Agenda ref 12D

September 2014
STAFF PAPER
IASB Meeting

Project IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors
Paper topic Distinction between a change in accounting policy and a change
in accounting estimate
CONTACT(S) Koichiro Kuramochi kkuramochi@ifrs.org +44 (0)20 7246 6496

This paper has been prepared by the staff of the IFRS Foundation for discussion at a public meeting of
the IASB and does not represent the views of the IASB or any individual member of the
IASB. Comments on the application of IFRSs do not purport to set out acceptable or unacceptable
application of IFRSs. Technical decisions are made in public and reported in IASB Update.

Introduction

1. In November 2013 and March 2014, the IFRS Interpretations Committee (the
Interpretations Committee) discussed a request from the European Securities and
Markets Authority (ESMA) (the submitter) to clarify the criteria for distinguishing
between a change in an accounting policy and a change in an accounting estimate,
in relation to the application of IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors.

Purpose of this paper

2. The objective of this paper is to:

(a) present background information on the issue;

(b) provide a summary of the Interpretations Committee’s discussions; and

(c) set out the staff’s rationale for recommending that the Disclosure
Initiative should work on the issue.

The IFRS Interpretations Committee is the interpretative body of the IASB, the independent standard-setting body of the IFRS Foundation.
IASB premises │ 30 Cannon Street, London EC4M 6XH UK │ Tel: +44 (0)20 7246 6410 │Fax: +44 (0)20 7246 6411 │ info@ifrs.org│ www.ifrs.org
Page 1 of 15
 Agenda ref 12D

Background information

3. The submitter states that enforcers have identified divergent practices regarding
the assessment of whether a change qualifies as a change in an accounting policy,
or as a change in an accounting estimate, in accordance with IAS 8.

4. The submitter points out that the distinction between a change in an accounting
policy and a change in an accounting estimate is particularly important, because
IFRS requires a different accounting treatment, resulting in application of the
changes either prospectively or retrospectively. Moreover, IAS 8 sets out stricter
criteria for a change in an accounting policy than for a change in an accounting
estimate. According to paragraph 14(b) of IAS 8, in order to change an
accounting policy, the issuer should be able to justify that the change provides
more relevant information, whereas there is no such requirement for a change in
an accounting estimate.

5. The submitter suggests that the criteria to distinguish a change in an accounting

policy from a change in an accounting estimate should be clarified. In particular,
the submitter suggests that the IASB should consider whether the reason for the
change should be taken into account and, if so, on what basis.

6. The submitter gives specific examples in which it claims that distinguishing

between a change in an accounting policy and a change in an accounting estimate
is difficult:

(a) a change in the method of calculation of own credit risk;

(b) a change in an entity’s method of assessment of High Quality Corporate

Bonds (in relation to the recent Interpretations Committee discussion);

(c) a change in the ‘significant or prolonged’ criteria used by an entity,

which trigger impairment for available-for-sale equity instruments, in
accordance with paragraph 61 of IAS 39 Financial Instruments:
Recognition and Measurement;

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 2 of 15
 Agenda ref 12D

(d) a change in the method of credit value adjustment (CVA) calculation,

from historical approach to a market approach, in order to determine the
probability of default and the loss given default; and

(e) a change in the inventory measurement formula from first-in first-out

(FIFO) to a weighted average method.

7. Furthermore, the submitter states that there may be a need to clarify the
interaction between the following paragraphs in different Standards:

(a) paragraph 66 of IFRS 13 Fair Value Measurement states that a change

in a valuation methodology is a change in an accounting estimate;

(b) paragraph 35 of IAS 8 notes that a change in the measurement basis

applied is a change in an accounting policy; and

(c) paragraph 118 of IAS 1 Presentation of Financial Statements states that

measurement bases (for example, historical cost, current cost, net
realisable value, fair value and recoverable amount) are accounting
policies.

Staff analysis of the issue

Definition of a change in an accounting estimate and accounting policies

8. We think that the definition of a change in an accounting estimate in paragraph 5
of IAS 8 is relatively clear and changes should be assessed against the definition.
However, we think that accounting policies are defined broadly and, as a result,
the definition of accounting policies appears to overlap with the definition of a
change in an accounting estimate:

5 Accounting policies are the specific principles, bases, conventions,

rules and practices applied by an entity in preparing and presenting
financial statements.

A change in an accounting estimate is an adjustment of the carrying

amount of an asset or a liability, or the amount of the periodic

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 3 of 15
 Agenda ref 12D

consumption of an asset, that results from the assessment of the

present status of, and expected future benefits and obligations
associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and,
accordingly, are not corrections of errors.

9. Accordingly, we do not think that the definitions themselves provide sufficient

clarity to distinguish between the changes.

A change in the measurement basis

10. A change in the measurement basis applied is a change in an accounting policy,
according to paragraph 35 of IAS 8:

35 A change in the measurement basis applied is a change in an

accounting policy, and is not a change in an accounting estimate.
When it is difficult to distinguish a change in an accounting policy from
a change in an accounting estimate, the change is treated as a change
in an accounting estimate.

11. The question therefore arises as to what constitutes a change in measurement basis.
We note that there is some useful guidance on this matter in IAS 1 (paragraph
118) and in IFRS 13 (paragraphs 2 and 62).

12. We note that paragraph 118 of IAS 1 gives examples of measurement basis as
“historical cost, current cost, net realisable value, fair value or recoverable
amount.” We observe that fair value is identified in paragraph 118 of IAS 1 as
one measurement basis. We further note that paragraphs 2 and 62 of IFRS 13
state:

2 For some assets and liabilities, observable market transactions or

market information might be available. For other assets and liabilities,
observable market transactions and market information might not be
available. However, the objective of a fair value measurement in both
cases is the same—to estimate the price at which an orderly
transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current
market conditions.
62 The objective of using a valuation technique is to estimate the price at
which an orderly transaction to sell the asset or to transfer the liability

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 4 of 15
 Agenda ref 12D

would take place between market participants at the measurement

date under current market conditions.

13. We note that paragraph 66 of IFRS 13 states that “revisions resulting from a
change in the valuation technique or its application shall be accounted for as a
change in an accounting estimate in accordance with IAS 8.”, which is consistent
with the paragraphs above.

14. On the basis of the above assessment, we think that the paragraphs identified in
the submission (referred in paragraph 7 of this paper) are consistent.

15. We conclude from this that a change in measurement basis, such as a change
between historical cost and fair value, is a change in an accounting policy. We
also note that a change in the valuation technique used, or in its application, while
retaining the same measurement objective (eg a measurement objective of fair
value) is a change in an accounting estimate.

When it is difficult to distinguish a change in an accounting policy from a

change in an accounting estimate
16. When it is difficult to distinguish a change in an accounting policy from a change
in an accounting estimate, the change is treated as a change in an accounting
estimate, according to paragraph 35 of IAS 8. However, we consider that
sufficient analysis should be made before reaching that conclusion.

(a) First of all, an assessment should be made to distinguish an error from a

change in an accounting policy or a change in an accounting estimate.
In accordance with paragraph 5 of IAS 8, changes in accounting
estimates result from new information or new developments and,
accordingly, are not corrections of errors.

In preparation for the Interpretations Committee’s discussion, we asked

securities regulators and national standard-setters to provide us with
information on any challenges they had experienced in relation to the
distinction between a change in accounting policy and a change in
accounting estimate. In response to the outreach, one regulator pointed
IAS 8│Distinction between a change in an accounting policy and an accounting estimate
Page 5 of 15
 Agenda ref 12D

out that they have noted instances in which the disclosures suggested
that changes characterised as changes in estimates or policies may have
been corrections of errors.

(b) Secondly, we note that there are some judgements made in the
preparation of financial statements that result in changes to financial
statements but that are not judgements related to estimates. We further
note that there are specific disclosure requirements in respect of those
judgements, in accordance with paragraph 122 of IAS 1:

122 An entity shall disclose, in the summary of significant accounting

policies or other notes, the judgements, apart from those involving
estimations (see paragraph 125), that management has made in the
process of applying the entity’s accounting policies and that have
the most significant effect on the amounts recognised in the
financial statements.

We consider that the change in the judgements is neither a change in

accounting policy nor a change in accounting estimate. Paragraphs 123–
124 of IAS 1 provide examples of such judgements as follows:

o when substantially all the significant risks and rewards of ownership of

financial assets and lease assets are transferred to other entities;
o whether, in substance, particular sales of goods are financing
arrangements and therefore do not give rise to revenue;
o whether an entity controls another entity; and
o the criteria developed by the entity to distinguish investment property
from owner-occupied property and from property held for sale in the
ordinary course of business, when classification of the property is
difficult.

Sufficiency of the existing guidance on distinction between a change in an

accounting policy and a change in an accounting estimate
17. Although we noted that the Standards mentioned earlier provide some guidance to
distinguish a change in an accounting policy and a change in an accounting
estimate, the guidance does not necessarily solve the issues, for the following
reasons:

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 6 of 15
 Agenda ref 12D

(a) the definition of a change in an accounting estimate is relatively

specific, but the definition of accounting policy is broad, and thus, the
two definitions overlap.

(b) IAS 8 states that a change in the measurement basis applied is a change
in an accounting policy; however, it is not clear in all circumstances
what constitutes a change in the measurement basis, in particular
whether a change in historical cost bases is a change in the
measurement basis (for example, from FIFO to a weighted-average
method) or merely a change in accounting estimate.

The Interpretations Committee’s view

18. The Interpretations Committee noted that a change in an accounting estimate may
encompass the following changes:

(a) a change in the inputs used to make the estimate; and

(b) a change in the method used to develop an accounting estimate.

19. The Interpretations Committee observed that it would be helpful if clear guidance
was given about the circumstances in which changes in the method of estimation
may be made.

20. The Interpretations Committee notes that IFRS provides criteria for a change in an
accounting policy. In addition, similar criteria exist for a change in an accounting
estimate resulting from a change in the valuation technique or its application
under IFRS 13. However, such explicit criteria are not given for other changes in
method used to develop an accounting estimate:

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 7 of 15
 Agenda ref 12D

Change in an accounting Change in method used to develop an

policy under IAS 8 accounting estimate
A change in the valuation Other change
technique or its in method for
application an accounting
estimate
Justification An entity shall change an A change in a valuation No explicit
for change accounting policy only if the technique or its guidance
required? change results in the application is appropriate
(threshold) financial statements if the change results in a
providing reliable and more measurement that is
relevant information equally or more
(paragraph 14(b)). representative of fair
value in the
circumstances (paragraph
65).
Related The reasons why applying The reason for the change N/A (Only the
disclosure the new accounting policy in the valuation nature and
requirement provides reliable and more technique (paragraph amount of the
relevant information 93(d)). change is
(paragraph 29(b)). required to be
disclosed.)
(IAS 8
paragraph 39)

21. During its discussions on this topic, some Interpretations Committee members
noted that although it is not explicit in the Standards, a change in the method used
to develop an estimate, should, by its nature, involve judgements similar to those
for assessing a change in valuation technique in IFRS 13, and should not be a free
choice.

22. The Interpretations Committee thinks that a change in the method used to develop
an estimate should only be made if that change produces a reliable and equally or
more relevant estimate, which will enhance the consistency between the existing
IFRS 13 and IAS 8.

23. The Interpretations Committee, having considered the existing disclosures

requirements, noted that the following requirements support useful, relevant
disclosures about changes in the method of estimation used:

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 8 of 15
 Agenda ref 12D

The Interpretations Committee also noted that paragraph 39 of IAS 8

requires disclosure of the nature and amount of a change in accounting
estimate, and that such disclosure would include information about a change
in the method used. The Interpretations Committee observed that information
about the change in the method used would need to be disclosed in
accordance with paragraph 39 of IAS 8 or, in the case of a change in
valuation technique for a fair value measurement, in accordance with
paragraph 93(d) of IFRS 13. [IFRIC Update March 2014]

24. On the basis of the discussion, the Interpretations Committee recommended that
the IASB should amend IAS 8 to clarify the circumstances in which changes in
the method of estimation may be made. In particular, the Interpretations
Committee thought that a change in a method used to develop an estimate should
only be made: if that change produces a reliable and equally, or more, relevant
estimate.

Concerns about significant increase in disclosures

25. In response to the observation and recommendation by the Interpretations

Committee, we conducted analysis for a disclosure on the change in method used.
We are aware of concerns about a potential significant increase in disclosures if
additional disclosures are required on a change in an accounting estimate. For
example, large financial institutions may use many methods to develop estimates
for impairment provisions and may continuously improve these methods used to
develop their estimates. Some have expressed concern that if disclosures are
required for all those changes in methods used, it could significantly increase
disclosures.

26. We consider that the disclosure of a change in method used to develop an estimate
should be provided only if the change has a material effect that could influence
users’ decisions. However, we understand the concerns and consider that

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 9 of 15
 Agenda ref 12D

threshold of the disclosure requirements should be made clear as part of any

amendment. We note that ‘Materiality’ is currently considered by the Disclosure
Initiative and the issue could interact with the Disclosure Initiative.

27. We discussed the issue with the Disclosure Initiative team to understand how the
Interpretations Committee’s recommendation interacts with the current projects of
the Disclosure Initiative. We noted that the Principles of Disclosure project,
which forms part of the Disclosure Initiative, is planning to consider an overall
disclosure principle for ‘consistency and comparability’. The disclosure
requirements that relate to a change in an accounting policy and a change in an
accounting estimate are expected to be considered when developing the principle.

28. In addition, we note that under the umbrella of the Disclosure Initiative, the IASB
plans to work with a national standard-setter to review current transition
requirements in IFRS. This review will consider how often and in what
circumstances full retrospective application of a new Standard is required,
compared to the circumstances in which modifications require full retrospective
application. This research may inform the IASB about the distinction between
accounting policies and estimates.

29. On the basis of the discussion, we consider that the issue of distinguishing
between a change in accounting policy and accounting estimate should be
incorporated into the Disclosure Initiative, rather than proposing a separate
narrow-scope amendment.

Staff recommendation

30. The Interpretations Committee thought that the issue would benefit from greater
clarity and guidance to help distinguish a change in an accounting policy from a
change in an accounting estimate. The Interpretations Committee also thinks that
users would benefit if entities explained changes in an accounting estimate in

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 10 of 15
 Agenda ref 12D

which the change was as a consequence of a change in the method used to make
the estimate.

31. We recommend that the issue about distinguishing between a change in an

accounting policy and a change in an accounting estimate, and any applicable
thresholds and disclosures, should be considered as part of the Disclosure
Initiative.

Questions for the IASB

Does the IASB agree with the staff’s recommendation that this issue should be
considered in the Principles of Disclosure project and in the additional work on
the transition requirements in IFRS, both of which form part of the Disclosure
Initiative?

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 11 of 15
 Agenda ref 12D

Appendix A—Original agenda request

A1. The IFRS Interpretations Committee received a request for clarification to distinguish
between a change in an accounting policy and a change in an accounting estimate from
ESMA as follows:

Mr Wayne Upton
IFRS IC
Cannon Street 30
London EC4M 6XH United Kingdom

Agenda item request: Application of IAS 8 - Accounting Policies, Changes in

Accounting Estimates and Errors to distinguish between a change in accounting
estimate and a change in accounting policy

Dear Mr Upton,

The European Securities and Markets Authority (ESMA) is an independent EU Authority that
contributes to enhancing the protection of investors and promoting stable and well-functioning
financial markets in the European Union (EU). ESMA achieves this aim by building a single rule
book for EU financial markets and ensuring its consistent application across the EU. ESMA
contributes to the regulation of financial services firms with a pan-European reach, either through
direct supervision or through the active coordination of national supervisory activity.
As a result of the enforcement activities carried out by national competent authorities ESMA has
identified an issue related to the application of IAS 8 - Accounting Policies, Changes in Accounting
Estimates and Errors, which we would like to bring to the attention of the IFRS Interpretations
Committee for adding it to its agenda.

A detailed description of the issue is set out in the appendix to this letter. We would be happy to
further discuss this issue with you.

Yours sincerely,

Steven Maijoor
Chair
European Securities and Markets Authority

APPENDIX- DETAILED DESCRIPTION OF THE ISSUE

1. Enforcers have identified divergent practices regarding the assessment of whether a change
qualifies as a change in an accounting policy or as a change in an accounting estimate in
accordance with IAS 8, as illustrated in the examples below.

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 12 of 15
 Agenda ref 12D

Description of the issue

2. The distinction between a change in accounting estimate and a change in accounting policy
is particularly important because IFRS requires a different accounting treatment resulting in
application of the change prospectively or retrospectively.

3. Moreover, IAS 8 sets out stricter criteria for changes in accounting policy than for changes
in accounting estimate. According to paragraph 14(b) of IAS 8, in order to change an
accounting policy the issuer should be able to justify that the change provides more
relevant information, whereas there is no such requirement for a change in accounting
estimate.

4. Recent debates at the IFRS IC on the request for guidance on the determination of the
rate used to discount post-employment benefit obligations show that IFRS IC members were
divided on the qualification of a change of the way to determine a discount rate. The
November 2012 IFRS IC Update1 states that "the Interpretations Committee briefly discussed,
but did not conclude, on whether a change to the way in which an entity determines the
discount rate would be a change in accounting policy or a change in estimate".

5. ESMA is concerned that diversity in practice may exist regarding this qualification. ESMA
provides the following examples to illustrate the ambiguities arising from the assessment
whether a change qualifies as a change in accounting policy or as a change in accounting
estimate.

Example A - Change in the own credit risk calculation

6. Historically, bank A computed its own credit risk for the measurement of its financial
liabilities at fair value using credit default swap (CDS) curves. Following the financial crisis
and the dislocation of the CDS market, bank A modified its methodology and assessed its
own credit risk at year-end based on the spread of its most recent debt issuance.

1
IFRS IC Update – November 2012, IFRS Foundation, November 2012

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 13 of 15
 Agenda ref 12D

View1
7· Supporters of view 1 believe that this change is a change in accounting policy, as the basis for
determining the own credit risk changed from CDS curve method to a methodology based on
the spread of the historical debt issuances.

View2
8. Supporters of view 2 argue that this is a change in accounting estimate because the objective of
the accounting policy related to the measurement of own credit risk has not changed. The
method of valuation was modified as the CDS curve was no longer relevant. Hence, according to
this view, this change is due to "changes which occurred in the circumstances on which the
estimate was based" as referred to in paragraph 34 of IAS 8.

Example B - Change in the definition of High Quality Corporate Bonds

9. The subject was briefly discussed during the November IFRS IC meeting as part of the
discussion on high quality corporate bonds (HQCB) in IAS 19 and IFRS IC members expressed
diverging views on whether such change would qualify as a change in accounting policy or a
change in accounting estimate.
View1
10. Proponents of view 1 believe that a change in the reference used to determinate the discount
rate is a change in accounting policy because the measurement basis used in determining the
discount rate changed. If an issuer used in the past the yield of AA-rated bonds, switching to
the yield of BBB- rated bonds is a change in the measurement basis.

11. They argue that the change is not a change in accounting estimate because the issuer had
chosen AA-rated bonds as a definition for HQCB. Changing the definition of a concept cannot be
a change in estimate.

View2
12. Proponents of view 2 argue that this change is not a change in accounting policy because the
objective which is to determine the discount rate with the reference to the yield of HQCB did not
change (i.e. there was no change in measurement basis). The fact that the yield of HQCB was
formerly evaluated using AA-rated bonds and is now evaluated using BBB-rated bonds is a
change in accounting estimate. The number of AA-rated entities is no longer sufficient and
consequently it is more relevant to use BBB-rated bonds. Hence, this change is due to
"changes which occurred in the circumstances on which the estimate was based" as referred to
in paragraph 34 of IAS 8.

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 14 of 15
 Agenda ref 12D

Other examples
13. ESMA notes other examples where the assessment whether a change qualifies as
a change in accounting policy or as a change in accounting estimate is difficult:

a. a change in the "significant or prolonged" criteria which trigger

impairment for Available for Sale equity instruments in accordance
with paragraph 61 of IAS 39 - Financial Instruments: Recognition and
Measurement,

b. a change of method of credit value adjustment (CVA) calculation, from

historical approach to determine the probability of default and the
loss given default to market based approach,

c. a change in the measurement formula of the cost of the inventories from

first-in-first-out (FIFO) to weighted average cost.

Request
14. ESMA would suggest that the criteria to distinguish a change in accounting policy
from a change in accounting estimate need to be clarified. In particular, ESMA
suggests the IASB to clarify whether the reason to justify the change should be
taken into account (e.g. voluntary change or change due to external
circumstances) and if so on what basis.

15. Furthermore, ESMA finds that there might be a need to clarify the interaction
between the following paragraphs in different IFRSs:

• paragraph 66 of IFRS 13 -Fair Value Measurement which states that a

change in a valuation methodology is a change in accounting estimate,

• paragraph 35 of IAS 8 which notes that a change in the measurement

basis applied is a change in accounting policy, and

• paragraph 118 of IAS 1 - Presentation of Financial Statements which

states that measurement bases (e.g. historical cost, current cost, net
realisable value, fair value and recoverable amount) are accounting
policies.

IAS 8│Distinction between a change in an accounting policy and an accounting estimate

Page 15 of 15