IAS 8 - Accounting Policies, Accounting Estimates and Errors

Scope and Definitions

  • Overview

    • IAS 8 prescribes criteria for selecting and applying accounting policies.

    • It also deals with the accounting treatment and disclosure requirements of changes in accounting policies and accounting estimates, as well as corrections of prior period errors.

    • The standard aims to improve the relevance, reliability and comparability of financial statements.

    • (Notes: the slides reference “2023 IAS 8 – Accounting policies, accounting estimates and errors.”)

  • Key definitions

    • Accounting policies: the specific principles, bases, conventions, rules and practices that an entity applies when preparing and presenting financial statements.

    • Accounting estimates: monetary amounts in financial statements that are subject to measurement uncertainty.

    • Errors: omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

    • (a) was available when financial statements for those periods were authorized for issue; and

    • (b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

  • Objective and relevance

    • The standard supports relevance, reliability and comparability of financial statements.

  • Connections to foundational principles (real-world relevance)

    • Users rely on consistency of policies over time for comparability.

    • Clear definitions help ensure that estimates, errors and policy changes are treated consistently across entities.

    • Emphasizes that estimates involve judgment and the use of the latest reliable information.

Changes in Accounting Policies

  • Overview

    • A change in accounting policy occurs when a standard or interpretation requires the change, or when the change will provide reliable and more relevant information about the effects of transactions or other events/conditions on the entity’s financial position, financial performance or cash flow.

  • When to change accounting policies

    • An entity should change its accounting policies only if:

    • Initial application of an IFRS or interpretation (including early adoption), or

    • Voluntary changes to accounting policies.

  • Accounting treatment

    • For required changes: either

    • in accordance with the specific transitional provisions of that standard or interpretation, if any; or

    • retrospective application.

    • For voluntary changes to accounting policies:

    • retrospective application.

  • Retrospective application

    • Retrospective application refers to applying a new accounting policy to transactions, other events and conditions as if the policy had always been applied.

  • Practical implications

    • Changes (especially voluntary ones) affect prior period figures and the way comparative information is presented.

    • The choice between retrospective application and other approaches depends on transitional provisions and pragmatic considerations, aiming to enhance comparability and usefulness of financial information.

Changes in Accounting Estimates

  • Overview

    • Changes in accounting estimates are recognised prospectively.

  • Recognition in profit or loss

    • An entity should recognize the effect of changes in accounting estimates in profit or loss:

    • in the period of the change, if the change affects that period only; or

    • in the period of the change and future periods, if the change affects both.

  • Focus Point

    • A change in accounting estimates might affect both assets and liabilities or relate to an equity item rather than affecting profit or loss.

    • An entity should recognize such a change by adjusting the carrying amount of the related assets and liabilities or by adjusting equity in the period of the change.

    • Generally, the changes in estimates would affect profit or loss when the corresponding adjustments to assets and liabilities or to equity do not fully offset.

  • Nature of estimates

    • The preparation of financial statements often requires management to make estimates.

    • Estimates involve judgments based on the latest available, reliable information (examples: loss allowance for expected credit losses; provision for obsolete inventory).

  • Practical examples and relevance

    • Examples include updating loss allowances, revising useful lives or depreciation methods, revising estimates of recoverable amounts, etc.

Errors

  • Overview

    • The standard addresses corrections of prior period errors.

  • Materiality and correction approach

    • An entity should correct a material prior period error by retrospective restatement in the first financial statement issued following its discovery, except where it is impracticable.

    • Retrospective restatement means correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

  • How restatements are achieved

    • Restating comparative amounts for the prior periods presented in which the error occurred; or

    • If the error occurred before the earliest prior period presented in the financial statements, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

  • Non-material errors

    • It might be acceptable to correct an error that is not material to the prior period financial statements in the current period, but the correction could still be retrospective if it is material to the current period.

    • Management should evaluate whether such an approach would result in a material error in the current period, considering qualitative and quantitative factors.

  • Practical implications for financial reporting

    • Restatements affect comparability across periods and can influence user decisions.

    • The assessment of materiality is both qualitative and quantitative, and decisions should reflect both mechanics and user impact.

Connections and real-world relevance

  • Comparability across entities and time is enhanced by consistent application and appropriate restatements.

  • Reliability improves when changes in policies/estimates are transparently disclosed and justifiable based on reliable information.

  • The ethical and practical implications include: avoiding selective reporting, ensuring timely corrections, and providing users with faithful representations of economic reality.

Summary of key terms

  • Accounting policies: the specific principles and practices used in preparing FS.

  • Accounting estimates: monetary amounts subject to measurement uncertainty.

  • Errors: omissions/misstatements in prior periods due to unreliable information.

  • Retrospective application: applying a policy as if it had always been used.

  • Restatement: correction of prior period errors through adjustment of opening balances and/or comparative amounts.

  • Prospective recognition: changes in estimates are recognized in the period of change and future periods, as applicable.

IAS 8 dictates criteria for selecting and applying accounting policies, and governs the treatment of changes in policies and estimates, as well as corrections of prior period errors. Its goal is to improve the relevance, reliability, and comparability of financial statements.

Key Definitions

  • Accounting policies: Specific principles and practices for preparing financial statements.

  • Accounting estimates: Monetary amounts in financial statements subject to measurement uncertainty.

  • Errors: Omissions or misstatements in prior period financial statements due to failure to use or misuse of reliable information.

Changes in Accounting Policies

Accounting policies are changed only if required by a standard (IFRS/interpretation) or if the change yields more reliable and relevant information. Such changes are typically applied retrospectively, meaning the new policy is applied as if it had always been in effect.

Changes in Accounting Estimates

Changes in accounting estimates are recognized prospectively, impacting profit or loss in the current period, or both current and future periods, as applicable. These estimates involve management's judgment based on the latest available, reliable information.

Errors

Material prior period errors must be corrected by retrospective restatement in the first financial statement issued after discovery. This involves adjusting comparative amounts or, if the error predates the earliest presented period, restating the opening balances of assets, liabilities, and equity for that earliest period. Non-material errors may be corrected in the current period if not material to it.

Overall Relevance

Consistent application of IAS 8 and transparent disclosures enhance the comparability and reliability of financial statements, ensuring users receive faithful representations of an entity's economic reality.