A company enters into a transaction for which no IFRS Standard specifically prescribes an accounting treatment. Under IAS 8, before considering the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, what must management do first when developing an accounting policy for this transaction?
- Refer to the requirements and guidance in IFRS Standards dealing with similar and related issues, and to the definitions and recognition and measurement concepts in the Conceptual Framework
- Adopt whatever policy is most commonly used by other entities in the same industry, regardless of whether an IFRS Standard addresses an analogous issue
- Apply the most conservative policy available, since IAS 8 requires prudence to override all other considerations when no specific standard applies
- Consult recent pronouncements of other standard-setting bodies immediately, since IAS 8 places these above analogy to existing IFRS Standards
Why A? And why not the others?
Correct answer: A. Refer to the requirements and guidance in IFRS Standards dealing with similar and related issues, and to the definitions and recognition and measurement concepts in the Conceptual Framework
IAS 8 sets out a hierarchy for developing an accounting policy in the absence of a specifically applicable IFRS Standard: management must first refer to, and consider the applicability of, the requirements in IFRS Standards dealing with similar and related issues, together with the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework. Only after that step may management additionally consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework, other accounting literature, and accepted industry practice, to the extent these do not conflict with the sources considered first. The option jumping straight to common industry practice skips the required analogy step entirely and lets practice override IFRS-based reasoning. The option invoking prudence as an overriding rule invents a general override that does not exist in IAS 8; prudence is one input to judgement, not a trump card that bypasses the hierarchy. The option placing other standard-setters' pronouncements above analogy to IFRS Standards reverses the actual order in the hierarchy, since those pronouncements are only a secondary source to be considered afterward.
Source: IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 10–12 (selection and application of accounting policies)