IAS 8, Accounting Policies, Changes in Accounting

Estimates and Errors

© 2023 Association of International Certified Professional Accountants. All rights reserved.

IAS 8, Accounting Policies, Changes in Accounting

Estimates and Errors
IAS 8 has been around in some form since 1978, with its
most recent version being issued in 2003.

79
Learning objectives
• Determine how to select an
accounting policy.
• Identify the criteria for determining
when it is appropriate to change an
accounting estimate.
• Identify criteria that should be
applied when selecting and
changing accounting policies.
• Recognise the impact on the
financial statements of changing an
accounting policy or estimate.

80 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Learning objectives
 Determine how to select an accounting policy.
 Identify the criter ia for determining when it is
appropriate to change an accounting estimate.
 Identify criteria that should be applied when
selecting and ch anging accounting policies.
 Recognize the impact on the financial statements of
changing an accounting policy or estimate.

80
IAS 8 overview

Accounting policies Accounting estimates Prior period errors

Selection Changes Changes Correction

81 © 2023 Association of International Certified Professional Accountants. All rights reserved.

IAS 8 overview
In our discussion of IAS 8, we will address the following:
 How companies should select accounting policies
 How to account for
— changes in accounting policies,
— changes in accounting estimates, and
— correction of material prior period errors.

81
Components of accounting policies

Principles

Accounting
policies

Measurem
Practices
ent bases

82 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Components of accounting policies

First, we’ll think about accounting policies.

If we were to explain the term accounting policies to a

non-accountant, we would probably start by saying that
they are the rules we follow when preparing a set of
financial statements. This is not incorrect, but IAS 8 takes
this further and doesn’t just define accounting policies
as rules but refers to them as the specific principles,
measurement bases and practices applied by an entity in
preparing and presenting financial statements. This
definition is to help distinguish accounting policies from
accounting estimates, which we will hear more about
shortly.

82
Selection of accounting policies

Specific IFRS Standard No specific IFRS

Apply the relevant IFRS Judgment required Consider:

Standard to ensure
relevant* and
reliable*
information
Similar IFRS Standards
*Consistency needed Conceptual framework
Other standard setters

83 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Selection of accounting policies

The previous information leads us to think about how an entity should choose which accounting
policies to apply when preparing financial statements.

Not surprisingly, IAS 8 says that if there is a specific IFRS Standard, then that should be applied. For
example, to account for plant, property, and equipment, a company would follow the provisions in IAS
16. For inventories, a company would follow IAS 2.

In the case of some transactions, however, there may not be a specific IFRS Standard to refer to. In
that case, IAS 8 recognizes that judgment will be required to ensure that the policy chosen results in
relevant and reliable information for the users of the financial statements.

In making this judgment, IAS 8 allows preparers to consider the following sources in descending order:
 IFRS Standards dealing with similar and related issues
 The underlying concepts in the conceptual framework
 Most recent pronouncements of standard setters that use a similar conceptual framework.
Accounting policies should be selected and applied consistently for similar transactions, events, and
conditions. Without consistency of information in the financial statements, it is not possible for users
to identify trends in the position, performance, and cash flows of the company.

Conceptual framework: Comparability

83
When can we change accounting policies?
Permitted when:

• Required by standard or
interpretation (e.g., IFRS 15
or IFRS 16, Leases)

• Results in more relevant and

reliable information

84 © 2023 Association of International Certified Professional Accountants. All rights reserved.

When can accounting policies be changed?

But what if a company is required to change, or wishes to
voluntarily change, an accounting policy? Changing a policy
and how we account for a particular transaction will
obviously affect the comparability of information year on
year and company to company, so IAS 8 permits policies to
be changed in limited circumstances only.

IAS 8 states that accounting policies can only be changed if

the change

 is required by IFRS (for example, both recently issued

standards on revenue recognition leases — IFRS 15 and
IFRS 16 — required companies to change their
accounting policies), or
 results in more relevant and reliable information in the
financial statements.

84
How do we change accounting policies?

Changes

Voluntary or no specific
Required
transitional provisions

Use specific transitional

Retrospective application
provisions

85 © 2023 Association of International Certified Professional Accountants. All rights reserved.

How do we change accounting policies?

If the change is required by IFRS Standards, the company
will account for the change in line with the specific
transitional provisions of that standard.

For example, the transitional provisions of IFRS 16 require

either
 full retrospective application, or
 recognition of the cumulative effect as an adjustment to
opening equity at the date of transition, without
restating comparatives.

If there are no specific transitional provisions, or the change

in policy is voluntary, then full retrospective application is
required.

85
Retrospective application
• Apply new policy to this year

• Adjust opening balance of each affected component of equity

• As if new policy always been in place

• Separate line in statement of changes in equity

86 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Retrospective application
Retrospective application is required to enhance
comparability. The new policy is applied to the current
year and also to the opening balances of each affected
component of equity, which are restated for the earliest
prior period presented to give the impression that the
policy has always been applied. The adjustment would
be given its own line in the SOCE for visibility.

Conceptual framework: Comparability

86
Disclosures ― Changes in accounting policies

New IFRS Voluntary change

• Title of IFRS • Nature of change

• Nature of change • Reasons
• Transitional provisions • FS line items affected
• FS line items affected • Impact on basic and diluted EPS
• Impact on basic and diluted
earnings per share (EPS)

87 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Disclosures — Changes in accounting policies

For initial application of an IFRS Standard, entities are required to disclose the following:
 The title of the standard
 The nature of the change
 If change was made in accordance with transitional provisions, and a description of
these provisions
 Amount of adjustment to each FS line affected for current period and each prior period
presented
 Amount of adjustment to basic and diluted earnings per share (EPS) for current period
and each prior period presented

For voluntary changes, entities are required to disclose the following:

 The nature and reasons for the change (including why it provides more relevant and
reliable information)
 Amount of adjustment to each FS line affected for current period and each prior period
presented
 Amount of adjustment to basic and diluted EPS for current period and each prior
period presented

87
Accounting Estimates
Accounting estimates are:

‘Monetary amounts in financial statements

that are subject to measurement uncertainty’

88 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Accounting estimates
The accounting estimate definition is a result of a recent amendment to IAS 8. Previously, the standard referred
to a change in accounting estimate without an actual definition.
Accounting estimates are ‘monetary amounts in financial statements that are subject to measurement
uncertainty – this tries to convey that estimates are inputs in achieving a particular accounting policy.
Measurement uncertainty will arise when monetary amounts required to apply an accounting policy cannot be
observed directly. In such cases, accounting estimates will need to be developed using judgements and
assumptions. Examples include estimates of net realisable value of inventory, or the fair value of assets and
liabilities.

88
Accounting estimates ―
Changes
• Accounting estimates
— Useful lives
— Warranty provisions
— Fair values
— Inventory obsolescence

This year
• Prospective
application
Future years
• Disclose
— Nature and financial effect

89 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Accounting estimates — changes

Changes to accounting estimates, on the other hand, are accounted for
prospectively, so there is no adjustment to opening equity. The new
estimate is applied from the date of change going forward.

Examples of accounting estimates include useful lives, warranty

provisions, fair values, and inventory obsolescence.

Prospective application leads to a lack of comparability year on year;

however, it is important to note that estimates change far more
frequently than accounting policies. Applying retrospective application to
changes in estimates would lead to regular restatement of opening
balances, which would be detrimental to the relevance and reliability of
the financial statements.

Required disclosures include

 the nature of the change in the accounting estimate, and
 the affected financial statement line items.

89
Material prior period errors
• Retrospective application

• In first set of financial statements after the error is discovered

• Disclose
— Nature
— FS line affected
— Impact on basic and diluted EPS

90 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Material prior period errors

When a material prior period error is discovered, it must
be corrected retrospectively in the first set of financial
statements authorized for issue after its discovery.

Required disclosures include the following:

 Nature of the error
 Affected financial statement line items
 Impact on basic and diluted EPS

90
IAS 8 disclosures for Domino’s
Adoption of new and revised standards — Amendments to IFRS 9, IAS 39,
IFRS 7, and IFRS 16

New standards and interpretations not yet applied. Effective for periods
beginning on or after:

International Financial Reporting Standards ('IFRSs')

Covid-19 related Rent Concessions - Amendments to IFRS 16 1 April 2021
International Accounting Standards ('IAS')
Property, Plant and Equipment: Proceeds before intended use - Amendments to IAS 16 1 January 2022
Reference to the Conceptual Framework - Amendments to IFRS 3 1 January 2022
Classification of Liabilities as Current or Non-Current - Amendments to IAS 1 1 January 2023
Disclosure of Accounting Policies - Amendments to IAS 1 1 January 2023
Definition of Accounting Estimates - Amendments to IAS 1 1 January 2023
Deferred Tax related to Assets and Liabilities arising from a single transaction - Amendments to IAS 12 1 January 2023

None of the above standards are expected to have a material impact on the Group financial statements on application.

91 © 2023 Association of International Certified Professional Accountants. All rights reserved.

IAS 8 disclosures for Domino’s

Note 2 of Domino’s financial statements sets out the
new and amended standards that were in issue but not
yet effective. None of the amended standards was
expected to have a significant impact on the reported
financial performance or position of the group.

It also discloses the new standards and interpretations

that have not yet been applied. None are expected to
have a material impact on the group.

91
Comparison to U.S. GAAP

IFRS U.S. GAAP

Notes to FS require: Critical accounting policies and

• Judgments made significant estimates made in Form
• Key assumptions 10-K (SEC)

Increased prominence Summary of significant policies in

notes to FS

92 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Comparison to U.S. GAAP

IFRS tends to give more prominence to the disclosure of critical
accounting policies and critical accounting estimates than U.S. GAAP.

Under IFRS, companies are required to disclose in the notes both:

 judgments made in the application of the most significant

accounting policies, and
 information about the key future assumptions that have
significant risk of causing material adjustment to asset and
liability carrying amounts within the next financial year.

Under U.S. GAAP, companies should include a summary of

significant accounting policies within the notes to the FS. SEC
registrants, however, are required to disclose application of critical
accounting policies and significant estimates in the “Management’s
Discussion and Analysis” section of Form K-10.

92
Discussion exercise – Voluntary change
For what purpose does IAS 8 permit a voluntary change
in accounting policy?

a. To achieve a more faithful representation of an underlying transaction

b. To improve comparability with other reported amounts in the
financial statements.
c. To achieve more relevant and reliable information in the financial
statements.
d. To ensure compliance with the principles of the conceptual framework.

93 © 2023 Association of International Certified Professional Accountants. All rights reserved.

93
Discussion exercise solution – Voluntary change
To achieve more relevant and reliable information in the financial
statements.

94 © 2023 Association of International Certified Professional Accountants. All rights reserved.

Discussion exercise solution

IAS 8 states that a voluntary change in accounting
policy is permitted only if it results in information that
is more relevant and reliable. Relevance and faithful
representation are fundamental qualitative
characteristics of financial information; reliability is
an element of faithful representation.

94