IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IFRS 2022 update – IAS 8 Definition of Accounting Estimates – Your best read

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IFRS 2022 update – IAS 8 Definition of Accounting Estimates

Effective for annual periods beginning on or after 1 January 2023.

On 12 February 2021, the International Accounting Standards Board (the IASB or the Board) issued amendments to IAS 8 Accounting Policies, Changes to Accounting Estimates and Errors, in which it introduces a new definition of ‘accounting estimates’. The amendments are designed to clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors.

Definition of an accounting estimate

The current version of IAS 8 does not provide a definition of accounting estimates. Accounting policies, however, are defined. Furthermore, the standard defines the concept of a “change in accounting estimates”. A mixture of a definition of one item with a definition of changes in another has resulted in difficulty in drawing the distinction between accounting policies and accounting estimates in many instances. In the amended standard, accounting estimates are now defined as, “monetary amounts in financial statements that are subject to measurement uncertainty”.

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IAS 8 Best summary policies estimates and errors

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IAS 8 Best summary policies estimates and errors comprises a high level summary of the three items in this standard:

  1. Accounting policies,
  2. Accounting Estimates
  3. Errors

1. Accounting policies

Definition:

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

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Selection and application of accounting policies:

  • If a standard or interpretation deals with a transaction, use that standard or interpretation
  • If no standard or interpretation deals with a transaction, judgment should be applied. The following sources should be referred to, to make the judgement:
    • Requirements and guidance in other standards/interpretations dealing with similar issues
    • Definitions, recognition criteria in the framework
    • May use other GAAP that use a
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Change in accounting estimate

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Change in accounting estimate – An adjustment of the carrying amount of an asset or a liability, or the amount of the periodic 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 correction of errors.

Therefore no retrospective restatement of financial statements is needed. The adjustment is recorded in profit or loss in the period it was re-estimated/re-calculated/re-validated.

Change in accounting estimate

Changes in accounting policies | Correction of errors Changes in estimates

Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required in calculating … Read more

Change in accounting policy?

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Change in accounting policyChange in accounting policy – Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized over proved developed reserves. License acquisition, common facilities and future decommissioning costs are amortized over total proved reserves. The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.

This clearly shows all the estimates involved in setting up a depreciation policy. Not only in a complex environment as the oil and gas industry but also in a manufacturing business consisting of a complex … Read more

The 6 things to know for IAS 8

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The 6 things to know for IAS 8 – The objective of IAS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors.

IAS 8 is intended to enhance the relevance and reliability of an entity’s financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.

1 Selection and application of accounting policies

When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering … Read more

Required Disclosure for error restatements

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Required Disclosure for error restatementsRequired Disclosure for error restatements – If an error (either accidental or intentional in nature) is subsequently discovered that affected a prior period, the nature of the error, its effect on previously issued financial statements, and the effect of its adjustment on current period’s net income and EPS should be disclosed in the period in which the error is adjusted. In addition, any comparative financial statements provided must be adjusted. Required Disclosure for error restatements

In accounting for events after the reporting period errors easily occur because adjusting events are not properly recognised or the difference between adjusting events and non-adjusting events is not correctly made. Adjusting events are those providing evidence of conditions existing at the end of … Read more

Accounting policies

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Accounting policies: The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Impracticable

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It is impracticable to apply a requirement if the entity cannot apply it after making every reasonable effort to do so. ‘Impracticable’ is a high hurdle.

Examples of adjustments of errors

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Examples of adjustments of errors – When errors affecting income are discovered, careful analysis is necessary to determine the required action to correct the account balances. As indicated, most errors will be caught and adjusted prior to closing the books. The few material errors not detected until subsequent periods and those that have not already been counterbalanced must be treated as prior-period adjustments. See also ‘Types of errors‘.

The following sections describe and illustrate the procedures to be applied when error adjustments require prior-period adjustments. It is assumed that each of the errors is material. Errors that are discovered usually affect the income tax liability for a prior period. Amended tax returns are usually prepared either to claim … Read more

Change in accounting principles

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Change in accounting principles – There is an underlying presumption that an accounting principle, once adopted, should not be changed for similar events and transactions. A change in principle may be Change in accounting principlescaused by new events, changing conditions, or additional information or experience.

There are two circumstances when a company is required to change an accounting policy. These are:

  • If the change is required by a Standard or an Interpretation; or Change in accounting principles
  • If the change results in the financial statements providing more reliable and relevant information about the effects of transactions (or other events).

IAS 8 19 (b) requires retrospective application (i.e., the application of a different accounting method to previous years as if that new method had … Read more