Judgement And Materiality In Accounting

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(i) Judgement and materiality play a significant role in helping to ensure that the selection of accounting policies in presenting the financial statements for a true and fair picture of the company’s financials. This means that entities should provide the financial statements with comparability, consistency and clarity to users of these statements. Entities must follow accounting policies required by IFRS and AASB should be relevant to particular circumstance. Judgement Judgement is a notion of relevance and reliability in developing and applying accounting policies. It is a requirement of management that they exercise a high degree of professional judgement when selecting appropriate accounting policies in the preparation of financial statements that is relevant to decision-making and assessment needs of users. Management should also consider the applicability of IFRS and AASB in dealing with similar and related issues and then the definitions, recognition criteria in the Conceptual Framework when there is no IFRS standard or interpretation in certain circumstances that are specifically applicable. Management may also consider the most current pronouncements of other standard-setting bodies to the extent that do not conflict with IFRS and AASB in developing accounting standards and accepted industry practices by using a similar conceptual framework. Accounting policies must be applied consistently to similar transactions and events, for example, entities are allowed to carry some items of PPE at historical cost and some at fair value, but similar items should be treated consistently in the same way within any one of class PPE. In the selection or changing accounting policies or estimates, management’s judgement will be restr... ... middle of paper ... ...er not to hold them to maturity. (iii) AASB 108 and earnings management As per paragraph 42 AASB 108, an entity shall correct material prior period errors retrospectively by restating the comparative amounts for the prior period(s) in which the error occurred, or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented. In other words, the effect is to restate the current year’s financial statements as if the error had never occurred. The discovery of any prior period errors are excluded from current period’s profit or loss, but will be shown or hidden in retained earnings. It could be argued that this gives incentives to managers for using prior period corrections as a form of earnings management because it allows them to manipulate current earnings.

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