IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors

Overview

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and re­flect­ing cor­rec­tions of prior period errors.

The standard requires com­pli­ance with any specific IFRS applying to a trans­ac­tion, event or condition, and provides guidance on de­vel­op­ing accounting policies for other items that result in relevant and reliable in­for­ma­tion. Changes in accounting policies and cor­rec­tions of errors are generally ret­ro­spec­tively accounted for, whereas changes in accounting estimates are generally accounted for on a prospec­tive basis.

IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.

History of IAS 8

October 1976  :-                      
Exposure Draft E8 The Treatment in the Income Statement of Unusual Itemsand Changes in Accounting Estimates and Accounting Policies
February 1978 :-                     

 IAS 8 Unusual and Prior Period Items and Changes in Accounting Policies
July 1992 :-                            

 Exposure Draft E46 Ex­tra­or­di­nary Items, Fun­da­men­tal Errors and Changes in Accounting Policies
December 1993 :-

IAS 8 (1993) Net Profit or Loss for the Period, Fun­da­men­tal Errors and Changes in Accounting Policies (revised as part of the 'Com­pa­ra­bil­ity of Financial State­ments' project)
1 January 1995:-                      

Effective date of IAS 8 (1993)
18 December 2003:-

Revised version of IAS 8 issued by the IASB
1 January 2005:-

Effective date of IAS 8 (2003)

Summary of IAS 8

Key de­f­i­n­i­tions [IAS 8.5]

• Accounting policies are the specific prin­ci­ples, bases, con­ven­tions, rules and practices applied by an entity in preparing and pre­sent­ing financial state­ments.
• A change in accounting estimate 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.
• International Financial Reporting Standards are standards and in­ter­pre­ta­tions adopted by the International Accounting Standards Board (IASB). They comprise:

1. International Financial Reporting Standards (IFRSs)

1. International Accounting Standards (IASs)
2. In­ter­pre­ta­tions developed by the International Financial Reporting In­ter­pre­ta­tions Committee (IFRIC) or the former Standing In­ter­pre­ta­tions Committee (SIC) and approved by the IASB.

• Ma­te­ri­al­ity. Omissions or mis­state­ments of items are material if they could, by their size or nature, in­di­vid­u­ally or col­lec­tively, influence the economic decisions of users taken on the basis of the financial state­ments.
• 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. Such errors result from math­e­mat­i­cal mistakes, mistakes in applying accounting policies, over­sights or mis­in­ter­pre­ta­tions of facts, and fraud.

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 any relevant Im­ple­men­ta­tion Guidance issued by the IASB for the Standard or In­ter­pre­ta­tion. [IAS 8.7]

In the absence of a Standard or an In­ter­pre­ta­tion that specif­i­cally applies to a trans­ac­tion, other event or condition, man­age­ment must use its judgement in de­vel­op­ing and applying an accounting policy that results in in­for­ma­tion that is relevant and reliable. [IAS 8.10]. In making that judgement, man­age­ment must refer to, and consider the ap­plic­a­bil­ity of, the following sources in de­scend­ing order:

• the re­quire­ments and guidance in IASB standards and in­ter­pre­ta­tions dealing with similar and related issues; and
• the de­f­i­n­i­tions, recog­ni­tion criteria and mea­sure­ment concepts for assets, li­a­bil­i­ties, income and expenses in the Framework. [IAS 8.11]

Man­age­ment may also consider the most recent pro­nounce­ments of other stan­dard-set­ting bodies that use a similar conceptual framework to develop accounting standards, other accounting lit­er­a­ture and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]

Con­sis­tency of accounting policies

An entity shall select and apply its accounting policies con­sis­tently for similar trans­ac­tions, other events and con­di­tions, unless a Standard or an In­ter­pre­ta­tion specif­i­cally requires or permits cat­e­gori­sa­tion of items for which different policies may be ap­pro­pri­ate. If a Standard or an In­ter­pre­ta­tion requires or permits such cat­e­gori­sa­tion, an ap­pro­pri­ate accounting policy shall be selected and applied con­sis­tently to each category. [IAS 8.13]

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. [IAS 8.14]

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. [IAS 8.16]

If a change in accounting policy is required by a new IASB standard or in­ter­pre­ta­tion, the change is accounted for as required by that new pro­nounce­ment or, if the new pro­nounce­ment does not include specific tran­si­tion pro­vi­sions, then the change in accounting policy is applied ret­ro­spec­tively. [IAS 8.19]

Ret­ro­spec­tive ap­pli­ca­tion means adjusting the opening balance of each affected component of equity 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. [IAS 8.22]

• However, if it is im­prac­ti­ca­ble to determine either the pe­riod-spe­cific effects or the cu­mu­la­tive effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and li­a­bil­i­ties as at the beginning of the earliest period for which ret­ro­spec­tive ap­pli­ca­tion is prac­ti­ca­ble, which may be the current period, and shall make a cor­re­spond­ing ad­just­ment to the opening balance of each affected component of equity for that period. [IAS 8.24]
• Also, if it is im­prac­ti­ca­ble to determine the cu­mu­la­tive effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the com­par­a­tive in­for­ma­tion to apply the new accounting policy prospec­tively from the earliest date prac­ti­ca­ble. [IAS 8.25]

Dis­clo­sures relating to changes in accounting policies

Dis­clo­sures relating to changes in accounting policy caused by a new standard or in­ter­pre­ta­tion include: [IAS 8.28]

• the title of the standard or in­ter­pre­ta­tion causing the change
• the nature of the change in accounting policy
• a de­scrip­tion of the tran­si­tional pro­vi­sions, including those that might have an effect on future periods
• for the current period and each prior period presented, to the extent prac­ti­ca­ble, the amount of the ad­just­ment:

1. for each financial statement line item affected, and
2. for basic and diluted earnings per share (only if the entity is applying IAS 33)

• the amount of the ad­just­ment relating to periods before those presented, to the extent prac­ti­ca­ble
• if ret­ro­spec­tive ap­pli­ca­tion is im­prac­ti­ca­ble, an ex­pla­na­tion and de­scrip­tion of how the change in accounting policy was applied.

Financial state­ments of sub­se­quent periods need not repeat these dis­clo­sures.
Dis­clo­sures relating to voluntary changes in accounting policy include: [IAS 8.29]

• the nature of the change in accounting policy
• the reasons why applying the new accounting policy provides reliable and more relevant in­for­ma­tion
• for the current period and each prior period presented, to the extent prac­ti­ca­ble, the amount of the ad­just­ment:

1. for each financial statement line item affected, and
2. for basic and diluted earnings per share (only if the entity is applying IAS 33)

• the amount of the ad­just­ment relating to periods before those presented, to the extent prac­ti­ca­ble
• if ret­ro­spec­tive ap­pli­ca­tion is im­prac­ti­ca­ble, an ex­pla­na­tion and de­scrip­tion of how the change in accounting policy was applied.

Financial state­ments of sub­se­quent periods need not repeat these dis­clo­sures.

If an entity has not applied a new standard or in­ter­pre­ta­tion that has been issued but is not yet effective, the entity must disclose that fact and any and known or rea­son­ably estimable in­for­ma­tion relevant to assessing the possible impact that the new pro­nounce­ment will have in the year it is applied. [IAS 8.30]

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: [IAS 8.36]

• 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. [IAS 8.37]

Dis­clo­sures relating to changes in accounting estimates

Disclose:

• the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods
• if the amount of the effect in future periods is not disclosed because es­ti­mat­ing it is im­prac­ti­ca­ble, an entity shall disclose that fact. [IAS 8.39-40]

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: [IAS 8.42]

• 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). [IAS 8.44]

Further, if it is im­prac­ti­ca­ble to determine the cu­mu­la­tive effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the com­par­a­tive in­for­ma­tion to correct the error prospec­tively from the earliest date prac­ti­ca­ble. [IAS 8.45]

Dis­clo­sures relating to prior period errors

Dis­clo­sures relating to prior period errors include: [IAS 8.49]

the nature of the prior period error

for each prior period presented, to the extent prac­ti­ca­ble, the amount of the cor­rec­tion:

for each financial statement line item affected, and

for basic and diluted earnings per share (only if the entity is applying IAS 33)

the amount of the cor­rec­tion at the beginning of the earliest prior period presented

if ret­ro­spec­tive re­state­ment is im­prac­ti­ca­ble, an ex­pla­na­tion and de­scrip­tion of how the error has been corrected.

Financial state­ments of sub­se­quent periods need not repeat these dis­clo­sures.