## Learning Outcomes

This article examines IAS 8 policies, estimates, and errors, with emphasis on selecting and changing accounting policies. You will learn when a policy change is required, how to distinguish between a policy and an estimate, and the requirements for retrospective application. You will gain confidence in applying IAS 8 in scenarios involving new IFRS Standards, better information, or error correction, and appreciate the role of professional judgement in these decisions.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand not just the definitions but also the practical implications of selecting and changing accounting policies under IAS 8. In particular, focus your revision on:

- Identifying what constitutes an accounting policy vs. an accounting estimate
- Determining when and how to change an accounting policy under IAS 8
- Applying retrospective adjustment when required by a standard or voluntary change
- Distinguishing policy changes from corrections of prior period errors and estimate revisions
- Understanding disclosure and transitional requirements in respect of policy changes

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which of the following situations typically requires retrospective restatement?
   a) Change in depreciation method
   b) Correction of a material error from a prior period
   c) Change in the estimated useful life of a patent
   d) Change to a new policy required by an updated IFRS Standard

2. Which of the following is best described as an accounting policy, not an estimate?
   a) Bad debt provision rate
   b) Valuing inventory at lower of cost or net realisable value
   c) Residual value of an asset
   d) Percentage completion estimate for construction

3. True or false? Entities are required to change an accounting policy only if mandated by an IFRS or if the change provides more relevant and reliable information.

4. Briefly explain the difference in accounting treatment between a change in policy and a correction of a prior period error under IAS 8.

## Introduction

IAS 8 _Accounting Policies, Changes in Accounting Estimates and Errors_ is central to financial reporting consistency and comparability. It sets the criteria for selecting and changing accounting policies, distinguishing these changes from estimate revisions and error corrections. The standard aims for faithful representation, ensuring useful and reliable financial information for users.

Choosing the correct accounting policy can have a significant impact on figures reported in the financial statements. Sometimes, a new standard may require a change. At other times, management may voluntary change to improve how transactions are represented. It is critical for ACCA candidates to know when and how these changes can be made—and how they are presented and disclosed.

> **Key Term: accounting policy**
> Specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
> **Key Term: accounting estimate**
> Monetary amounts in financial statements that are subject to uncertainty and require judgement to determine.
> **Key Term: prior period error**
> Omissions or misstatements in prior period financial statements arising from a failure to use reliable information that was available when the financials were authorised for issue.

### Selecting Accounting Policies

![Accounting policy selection under IAS 8, from identifying applicable IFRS Standards to using analogous guidance, the Conceptual Framework, and consistent application.](https://static.pastpaperhero.com/images/acca-sbr-policies-estimates-and-errors-ias-8-selecting-and-changing-accounting-policies_00.png)

_IAS 8 sets a decision process for selecting an accounting policy when a transaction is or is not specifically addressed by IFRS._

### Determining the Appropriate Policy

An entity must apply an IFRS Standard if it specifically addresses a transaction or event. For uncommon situations not covered by IFRS, the entity applies judgement to develop a policy that results in relevant and reliable information, considering:

- Requirements in standards dealing with similar issues
- Definitions and recognition criteria in the Conceptual Framework

If there is still uncertainty, management may look to practices adopted by other standard-setting bodies using similar frameworks, provided such guidance does not conflict with IFRS.

### Consistency of Application

Once selected, accounting policies should be applied consistently for similar transactions and events, unless an IFRS Standard requires or allows a category-specific policy.

### Worked Example 1.1

A company operates in a new industry with no specific IFRS Standard on certain digital assets it holds. Management refers to standards dealing with intangibles and financial assets before developing its own policy.

> **Answer:**
> The company first checks relevant IFRS Standards. If none apply, it considers the definitions and criteria in the Conceptual Framework, and may review other accepted practices—provided these are not in conflict with IFRS—to select the most appropriate policy.

### Changing Accounting Policies

### Requirements for Change

A change in accounting policy is permitted only if:

- Required by an IFRS Standard or IFRIC Interpretation
- The new policy provides more relevant and reliable information about events and transactions

Voluntary changes are uncommon and must be clearly justified.

### Retrospective Application

If a change is required, IAS 8 states it must usually be applied retrospectively:

- Adjust the opening balances of each affected component of equity for the earliest prior period presented
- Restate comparative figures as if the new policy had always been used

This approach increases comparability and helps users perform accurate trend analysis.

### Worked Example 1.2

An entity previously measured investment property at cost, but decides the fair value model provides more relevant and reliable information. There is no IFRS requirement for the change. What steps must it take?

> **Answer:**
> The entity may change the policy only if it demonstrates the new approach is more relevant and reliable. The change must be applied retrospectively: comparative figures are restated as if fair value had always been used, and opening equity is adjusted. Sufficient disclosures are required.

### Transitional Provisions

If an IFRS Standard specifies its own transitional provisions, the standard’s instructions override the general IAS 8 requirements.

### Voluntary Changes

Voluntary policy changes are rare and must clearly improve the relevance and reliability of reported results—mere preference or industry trends do not justify such changes.

> **Exam Warning:**
> Always distinguish a change in policy (retrospective) from a change in estimate (prospective) in your answers. Misclassifying these is a frequent exam error and may cause loss of marks.

### Distinguishing Policies, Estimates, and Errors

A change in _accounting policy_ changes the principles or rules for recognising, measuring, or presenting items (e.g., moving from FIFO to weighted average for inventory).

A change in _accounting estimate_ arises when revised information leads to a different expected outcome (e.g., revising an asset’s useful life based on new expectations). Estimate changes are applied prospectively.

A _prior period error_ involves correction of a material misstatement—such as mathematical mistakes, oversight, or misinterpretation of facts—that occurred in a prior period.

### Worked Example 1.3

A company increases its annual depreciation rate after reassessing the useful life of its machinery, based on recent technical evaluations. Is this a change in policy or an estimate?

> **Answer:**
> This is a change in accounting estimate. Only future (and, if applicable, current) depreciation should be affected. Previous periods are not restated.
>
> **Revision Tip:**
> When faced with a scenario, ask: does the change alter the principle for measuring/recognising (policy), or is it a new expectation about outcome (estimate)? This key distinction will guide your chosen treatment.

## Summary

IAS 8 policies, estimates, and errors provides the framework for selecting and changing accounting policies. Policy changes are made only when required by IFRS or when a new policy results in more relevant and reliable information. Changes are generally applied retrospectively to preserve comparability, unless specific transitional provisions apply. Distinguishing between policy changes, estimate revisions, and error corrections is essential for accurate reporting and is a common test area in ACCA exams.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Define and identify accounting policies and accounting estimates
- Explain how to select accounting policies under IAS 8
- Identify permissible reasons for changing accounting policies
- Describe the requirement and process for retrospective application of policy changes
- Distinguish changes in policies from changes in estimates and prior period errors

## Key Terms and Concepts

- accounting policy
- accounting estimate
- prior period error


Policies, estimates, and errors (IAS 8) - Selecting and changing accounting policies