and implement the accounting policies regularly, particularly for similar transactions.
However, in some cases where the FRS allows you to categorise some items in a different classification that needs a various policy, then, you will select another policy and implement it always. Note that the FRS 8 highlights consistency in accounting policies.
When changing the accounting policy of your business, the FRS 8 only recognises a modification in accounting policies if:
Often, it is difficult for you to measure some items on your financial statement because of inherent business transactions and uncertainties.
In such a circumstance, you need to approximate the values. The estimate procedure includes judgment based on the currently available and trusted data. For instance, you might need to estimate bad debts, product obsolesce and the fair value of financial assets or financial liabilities.
According to FRS 8, the use of logical estimate is essential in the preparation of financial statements and does not compromise their reliability and relevance. You might have to modify the estimates you made if there is a new modification in the estimated value. For instance, you estimate RM 200 for bad debts, then part of the bad debts is cleared, you might need to revise the initial estimate.
Practically, every company would face a modification in accounting estimates and errors when there is too much variables come into play when preparing the financial statements.
Nevertheless, only some companies deal with these modifications, according to FRS 8. If you failed to follow the FRS, your business operations would be affected. Hence, it is a good idea to comprehend what is the FRS 8 so that your company’s accounting function fulfil the requirements set by the FRS 8 (Also see 5 benefits of proper accounting).
Please do not hesitate to reach out any accounting firm in Johor Bahru to learn more about the financial reporting standard.