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AASB 108 “ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS”Introduction of AASB108AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors is an Australian Equivalent International Financial Reporting Standard (AIFRS) applicable to financial years beginning on or after 1 January 2005. This Policy Summary outlines the main requirements of AASB 108 and also explains the main differences between the requirements in the existing AAS standard regarding accounting policies and the new requirements of AASB 108.Requirement of AASB108 AASB 108 requires: voluntary changes in accounting policy to be recognized directly in equity and accounted for retrospectively, unless it is impracticable to do so; a change in accounting policy on the initial adoption of an AIFRS to be accounted for: o in accordance with the specific transitional provisions in that AIFRS; or o where no specific transitional provisions exist, retrospectively, unless it is impracticable to do so; changes in accounting estimates to be recognized in the Profit and Loss Statement and accounted for prospectively; prior period errors to be corrected by restating prior period information, unless it is impracticable to do so; accounting policies to be: o determined by applying AIFRS; or o selected and applied having regard to relevance and reliability where no AIFRS applies to the transaction, other event or condition; and specific disclosures in relation to changes in accounting policies, prior period errors and changes in accounting estimates.Objective of AASB108The objective of this standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The standard is intended to enhance the relevance and reliability of an entitys financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.Accounting policiesAASB108.5 Accounting policies are the specific principles, bases, conventions, rules and practices applies by an entity in preparing and presenting financial statements.AASB108.7 When an Australia Accounting Standard specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the standard.AASB108.10 In the absence of an Australia Accounting Standard the specifically applies to a transaction, other event or condition, management shall use its judgment in developing and applying an accounting policy that results in information that is:(a). relevant to the economic decision-making needs of users(b). 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, that is, free from bias - are prudent - are complete in all material respectsAASB108.13 must apply accounting policies consistently for similar transactions other events and conditions. Changes in accounting policy (AASB108.14) are only permitted if:(a) Is required by an accounting standard(b) The change results in the presentation of information that is more relevant and reliableChange in accounting estimate AASB108.32 As a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimated involves judgments based on the latest available, reliable information. For example, estimate maybe required of:(a) bad debts; (b) inventory obsolescence; (c) the fair value of financial assets or financial liabilities; and (d) the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets.(e) warranty obligationsChanges in accounting estimate are recognized prospectively, meaning that a change is applied to transactions, other events and conditions from the date of the change in estimate. A change in an accounting estimate may affect only the current periods operating result, or the operating result of both the current period and future periods. For example, a change in the estimate of the amount of bad debts affects only the current periods operating result and therefore is recognized in the current period. However, a change in the estimated useful life of, or the expected pattern of consumption of the future economic benefits embodied in, a depreciable asset affects depreciation expense for the current period and for each future period during the assets remaining useful life. In both cases, the effect of the change relating to the current period is recognized as income or expense in the current period. The effect, if any, on future periods is recognized as income or expense in those future periods.Accounting errorsPrior period errors are omissions from, and misstatements in, the entitys financial statement for one or more prior periods arising from a failure to use, or misuse of, reliable information that:- was available when financial statements for those periods were authorized for issue- could reasona