IAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

1Objective and scope

IAS 8 prescribes the criteria for selecting and changing accounting policies, the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of prior period errors, so that financial statements remain relevant, reliable and comparable over time.

2Key definitions

Accounting policies

The specific principles, bases, conventions, rules and practices an entity applies in preparing and presenting financial statements.

Change in accounting estimate

An adjustment to the carrying amount of an asset or liability, or the periodic consumption of an asset, resulting from reassessing the expected future benefits and obligations. It results from new information or new developments, not from a correction of an error.

Prior period errors

Omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when those financial statements were authorised for issue.

Retrospective application / restatement

Applying a new accounting policy, or correcting an error, as if it had always applied: adjusting the opening balance of each affected component of equity for the earliest prior period presented, and other comparative amounts.

3The three treatments

Event	How it is treated	Effect on comparatives
Change in accounting policy	Retrospective application (unless a transition provision or impracticability applies)	Restated
Change in accounting estimate	Prospective, in the period of change and future periods	Not restated
Correction of a prior period error	Retrospective restatement (unless impracticable)	Restated

A change in accounting policy is only permitted when required by an IFRS, or when it results in the financial statements providing more reliable and relevant information. Where an IFRS is silent on an issue, management uses judgement, applying the definitions and recognition criteria in the Conceptual Framework, and may consider the most recent pronouncements of other standard-setting bodies with a similar framework.

4Presentation and disclosure

For a voluntary change in policy: the nature of the change, the reasons it provides more reliable and relevant information, and the amount of the adjustment for the current and each prior period presented
For a change in estimate: the nature and amount of the change, and its effect on the current period and expected effect on future periods (unless impracticable to estimate)
For an error correction: the nature of the error, the amount of the correction for each prior period presented, and the amount at the beginning of the earliest period presented

5Examinable focus

What KASNEB tests

The classic exam trap is telling a change in accounting policy apart from a change in accounting estimate: revising an asset's useful life or depreciation method is a change in ESTIMATE (prospective), but switching from the cost model to the revaluation model for a whole class of assets is a change in POLICY (though IAS 16/38 give it prospective-style mechanics of their own). Also expect a full retrospective restatement question for a discovered prior-period error, showing the corrected opening retained earnings.