Learning Outcomes
After reading this article, you will be able to define and distinguish accounting policies, changes in accounting estimates, and prior period errors under IAS 8. You will know when to apply changes retrospectively or prospectively, how to present and disclose these changes, and explain their interaction with the Conceptual Framework. You will also be prepared to apply IAS 8 principles to ACCA SBR exam scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the rules and judgment involved in applying and changing accounting policies, revising estimates, and correcting prior period errors. Focus your revision on being able to:
- Identify and select appropriate accounting policies using IFRS Standards and the Conceptual Framework
- Explain and account for changes in accounting policies, including retrospective application requirements
- Distinguish and apply the treatment of changes in accounting estimates (prospective application)
- Identify prior period errors and apply the rules for retrospective restatement
- Prepare the required disclosures for each type of change or correction
- Discuss how judgment, comparability, and faithful representation are affected by these processes
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.
- Under IAS 8, when is a change in accounting policy applied retrospectively?
- Which of the following best describes a change in accounting estimate?
a) Adopting a new IFRS
b) Correcting a mathematical error
c) Revising the expected useful life of equipment
d) Adjusting the opening balance of equity - True or false? Prior period errors are always corrected prospectively.
- Outline the main disclosure requirements when a material prior period error is corrected.
Introduction
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, ensures that financial statements remain relevant, comparable, and reliable. The standard establishes how entities select accounting policies, account for changes in policies and estimates, and correct errors. This article will guide you on when to apply changes retrospectively versus prospectively and how to distinguish policies, estimates, and errors—a critical distinction for the ACCA SBR exam.
ACCOUNTING POLICIES
Accounting policies are the specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements. Selecting and consistently applying the right policies is fundamental to quality reporting.
Key Term: accounting policy
The specific rules and methods used by an entity for preparing and presenting financial statements in accordance with IFRS Standards.
Policies must follow relevant IFRS Standards. Where no Standard applies, judgment is required, referencing similar requirements and the Conceptual Framework to achieve relevant and faithfully represented information.
Selecting Policies
If multiple IFRS Standards offer choices, the most reliable and relevant policy must be used. Consistency is mandatory unless a change is required by an IFRS or would result in better information.
Changing Policies
A change in accounting policy is allowed only if:
- Required by a new IFRS Standard or interpretation, or
- The change provides more reliable and relevant information about performance or position.
When a policy is changed (unless an IFRS provides transitional provisions), retrospective application is required:
- Restate prior period comparatives as if the new policy had always applied
- Adjust the opening balance of each affected equity component for the earliest period presented
Key Term: retrospective application
Presenting prior periods’ financial statements as if a new accounting policy or correction had always been applied.
Worked Example 1.1
A company switches from the cost model to the revaluation model for its land in 20X4, with no specific transition guidance in IFRS. How should this change be accounted for?
Answer:
The change provides more relevant information. The revaluation model is a change in accounting policy without specific transitional provisions, so it is applied retrospectively. Prior period figures and opening equity should be adjusted as if the revaluation model were always used.
Exam Warning
A common mistake is to confuse changes in recognition or measurement due to new information (an estimate) with a change in policy. Only policy changes are retrospective.
CHANGES IN ACCOUNTING ESTIMATES
Estimates are inherent in accounting: useful lives, allowances, and impairment adjustments all require estimation. Sometimes, new information or developments require an estimate to be revised. This is not a change in policy but in estimate.
Key Term: accounting estimate
A monetary amount that is subject to judgment and uncertainty, determined using the latest available information.
Changes in estimates are applied prospectively—future periods only:
- Recognise the impact in the current period and future periods affected
- Do not restate prior period comparatives
Key Term: prospective application
Recognising the effects of a change or correction in the current and future reporting periods only.
Worked Example 1.2
A business changes the estimated useful life of machinery from 10 to 6 years in 20X5, after new evidence about higher usage. Is this a policy or estimate change, and how is it treated?
Answer:
Revising useful life is a change in estimate. The carrying amount should be depreciated over the revised remaining life, prospectively. No restatement of prior years.
PRIOR PERIOD ERRORS
Prior period errors are mistakes in previously issued financial statements. These include mathematical errors, misapplication of policies, or oversight of facts existing at the time.
Key Term: prior period error
An omission or misstatement in prior financial statements, discovered after issue, due to failure to use reliable information available at the time.
Material prior period errors must be corrected by retrospective restatement:
- Restate comparatives as if the error never occurred
- Adjust opening equity of the earliest presented period
Immaterial errors are corrected in the current period.
Worked Example 1.3
A material invoice from 20X3 was missed and discovered in 20X5. How should the error be corrected?
Answer:
As the error is material, restate 20X3 comparatives and adjust opening balances in 20X4 as if the invoice had always been recorded. Disclosure of the nature and amount is required.
DISTINCTION AND APPLICATION
Distinguishing between policies, estimates, and errors is key for proper accounting and for ACCA exam marks.
- Change in policy: New IFRS or better representation—retrospective application
- Change in estimate: New information—prospective application
- Error: Prior omission or misstatement—retrospective restatement
Revision Tip
If in doubt, ask: Is it new IFRS, better representation, or newly discovered information about the past? Policy or error changes are retrospective; estimate changes are prospective.
DISCLOSURE REQUIREMENTS
IAS 8 mandates disclosure when:
- A new policy has been applied or changed, including rationale and impact
- A change in estimate has a material effect, including the nature and amount affected
- Prior period errors are corrected, including the nature, amount, and periods affected
Where full retrospective application or restatement is impracticable, disclose why and how comparatives were adjusted.
Summary
IAS 8 requires entities to classify and account for changes as policy, estimate, or error—each with clear rules on retrospective or prospective application. Disclosure is mandatory for transparency and comparability. Judgement plays a role, but the default is: changes in policies and errors are retrospective, changes in estimates are prospective.
Key Point Checklist
This article has covered the following key knowledge points:
- Define and distinguish accounting policies, estimates, and errors
- Apply IAS 8's requirements for retrospective and prospective application
- Identify correct treatments for policy changes, estimate revisions, and error corrections
- Prepare, restate, or adjust comparative figures as required
- Make appropriate and complete disclosures under IAS 8
- Use judgement to classify each type of change or correction
Key Terms and Concepts
- accounting policy
- retrospective application
- accounting estimate
- prospective application
- prior period error