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PAS 8- Accounting Policies AND Changes IN Accounting
Estimates, Errors
BSA (Batangas State University)
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PAS 8 – ACCOUNTING POLICIES AND CHANGES IN ACCOUNTING ESTIMATES,
ERRORS
The Standard IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
tells us:
 How to select and apply our accounting policies;
 How to account for the changes in accounting policies;
 How to account for changes in accounting estimates; and
 How to correct errors made in the previous reporting periods.
#1 Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules, and practices
applied by an entity in preparing and presenting financial statements.
How to select accounting policy?
The question here is whether there IS some IFRS or interpretation IFRIC/SIC dealing with
your specific transaction or situation, or NOT.
If there is some standard or interpretation, then you simply apply it. For example, when
you account for your new machines, then you obviously need to apply IAS 16 Property,
plant and equipment.
When there is NO specific standard or interpretation dealing with your transaction or
item, then management needs to use judgement and develop its own policy, but
careful, the policy needs to provide as reliable and relevant information as possible.
How should you develop your accounting policy?
 First, you need to look at IFRS and IFRIC/SIC dealing with the similar or related
issues. For example, if you are selecting your accounting policy for artwork,
maybe IAS 16 Property, Plant and Equipment or IAS 40 Investment Property are
standards dealing with similar issues.
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
Second, you need to apply concepts from the Conceptual Framework for Financial
Reporting.
The entity shall select and apply the same accounting policies each period in order to
achieve comparability of financial statements or to identify trends in the financial position,
performance and cash flows of the entity.
When and how to change your accounting policy?
Life brings many twists and tweaks and sometimes, you need to change your accounting
policy.
When can you change the accounting policy?
Only at 2 circumstances:
1. When it is required by another IFRS. This will be the case when new IFRS is
issued and you HAVE TO apply it mandatorily.
2. When new accounting policy provides better, more reliable and relevant
information. In this case, you apply new accounting policy voluntarily.
How can you change the accounting policy?
If you apply new IFRS and this IFRS contains some transitional guidance, then you
simply follow the rules in that transition provisions. New IFRS will tell you exactly how.
However, if there’s no transitional guidance, or you change your accounting policy
voluntarily, then you should apply it retrospectively (there are some exceptions).
“Retrospectively” means going back to the previous reporting periods and restating
every single component of equity as if the new policy had always been in place. The
adjustments will be made on the opening balance of retained earnings.
Example of change in accounting policy:
a. Change in the method of inventory valuation (FIFO to weighted)
b. Change in the method of accounting for long term construction contract (cost
recovery method to percentage completion method)
c. The initial adoption of policy to carry assets at revalued amount is a change in
accounting policy to be dealt with as revaluation.
d. Change from cost to fair value model in measuring investment property.
e. Change to a new policy resulting from the requirement of a new PFRS.
Absence of Accounting Standards:
 In the absence of accounting standards, the management shall use judgement in
selecting and applying an accounting policy that results in information that is
relevant and faithfully represented.
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Hierarchy of guidance which the management may use when selecting accounting
policies in such circumstances:
a. Requirements of current standards dealing with similar matters.
b. Definition, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the CFAS.
c. Most recent pronouncements of other standard-setting bodies that use a similar
conceptual framework, other accounting literature and accepted industry practices.
#2 Accounting Estimates
Accounting estimate is a normal recurring correction or adjustment of an asset or
liability which is the natural result of the use of an estimate.
When you change the accounting estimate, you change either some amount of an asset
or a liability, or pattern of its consumption in both current and future reporting periods.
Again:
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

If these changes result from some new information or new trend, or development,
then they are changes in accounting estimates.
If these changes result from some error, such as incorrect calculation or wrong
application of accounting policies – then they are NOT changes in accounting
estimates, but errors and they must be accounted for as for errors.
Revision of the estimate does not relate to prior period and is not a correction of
error.
Estimation involves judgement based on the latest available and reliable information.
Typical examples of changes in accounting estimates are:
 Bad debt provisions,
 Inventory obsolescence
 Depreciation rates and useful lives of your assets, expected pattern of
consumption of benefit of depreciable assets
 Provisions for warranty repairs, etc.
 Fair value of assets and liabilities
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How can you account for change in accounting estimate?
Unlike accounting for change in accounting policy, we need to change our accounting
estimates currently and prospectively by including it in icome or loss of:
a. The period of change if the change affects the period only.
b. The period of change and future periods if the change affects both.
“Prospectively” means that you do NOT restate comparatives and equity. You do NOT
touch financial statements in the previous reporting periods; you simply adjust
calculations in the current and future reporting periods.
Difference between accounting policy and accounting estimate
Sometimes, it’s very difficult to assess whether we deal with an accounting policy or an
accounting estimate.
What are the main differences?
1. While accounting policy is a principle or rule, or a measurement basis,
accounting estimate is the amount determined based on selected basis or some
pattern of future consumption of the asset. For example: choice fair value vs.
historical cost is a choice in accounting policy (remember, measurement basis),
but updating some provision based on fair value change is a change in accounting
estimate.
2. While change accounting policy is accounted for retrospectively, you need to
account for change in accounting estimate prospectively.
Just be very careful and realize whether it’s about principle or about calculation. If you do
it wrong, well, your accounts can go wrong, too!
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Errors
Prior-period errors are some omissions from (that’s when you forget something) or
misstatements in the financial statements for one or more periods as a result of ignoring
or misusing the information that was available or could be reasonably obtained when
preparing these financial statements.
It does not really matter why the error happened – whether it was intentional (fraud) or
unintentional, you still need to correct it if it is material.
The question is:
Is the error material?
The concept of materiality is anything that can affect the decisions of users of financial
statements is material. In other words – anything significant.
Do not forget that something can be material not only because of its size, but also due
to its nature: for example, bonuses paid to your management are always significant,
whether they amounted to a few dollars or to millions.
Treatment of prior period errors:
1. If the error is NOT material, then you can correct it in the current reporting
period. Remember, if the error is NOT material, then your financial statements still
might be reliable and relevant.
2. If the error IS MATERIAL, then you always correct it retrospectively, by going
back and restating your figures in the previous periods.
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