IAS 8 Accounting Policies, Estimates
and Errors
IAS 8 Accounting Policies, Estimates and
Errors

IAS 8 governs the following topics:
 selection of accounting policies
 changes in accounting policies
 changes in accounting estimates
 correction of prior period errors.
Accounting policies

 Accounting policies are the specific principles, bases,
conventions, rules and practices applied by an entity in
preparing and presenting financial statements' (IAS 8, para 5).
 IAS 8 requires an entity to select and apply appropriate
accounting policies complying with International Financial
Reporting Standards (IFRS Standards) and Interpretations to
ensure that the financial statements provide 'information that is:
 relevant to the economic decision-making needs of users
 reliable in that the financial statements
Accounting policies
Cont….

 represent faithfully the financial position, financial
performance and cash flows of the entity
 reflect the economic substance of transactions, other events
and conditions and not merely the legal form
 are neutral, i.e. free from bias
 are prudent, and
 are complete in all material respects' (IAS 8, para 10)
Changing accounting policies

 The general rule is that accounting policies are normally
unchanged from period to period to ensure comparability of
financial statements over time. IAS 8 requires accounting policies
to be changed 'only if the change:
 is required by an IFRS Standard or
 results in the financial statements providing reliable and more
relevant information.
A change in accounting policy occurs if there has been a change in:
 recognition, e.g. an expense is now recognized rather than an asset
 presentation, e.g. depreciation is now included in cost of sales
rather than administrative expenses, or
 measurement basis, e.g. stating assets at replacement cost rather
than historical cost
Accounting for a change in accounting
policy

The required accounting treatment is that:
 the change should be applied retrospectively, with an
adjustment to the opening balance of retained earnings in
the statement of changes in equity
 comparative information should be restated unless it is
impracticable to do so.
 if the adjustment to opening retained earnings cannot be
reasonably determined, the change should be adjusted
prospectively, i.e. included in the current period’s
statement of profit or loss.
Accounting estimates

An accounting estimate is a method adopted by an entity to
arrive at estimated amounts for the financial statements.
Most figures in the financial statements require some
estimation:
 the exercise of judgement based on the latest information
available at the time.
 at a later date, estimates may have to be revised as a result
of the availability of new information, more experience or
subsequent developments
Changes in accounting estimates

The requirements of IAS 8 are:
 The effects of a change in accounting estimate should be included in
the statement of profit or loss in the period of the change and, if
subsequent periods are affected, in those subsequent periods.
 The effects of the change should be included in the same income or
expense classification as was used for the original estimate.
 If the effect of the change is material, its nature and amount must be
disclosed.
Examples of changes in accounting estimates are changes in:
 the useful lives of non-current assets
 the residual values of non-current assets
 the method of depreciating non-current assets
 warranty provisions, based upon more up-to-date information about
claims frequency and value.
Prior period errors

Prior period errors are omissions from, and misstatements in, the
financial statements for one or more prior periods arising from a failure to
use information that:
 was available when the financial statements for those periods were
authorised for issue and
 could reasonably be expected to have been taken into account in
preparing those financial statements.
 Such errors include mathematical mistakes, mistakes in applying
accounting policies, oversights and fraud.
 Current period errors that are discovered in that period should be
corrected before the financial statements are authorised for issue
Correction of prior period errors

Prior period errors are dealt with by:
 restating the opening balance of assets, liabilities and equity as if the
error had never occurred, and presenting the necessary adjustment to
the opening balance of retained earnings in the statement of changes in
equity
 restating the comparative figures presented, as if the error had never
occurred
 disclosing within the accounts a statement of financial position at the
beginning of the earliest comparative period. In effect this means that
three statements of financial position will be presented within a set of
financial statements:
 at the end of the current year
 at the end of the previous year
 at the beginning of the previous year.