Learning Outcomes
After working through this article, you will be able to explain the requirements of IAS 8 regarding the selection and application of accounting policies, changes in accounting estimates, and the correction of prior period errors. You will also be able to distinguish between changes in policies and estimates, describe their accounting treatments, and apply the standard's rules in practical ACCA exam scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the principles and application of IAS 8, especially regarding policies, estimates, and errors. This article focuses your revision on:
- The criteria for selecting and applying accounting policies
- Distinguishing between accounting policies, estimates, and errors
- The accounting and disclosure requirements for changes in accounting policies
- The accounting and disclosure requirements for changes in estimates
- The retrospective correction of prior period errors
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the main difference in financial statement treatment between a change in accounting policy and a change in accounting estimate under IAS 8?
- Which of the following is most likely a prior period error?
a) Changing depreciation from straight-line to reducing balance due to new information about the asset's useful life
b) Failure to accrue for a material legal claim where evidence was available in the prior year
c) Adopting a new standard required by IFRS - True or false? Corrections of prior period errors must be accounted for prospectively.
- Give one example of a situation where retrospective restatement of prior periods is not required for a change in accounting policy.
Introduction
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors prescribes how entities should select and apply accounting policies, how to account for changes in policies and estimates, and how to correct prior period errors. Distinguishing between these areas is essential for reliable, comparable, and relevant financial reporting.
Good knowledge of IAS 8 is expected in ACCA SBR, especially when analyzing scenarios involving new accounting policies, revised estimates, or discovered mistakes.
Selecting Accounting Policies
Entities must apply accounting policies required by IFRS Standards to all transactions. Where no standard directly applies, management must develop policies that best provide relevant and reliable information, referencing similar requirements and the Conceptual Framework when necessary.
Key Term: Accounting policy
The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
Changes in Accounting Policies
A change in accounting policy is only permitted if required by an IFRS Standard, or if it results in more relevant and reliable information. Examples include switching from the cost model to the revaluation model for property, plant and equipment, or initial adoption of a new standard.
When a change in policy occurs:
- Apply the new policy retrospectively, as if it had always been in use
- Restate prior period comparative figures and adjust opening balances of affected components of equity at the start of the earliest period presented
Disclosures must explain the nature of the change, provide comparative information, and state the reason for the policy change.
Worked Example 1.1
On 1 January 20X3, Tern Ltd switches from the cost model to the revaluation model for buildings, as allowed by IAS 16. Prior year comparatives and opening equity require restatement. What is the correct approach?
Answer:
Tern Ltd must restate prior periods as if the revaluation model had always applied. Comparative figures for 20X2 are recalculated, and opening equity at 1 January 20X2 is adjusted for the cumulative effect of the new policy. Disclosures must explain the change and impact.
Changes in Accounting Estimates
Estimates are needed where outcomes are uncertain—for example, asset useful lives, provision amounts, or bad debt percentages. A change in estimate occurs when new information or experience causes a reassessment.
Key Term: Estimate
A monetary amount in financial statements subject to measurement uncertainty, requiring judgment about the outcome of uncertain future events.
A change in estimate is accounted for prospectively—from the date of the revision onward. Prior periods are never restated for changing estimates.
Worked Example 1.2
Sable Ltd estimated a machine's useful life as 10 years. In 20X4 (year 3), new information suggests only 6 years are expected. How should Sable Ltd adjust its depreciation?
Answer:
Sable Ltd should revise depreciation charges for 20X4 and future periods based on the remaining carrying amount and the revised remaining useful life (4 years). No prior year restatement is made.
Exam Warning
In the exam, never retrospectively restate comparative figures when a change is clearly an estimate rather than a policy. This is a common error.
Prior Period Errors
Prior period errors are mistakes or omissions from prior financial statements, due to failure to use reliable information available when those statements were authorized for issue.
Key Term: Prior period error
Omission or misstatement in prior periods from mistakes, misuse, or failure to use reliable data available at the time.
Prior period errors must be corrected retrospectively, restating comparative figures and opening equity for earliest period presented.
Key Term: Retrospective restatement
Presenting prior period information as if the error had never occurred, adjusting comparatives and opening balances of equity accordingly.Key Term: Prospective application
Accounting for amounts in current and future periods only, with no restatement of prior periods.
Worked Example 1.3
In 20X5, Loon Co discovers it failed to account for a major warranty provision in 20X3, despite having all evidence at that time. What should be done?
Answer:
Loon Co must correct this as a prior period error by restating 20X3 and 20X4 comparatives, adjusting equity at 1 January 20X3 as if the provision had been recognized originally, and fully disclosing the circumstances.
Revision Tip
If you are unsure whether an adjustment is a policy change, estimate change, or error, first ask: was the original accounting acceptable using information available at the time? If not, it is an error.
Disclosure and Impracticability
When retrospective application or restatement is impracticable, adjust from the earliest practicable date. Full disclosure must explain the reasons and describe how adjustments were determined.
Entities must clearly explain the nature and effect of changes or error corrections in the financial statements, including quantitative impacts.
Summary Table: Key Differences
| Type | Definition | Accounting Treatment |
|---|---|---|
| Change in accounting policy | Change in rules/method | Retrospective restatement |
| Change in accounting estimate | Revised assumption | Prospective application |
| Prior period error | Past omission/mistake | Retrospective restatement |
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the process of selecting and applying accounting policies under IAS 8
- Distinguish changes in accounting policy, estimate, and prior period error
- Apply retrospective restatement for policy changes and errors
- Apply prospective adjustments for estimates
- Understand required disclosures for each situation
Key Terms and Concepts
- Accounting policy
- Estimate
- Prior period error
- Retrospective restatement
- Prospective application