IAS 8 accounting policies, estimates and errors

What does IAS 8 cover?

Three kinds of change and how to account for them: changes in accounting policies, changes in accounting estimates and corrections of prior period errors. It also sets the hierarchy for choosing a policy when no standard covers a transaction. The decision tree below shows which treatment applies.

How are accounting policies selected?

Where a standard applies to a transaction, the company applies it. Where none does, management develops a policy that is relevant to users' decisions and reliable, meaning it represents faithfully, reflects substance, and is neutral, prudent and complete. It considers, in order, the requirements of standards dealing with similar and related issues, and the definitions, recognition criteria and measurement concepts in the Conceptual Framework; it may also look at recent pronouncements of other standard setters with a similar framework, such as US GAAP. Policies are applied consistently to similar transactions. See the IFRS Conceptual Framework.

When can an accounting policy be changed?

Only if a standard requires it, or if the new policy gives reliable and more relevant information. A voluntary change, such as moving investment property from the cost model to the fair value model, is applied retrospectively: comparatives are restated and the opening equity of the earliest period presented is adjusted, as if the new policy had always applied. A change caused by a new standard follows that standard's transition rules. Applying a policy to transactions that are new or different in substance is not a change in policy.

What is a change in accounting estimate?

Since the 2021 amendments, effective from 2023, accounting estimates are defined as monetary amounts in the financial statements that are subject to measurement uncertainty, such as the useful life of an asset, an expected credit loss, a provision or a fair value. A change in an input or a measurement technique used to develop an estimate is a change in estimate, unless it corrects an error. Its effect is recognised prospectively, in profit or loss for the current period and, if relevant, future periods. A change in depreciation method is also treated as a change in estimate. See IAS 16 depreciation methods.

IAS 8 in practice: three changes in one year

The machine is not restated, because the old life was a reasonable estimate when made; the revenue error is, because the information needed to get it right existed and was misused. Each change is disclosed: the nature and reason for the policy change and the amounts affected, the nature and amount of the estimate change, and the nature of the error and each line item restated.

How are prior period errors corrected?

Material prior period errors, including mistakes in applying policies, oversights, misinterpretation of facts and fraud, are corrected in the first financial statements authorised after their discovery, by restating the comparative amounts for the periods in which the error occurred or, if it occurred earlier, the opening balances of the earliest period presented. A third balance sheet at the start of the comparative period is presented when the restatement has a material effect on it. Errors discovered before the financial statements are authorised are simply corrected; see IAS 10 events after the reporting period.

What does impracticable mean?

Applying a requirement is impracticable when the company cannot do so after making every reasonable effort, for example because the data was not collected in a form that allows retrospective application, or because it would require estimates based on hindsight. The company then applies the change or correction from the earliest date that is practicable, which may be the start of the current period, and explains why.

What changes in 2027?

IFRS 18, effective for periods beginning on or after 1 January 2027, replaces IAS 1. Requirements that IAS 1 contained on fair presentation and compliance with IFRS Accounting Standards, the going concern assessment, the accrual basis of accounting and the disclosure of accounting policy information move into IAS 8, which is renamed Basis of Preparation of Financial Statements. The requirements on policies, estimates and errors are unchanged. See IFRS 18 explained and climate and going concern.

How does IAS 8 compare with ASC 250?

The structure is the same: policy changes and error corrections are retrospective and estimate changes prospective. US GAAP requires a voluntary change in accounting principle to be preferable, treats a change in depreciation method as a change in estimate effected by a change in principle, and distinguishes reissuing restated statements for material errors from revising comparatives for immaterial ones. See IFRS vs US GAAP key differences and ASC 250 accounting changes.

This guide is general information. It is not tax or legal advice for your situation.