IAS 8: Change in Estimates, Policy and Errors

Policy:
The specific principles, bases, conventions, rules and practices adopted by entity in preparing and
presenting financial statements.

Recognition, Measurement, Presentation

 Lower off cost or NRV

 FIFO to AVCO
 Depreciation from COS to Admin Exp
 Cost to Revaluation Model (Outside the Scope of IAS 8)

Change in Accounting Estimate:

An adjustment of carrying amount of an asset or liability or the periodic consumption of an asset.
Change arises because of new information, new development. But it is NOT correction of errors.

Error:
Omission, misstatement in the entity’s financial statements for one or more prior period.

Change in policy:

Change is allowed only when

 It is required by IFRS
 Change will result in more appropriate presentation of events or transactions in financial
statements of entity

Following are NOT change in policy

 Adopting an accounting policy for new type of transaction that was never previously dealt
 Adopting a new policy for a transaction which has never happened in the past, or which was
not material. Like using FIFO method by Subsidiary and Parent uses AVCO and in
consolidated accounts they use AVCO. Then it won’t be change in policy.
 Change in policy is applied retrospectively so as it has always been in use.
 Prospective application is not allowed when it is impracticable to do so.

Disclosures:

 Reasons for change

 Reason why change is more reliable
 Amount of adjustment for the current as well as prior periods
 Amount of adjustment relating to prior period should be incorporated into comparator
 The fact that if the comparatives are restated or it is impracticable

Changes in Estimates
Because of uncertainties in business, accounting estimates are made. But sometimes the
judgements may be wrong and need to adjusted for the new available information.
Some Examples are
 Irrecoverable Debt Allowance
 Useful Life of Assets
 Provision for inventory

Accounting Treatment

 Change in estimates are applied prospectively i.e. the current financial statements and future
financial statements are adjusted for the fact. For Example, the allowance for doubtful debts is
example where the changes affect only the current period. Revision of Useful life of an asset is
an estimate which affects future as well as present financial statements.
 The effect of change should be included in the same class of expense as was previously used for
the estimates to ensure consistency
 Materiality of change is irrelevant.

Errors
Error may arise through

 Mathematical Mistakes
 Mistakes in application of accounting policies
 Misinterpretation of facts
 Frauds

Accounting Treatment
Prior period errors: Retrospectively Correction.

 Restate the opening balances of assets, liabilities and equities

 Restate the comparatives

So error is corrected is so as this error had never occurred.

When it is impracticable the correction may be applied prospectively.

Disclosures

 Nature of error
 Amount of correction of each line item
 Change EPS if it affects EPS.
 If retrospective affect is impracticable, describe the circumstances which led to this.