IAS 8: Accounting Policies, Changes in Estimates and Errors

International Accounting Standard 8 (IAS 8) is designed to improve the relevance, reliability, and comparability of a company’s financial statements. It establishes a framework for selecting and modifying accounting policies. The standard also governs the accounting treatment and disclosure for changes in accounting policies, adjustments to accounting estimates, and corrections of prior period errors. This standardization ensures financial statements are consistent over time and comparable with those of other companies.

Accounting Policies and Their Changes

Accounting policies are the specific principles, bases, conventions, rules, and practices a company applies when preparing and presenting its financial statements. Examples include the method used to value inventory, such as the first-in, first-out (FIFO) or weighted-average cost method. Another policy is the measurement model for property, plant, and equipment, where a company might choose between the cost model or the revaluation model. These choices directly influence how transactions are reflected in financial reports.

When a specific International Financial Reporting Standard (IFRS) does not address a transaction, a company must use its judgment to develop a policy. The company should first look to other IFRS standards dealing with similar issues. If none exist, it should then refer to the concepts in the Conceptual Framework for Financial Reporting.

A company may only change an accounting policy if a new IFRS standard requires it, or if the change voluntarily results in more reliable and relevant information. This applies to information about the company’s financial position, performance, or cash flows.

A change in accounting policy is accounted for through retrospective application, meaning the new policy is applied as if it had always been in use. The company must adjust the opening balance of affected equity for the earliest prior period presented and restate all comparative information.

Changes in Accounting Estimates

A change in an accounting estimate is an adjustment to an asset or liability’s carrying amount that stems from new information or developments. Examples include revising an asset’s useful life, updating a warranty provision, or modifying the allowance for doubtful accounts. These changes result from resolving prior uncertainties.

A change in estimate must be distinguished from a change in accounting policy. For instance, changing a depreciation method is a change in estimate because it reflects a new pattern of asset consumption. In contrast, switching from valuing property at historical cost to fair value is a change in the measurement basis, which is a change in accounting policy.

The treatment for a change in an estimate is prospective application, meaning the effect is recognized in the current and future periods. Prior period financial statements are not restated. If the change affects only the current period, its impact is recognized in that period’s profit or loss. If it affects future periods, the impact is spread accordingly.

Correction of Prior Period Errors

Prior period errors are omissions and misstatements in past financial statements. They arise from a failure to use, or misuse of, reliable information that was available when the statements were issued. Examples include mathematical mistakes, incorrect application of accounting policies, misinterpretation of facts, or oversights.

An error is distinct from a change in an accounting estimate. An error means the financial statements were incorrect when issued, such as failing to accrue a known expense. In contrast, a change in an estimate is a revision based on new information; the original estimate was not a mistake.

A material prior period error must be corrected through retrospective restatement, correcting the financial information as if the error never occurred. The company must restate the comparative amounts for the prior period(s) where the error occurred. If the error happened before the earliest period presented, the opening balances of assets, liabilities, and equity for that period must be restated.

Disclosure Requirements

For a change in accounting policy, a company must disclose:

• The title of the IFRS standard that prompted the change.
• The nature of the policy change and any transitional provisions.
• The adjustment amount for each affected financial statement line item for the current and all prior periods presented.

For a change in an accounting estimate, a company must disclose the nature and amount of the change affecting the current period or expected to affect future periods. If estimating the future effect is not practicable, that fact must be disclosed.

For a material prior period error, a company must disclose the nature of the error. It must also disclose the correction amount for each affected financial statement line item for each prior period presented, and the correction amount at the beginning of the earliest prior period.