IAS 8 - ACCOUNTING
POLICIES, CHANGES IN
ESTIMATES & ERRORS
Dr. Haruna Maama
harunam@dut.ac.za
Tel: 0313735627
Learning Outcomes
◼ Explain IAS 8
◼ Meaning of accounting policies
◼ Accounting policies - selection
◼ Accounting policies - consistency
◼ Changes in accounting policies
◼ Changes in accounting estimates
◼ Prior period errors
Overview of IAS 8
◼ IAS 8 prescribes the criteria for selecting and changing
accounting policies, and how to account for and disclose
changes in accounting policies, changes in accounting
estimates, and corrections of prior period errors.
◼ Its objective is to enhance the relevance, reliability, and
comparability of an entity’s financial statements over time and
across entities.
Key Definition
Accounting Policies
These are the specific principles, bases, conventions, rules, and practices
applied by an entity in preparing and presenting financial statements.
Examples: Cost model vs revaluation model for PPE, FIFO vs weighted
average for inventories, etc.
Accounting Estimates
These are approximations used in financial reporting, based on judgment
and the latest available information.
Examples: Useful life of assets, bad debt provision, fair value estimates,
warranty obligations.
A Change in Accounting Estimate: This is an adjustment of the
carrying amount of an asset or liability, or related expense, resulting
from reassessing the expected future benefits and obligations associated
with that asset or liability.
Key Definition
Errors (Prior Period Errors)
◼ Prior period errors are 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 and could reasonably be expected to have been obtained
and taken into account in preparing those statements.
◼ These are omissions or misstatements in prior period financial
statements due to:
• Mathematical mistakes
• Mistakes in applying accounting policies
• Oversight or misinterpretation of facts
• Fraud
IAS 8 IN A NUTSHELL
IAS 8 Deals with three main issues:
1. Accounting 2. Accounting 3. Errors
policies estimates
How to select / How to identify How to identify
apply
Treatment of: (i)change in acc (ii)change in (iii) correction
policy estimate of error
Requires: retrospective prospective retrospective
application recognition restatement
(apply to current (apply to current (restate prior
& prior years) & future years) years)
6
CHANGES IN ACCOUNTING POLICIES
An entity is permitted to change an accounting policy only if the change:
• is required by a standard or interpretation; or
• results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or conditions
on the entity's financial position, financial performance, or cash flows.
◼ Note that changes in accounting policies do not include applying an
accounting policy to a kind of transaction or event that did not occur
previously or were immaterial.
◼ The change in accounting policy is applied retrospectively.
◼ Retrospective application means adjusting the opening balance of
each affected component of Financial Statement for the earliest prior
period presented and the other comparative amounts disclosed for
each prior period presented as if the new accounting policy had
always been applied.
Change in Accounting Policy occurs when:
◼ Required by a new IFRS standard; or
◼ Voluntarily made if it provides more reliable and relevant information
Accounting treatment:
◼ Apply retrospectively unless impracticable.
◼ Adjust opening balances of the earliest prior period presented.
◼ Restate comparative figures as if the new policy had always been
applied.
Disclosures relating to changes in accounting policies
◼ Nature of the change
◼ Reasons for the change
◼ Amounts of adjustments for each financial statement line item
affected
◼ If retrospective application is impracticable, explanation of why
ACCOUNTING ESTIMATES
◼ An accounting policy may require items in financial
statements to be estimated, i.e., measurement uncertainty is
involved.
◼ Consequently, an entity develops an accounting estimate to
achieve the objective set out by the accounting policy whereby
judgements or assumptions are used.
◼ An entity uses measurement techniques (encompassing
estimation and valuation techniques) and inputs to develop an
accounting estimate.
Examples of accounting estimates
◼ allowance for expected credit losses (applying IFRS 9) and a
provision for warranty obligations (applying IAS 37) as.
Changes in Accounting Estimates
◼ The effect of a change in an accounting estimate shall be
recognised prospectively by including it in profit or loss in:
- the period of the change, if the change affects that
period only, or
- the period of the change and future periods, if the
change affects both.
◼ However, to the extent that a change in an accounting
estimate gives rise to changes in assets and liabilities, or
relates to an item of equity, it is recognised by adjusting the
carrying amount of the related asset, liability, or equity item in
the period of the change.
Change in Accounting Estimate Occurs due to:
◼ New developments or information (not correction of an error)
◼ Revisions to inputs or assumptions used in past estimates
Accounting treatment:
◼ Apply prospectively in the period of the change and future
periods (if applicable)
◼ Do not restate prior periods
Disclosure
Nature and amount of change, if it affects the current or future
periods significantly
◼ If estimate is impracticable, explanation of why
ERRORS
◼ The general principle in IAS 8 is that an entity must correct all
material prior period errors retrospectively in the first set of
financial statements authorised for issue after their discovery by:
• restating the comparative amounts for the prior period(s)
presented in which the error occurred; or
• if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.
◼ However, if it is impracticable to determine the period-specific
effects of an error on comparative information for one or more
prior periods presented, the entity must restate the opening
balances of assets, liabilities, and equity for the earliest period for
which retrospective restatement is practicable (which may be the
current period).
Correction of Prior Period Errors Includes:
◼ Mistakes or fraud identified in subsequent periods
Accounting treatment:
◼ Apply retrospectively
◼ Adjust opening equity of the earliest prior period presented
◼ Restate comparative figures, unless impracticable
Disclosure:
◼ Nature of the error
◼ Amount of correction for each financial statement line item
◼ Impact on earnings per share (if applicable)
◼ If retrospective restatement is impracticable, explain why
Summary Table of IAS 8
Restate Prior
Type Cause Treatment
Periods?
Change in
New standard or
Accounting Retrospective Yes
voluntary
Policy
Change in
New info or re-
Accounting Prospective No
assessment
Estimate
Correction of Mistake,
Prior Period oversight, or Retrospective Yes
Error fraud
