GRAP 3 - Pages

1 ACCOUNTING GUIDELINE GRAP 3 Accounting Policies, Changes in Accounting Estimates and Errors All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the National Treasury of South Africa. Permission to reproduce limited extracts from the publication will not usually be withheld. Though National Treasury (NT) believes reasonable efforts have been made to ensure the accuracy of the information contained in the guideline, it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by posting the amended terms on NT's Web site. Note that this document is not part of the GRAP standard. The GRAP takes precedence while this guideline is used mainly to provide further explanations on the concepts already in the 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 3 of 39 Contents 1.

2 Introduction .. 4 2. Scope .. 5 3. Accounting Policies .. 5 Initial setting of an accounting policy .. 5 No standard of GRAP available to apply to a transaction, event or circumstance 7 Materiality .. 9 Consistent application of accounting policies .. 10 Subsequent change in accounting policy .. 11 Instances that will not result in a change in accounting policy .. 13 Applying changes in accounting policies .. 14 Impracticability and application of hindsight .. 18 Disclosure .. 24 4. Accounting Estimates .. 26 Applying a change in an accounting policy .. 28 Disclosure .. 31 5. Errors .. 33 Correction of errors .. 33 Disclosure .. 34 6. Useful links and references .. 38 GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 4 of 39 1. Introduction This document provides guidance on the bases for the presentation of financial statements. The contents should be read in conjunction with GRAP 3.

3 For purposes of this guide, entities refer to the following bodies to which the standard of GRAP relate to, unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Trading entities and government components applying the standards of GRAP Parliament and the provincial legislatures TVET and CET colleges Explanation of images used in manual: Definition Take note Management process and decision making Example GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 5 of 39 2. Scope GRAP 3 is applicable to all entities preparing their financial statements on the accrual basis of accounting. Changes in accounting policies, changes in accounting estimates and corrections of prior period errors relating to taxation, where applicable, must be accounted for in accordance with IAS 12 Standard on Income Taxes.

4 Entities will comply with GRAP 3 for all changes in accounting policies, changes in accounting estimates and errors where no other specific standard or directive provides guidance and/or transitional provisions, where a specific standard or directive provides transitional provisions on adopting of a new standard of GRAP or applying amendments to a standard of GRAP, the provisions in that standard should be followed and not GRAP 3. 3. Accounting Policies Accounting policies are specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting its financial statements. Accounting policies describe the manner in which an entity has elected to account for similar types of transactions in the preparation and presentation of its financial statements. Initial setting of an accounting policy Where a Standard of GRAP applies to a material transaction, other event or circumstances, an entity should determine the accounting policy or policies to be applied by reference to the requirements of that Standard.

5 Standard of GRAP include the Standards of GRAP, Interpretations of the Standards of GRAP and any Directives issued by the ASB. Guidelines explain the application of the principles included in the Standards and/or Interpretations to specific transactions, events or circumstances. The authority of Guidelines is set out in each Guideline or in Directives issued by the Board. To this end, the accounting policies embedded in the Standards will result in financial statements that contain relevant and reliable information about the transactions, other events GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 6 of 39 and circumstances to which they apply. Accordingly an accounting policy must always be in line with the applicable Standard of GRAP. Example : Accounting policy extract Property, plant and equipment Items of [include types of property, plant and equipment] are recognised as assets on acquisition date and are initially recorded at cost.

6 The cost of such items is the purchase price and other costs attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by the Where an accounting standard permits an entity to adopt one of two alternative accounting treatments, it is important that the entity clearly indicates the alternative that has been adopted (and which should apply consistently, unless a standard permits otherwise). What should be included in accounting policies Ensure that the following basic principles are addressed as a minimum when developing the policies, : Initial recognition, initial measurement, subsequent measurement, impairment, derecognition and presentation (where relevant). Take note that not all of these principles will necessarily be applicable to all items in the financial statements. A review of the accounting policies is necessary if the applicable standard of GRAP changes.

7 In many instances, the standard of GRAP will provide for transitional provisions which will be used to apply the new requirements. The accounting policy therefore also needs to be changed to be in line with the relevant accounting standard to which it relates and any applicable transitional provisions. How does an entity decide which accounting policies should be included in its financial statements? An entity includes accounting policies in its financial statements for those material transactions or events included in the entity s financial statements for the current or prior years (either recognised or included in a specific component of the financial statements, the statement of financial position or the comparison of budget and actual information, or disclosed in the notes to the financial statements). An entity would not include accounting policies in its financial statement that are not relevant to the transactions and events undertaken for the current or prior years.

8 For example, an entity would not include an accounting policy in its financial statements for internally generated intangible assets it is has not undertaken such transactions in the current or prior years. GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 7 of 39 When an accounting policy is selected, any other relevant interpretations issued by the Accounting Standards Board (ASB) need to be considered. A very important source of information to consider is Directive 5 on Determining the GRAP Reporting Framework issued by the ASB. What versions of the Standards of GRAP should be applied on first time adoption? An entity that adopts the Standards of GRAP for the first time should apply the versions of the Standards effective for the first GRAP reporting period. The versions of the Standards that are applicable can be determined with reference to the annexure to Directive 5 on Determining the GRAP Reporting Framework and by reference to the ASB s website.

9 An entity should use the same accounting policies, based on the versions of the Standards of GRAP effective at the end of the entity s first GRAP reporting period, for both the current and comparative information presented. Example : Applying the correct version of a Standard of GRAP The end of Entity A s first GRAP reporting period is 31 March 20X8. Entity A presents comparative information in those financial statements. Therefore, its date of transition to the Standards of GRAP is 1 April 20X6. Entity A is required to apply the Standards in Directive 5 effective for the 31 March 20X8 period in preparing and presenting its: a) Statement of financial position, statement of financial performance, statement of changes in net assets, statement of cash flows and notes for 31 March 20X8 (including comparative information for 31 March 20X7); and b) A comparison of budget an actual amounts and notes for the year 31 March 20X8.

10 The transitional provisions in other Standards of GRAP apply to changes in accounting policies made by an entity that already applies the Standards of GRAP. No standard of GRAP available to apply to a transaction, event or circumstance In cases where no standard of GRAP is available to initially develop an accounting policy, management must use their judgement when determining the accounting policy in line with the hierarchy provided in GRAP 3. GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors Issued February 2020 Page 8 of 39 The following key principles need to be considered: Directive 5 provides guidance on which standards to apply. Where no guidance is available, a very strict hierarchy must be followed to determine a specific accounting policy. While considering the above key principles, the following hierarchy is used to determine which standard or guidance to follow: When an entity uses pronouncements of, for example other standard-setting bodies, it should ensure that it is not in conflict with similar standards of GRAP or the GRAP Framework.