IAS 8

ACCOUNTING
POLICIES, CHANGES IN
ACCOUNTING
ESTIMATES AND
ERRORS

This material is the property of Department of1 Accounting

and Finance, CoBE, AAU. Permission must be obtained from

OBJECTIVE OF IAS 8
It prescribes the criteria for:

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;

How to correct errors made in the

previous reporting periods; and

ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND
ERRORS

DEFINITION OF ACCOUNTING
POLICIES
Accounting

policies are the specific

principles, bases, guidelines, conventions,

rules, practices, and similar norms
applied/used by an entity in preparing and
presenting financial statements.
Examples:
Valuation of inventory using FIFO, Average
Cost or other suitable basis as per IAS 2
Classification, presentation and
measurement of financial assets and
liabilities under categories specified under
4

SELECTION AND APPLICATION

OF ACCOUNTING POLICIES
IAS 8 establishes the hierarchy that firms
must follow when dealing with an
accounting issue (transaction or item). The
IFRS ACCOUNTING POLICY HIERARCHY
is:
1. Apply specifically relevant standards
(IASs, IFRSs, Interpretations).
2. Refer to other IASB standards.
3. Refer to the IASB Framework for
guidance.
5

CHANGES IN ACCOUNTING
POLICIES
When

to change an accounting

policy?

When it is required by another IFRS.

This will be the case when new IFRS is
issued and you HAVE TO apply it
mandatorily.

When new accounting policy provides

better, more reliable and relevant
6

CHANGES IN ACCOUNTING
POLICIES
The change results in the financial
statements providing reliable and more
relevant information about the effects
of transactions, other events or
conditions on the entitys:
Financial position,
Financial performance, or
Cash flows.

CHANGES IN ACCOUNTING POLICIES

Examples
A change from measuring a class of assets
at depreciated historical cost to a policy of
regular revaluation (fair value)
Changing from writing off to capitalizing
interest relating to the construction of
noncurrent assets
Changing inventory valuation from
8

CHANGES IN ACCOUNTING POLICIES

Examples
Changing the way in which an item is
presented in the accounts, i.e.
classifying depreciation expenses as
cost of sales instead of administrative
Exclusions
Applying an accounting policy to a
new type of transaction.
Applying a new accounting policy to a
transaction different in substance to
those undertaken previously.
9

CHANGE IN ACCOUNTING
Accounting treatment [How]
POLICIES
If a new IFRS is applied and this IFRS
contains some transitional guidance, then
simply follow the rules in that transition
provisions. New IFRS will tell exactly how.
If theres no transitional guidance, change
the accounting policy voluntarily, then apply
it retrospectively as if the new policy had
10

CHANGES IN ACCOUNTING POLICIES

Exemptions from Retrospective Treatment

The effect of retrospective application of a change in
accounting policy is immaterial. Anything that cannot
affect the decisions of users of financial statements is
material.

Retrospective application of a change in accounting

policy is impracticable, then the new accounting policy
must be applied prospectively from the beginning of the
earliest period feasible which may be the current period.

Initial application of an IFRS where the transitional

accounting method provided allow or require
11

CHANGES IN ACCOUNTING
POLICIES
Disclosures
Following must be disclosed in the financial
statements of the accounting period in which a
change in accounting policy is implemented:
Title of IFRS
Nature of change in accounting policy
Reasons for change in accounting policy
Amount of adjustments in current and prior period
presented
Where retrospective application is impracticable, the
12
conditions that caused the impracticality

Demonstration
HANGES
IN ACCOUNTING POLICIES
ABC LTD until now has valued inventory using LIFO
method.
However, following changes to IAS 2 Inventories, the
use of
LIFO method has been disallowed. Therefore,
management of the company intends to use FIFO
method for the valuation of the company's stock.
Following are extracts of ABC LTD's most recent
financial statements before the application of FIFO
Statement of Financial Position as at 31
method.
December 20X2
20X2
20X1
Current Assets
Cash and Bank
6
4
Short Term
5
8
13
Investments

HANGES IN ACCOUNTING POLICIES

Income Statement for the year ended 31
December 20X2
20X2
20X1
Cost of Sales
Opening Inventory
12
8
Purchases
48
44
Closing Inventory
(10)
(12)
50
40
Statement of Changes in Equity for the year
ended 31 December 20X2
20X2
20X1
Retained Earnings
Opening Reserves
40
30
Net Profit
30
20
Dividend
(10)
(10)
Closing Reserves
60 14
40

ANGES IN ACCOUNTING POLICIES

Accounting Treatment
The switch from LIFO method to FIFO method
represents a change in accounting policy which must
be accounted for retrospectively in the financial
statements.
Adjust all comparative amounts presented in the
financial statements affected by the change in
accounting policy for each prior period presented.
Management estimates that the value of its inventory
using FIFO method would be as follows:
20X2
20X1
20X0
Inventory
12
13
10
15

HANGES IN ACCOUNTING POLICIES

Management further believes that the valuation of
inventory using FIFO method for periods prior to 20X0
would produce materially similar results.
The financial statement extracts of ABC LTD would
appear as follows after the retrospective application
of the change in accounting policy.
Statement of Financial Position as at 31
December 20X2
20X2
20X1
Current Assets
Cash and Bank
6
4
Short Term
5
8
Investments
16
Inventory
12
13

HANGES IN ACCOUNTING POLICIES

The amount of inventory is adjusted for current
period as well as the prior period.
Income Statement for the year ended 31
December 20X2
20X2
20X1
Cost of Sales
Opening Inventory
13
10
Purchases
48
44
Closing Inventory
(12)
(13)
49
41
17

HANGES IN ACCOUNTING POLICIES

Statement of Changes in Equity for the year
ended
31 December 20X2
20X2
20X1
Retained Earnings
Opening Reserves
40
31
Net Profit
31
19
Dividend
(10)
(10)
Closing Reserve
61
40
Note that the change is applied to both current period
and prior period comparative amounts presented (i.e.
retrospectively). The estimated effect of the change in
accounting policy relating to the prior periods that are
not presented (i.e. before 20X1) is adjusted in the
18
opening reserves of 20X1.

ACCOUNTING ESTIMATES

Reasons [Why]

When an item of financial statements cannot be

measured precisely, it can only be estimated. This is
because of:

Uncertainties inherent in the business;

Where judgments are involved based on information

that best reflects the conditions and circumstances
that exist at the reporting date. By its nature,
estimates are subjective and may require frequent
revisions in future.

19

ACCOUNTING ESTIMATES

Change in accounting estimate is a change

either some amount of an asset or a liability, or
pattern of its consumption in both current and
future reporting periods that result from changes
in the circumstances in which the estimate was
based.
As a result of a new information
As a result of new development
More experience
If

these changes result from some error, such as

20

incorrect calculation or wrong application of

CHANGES IN ACCOUNTING
ESTIMATES

Typical examples of changes in

accounting estimates are:

Depreciation rates and useful lives of assets

Provisions for warranty repairs
Impairment of non-current assets
Pattern of economic benefits expected to be
received from non-current assets for
calculating depreciation
21

Impairment of receivables (bad debt

CHANGES IN ACCOUNTING
ESTIMATES

Change in accounting estimates are accounted

prospectively, either:
1. In the current reporting period (e.g. bad debt
estimate);
2. In both the current and future reporting
periods, if the change affects both (for
example, change in useful lives affects
depreciation charges in both the current and
the future reporting periods).
Prospectively means that comparatives
and equity NOT restated. Financial
statements in the previous reporting periods
22

CHANGES IN ACCOUNTING
ESTIMATES

Prospective application of changes in

estimates prevents frequent revisions in prior
period comparative figures which might
cause unnecessary complications in respect
of financial statement balances.

When it is hard to differentiate between a

change in accounting policy and a change in
accounting estimate, the change is
23

accounted for prospectively as an estimate.

DIFFERENCE BETWEEN
ACCOUNTING POLICY AND
ACCOUNTING ESTIMATE
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.
24

APPLYING CHANGES IN ACCOUNTING

POLICY

25

CHANGES IN ACCOUNTING
ESTIMATES
Demonstration

ABC LTD has depreciated a machine over its

expected useful life of 5 years. No residual value
is expected at the end of the machine's useful
life. The cost of machine was Br100,000 and
annual depreciation charge was therefore
Br20,000.
Three years later, the remaining useful life of the
machine was estimated to be only 1 years.
ABC LTD should account for the change in
estimate prospectively by allocating the net
carrying amount of the asset over its remaining
useful life. No adjustment is required to restate
the depreciation charge in previous accounting
26

CHANGES IN ACCOUNTING
ESTIMATES
Depreciation expense for the machine would
therefore be as follows:
Accumula
Depreciat
ted
ion
Working
Depreciat
Expense
ion
(100,000/
Year 1
20,000
20,000
5)
Year 2
20,000
40,000 (80,000/4)
Year
3
30,000
Although
expected
useful70,000
life of (60,000/2)
the machine has
Year
4
100,000
reduced
at the30,000
end of third
year,(30,000/1)
depreciation
expense recorded in previous years is not affected.
Instead, the depreciation expense is increased
27
accordingly in years 3 and 4.

CORRECTIONS OF ERRORS
Prior-period

errors are some omissions from

or misstatements in the financial statements

as a result of ignoring or misusing the
information that was available or could be
reasonably obtained when preparing these
financial statements.

28

CORRECTIONS OF ERRORS

Examples
Misapplication of accounting policies: e.g. not
recognizing sale upon transfer of goods to a customer
Fraud: e.g. overstating sales revenue by issuing fake
invoices before the reporting date
Misunderstanding of, or failure to notice, information
at the time of preparation of financial statements:
e.g. not writing off a receivable who had been
announced as insolvent before the authorization of
financial statements
Arithmetical Errors
Oversights: Omission of transactions and29 events from
the financial statements

CORRECTIONS OF ERRORS

Accounting treatment
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.
If the error IS MATERIAL, then you always
correct it retrospectively, by going back
and restating your figures in the previous
periods.
If an error relates to a reporting period that is
before the earliest prior period presented,
then the opening balances of assets,
30

CORRECTIONS OF ERRORS

Where retrospective correction of accounting errors

from the earliest prior period presented becomes
impracticable due to lack of sufficient data the
correction must be applied prospectively from the
beginning of the earliest period feasible (which may
be the current period).

Accounting Errors discovered after the reporting date

but before the authorization of financial statements
are adjusting events after the reporting date as per
31

IAS 10 and must therefore be corrected in the current

Error

32

CORRECTIONS OF
Demonstration

Comparat
ERRORS
ive
Periods

ABC Inc noted in 20X6 that in 20X5 it had omitted to

record a depreciation expense on an asset amounting
to Br.60. Its accounts, before the correction of errors,
looked like this:
Current
Earliest
Period

Gross profit
Distribution costs
Administrative expenses
Depreciation
Profit from operations
Income tax
Net profit

20X6
600
(60)
(180)
(60)
300
(60)
24033

Period

20X5
690
(60)
(180)
Nil
450
(90)
360

CORRECTIONS OF ERRORS
ABCs retained earnings for the two years before the
correction of errors are:
20X6
20X5
Retained earnings c/fwd
690
450
Retained earnings b/fwd
450
90
IAS 8 (revised) states that the correction of an error
that relates to prior periods should be shown as an
adjustment to the opening balance of retained
earnings.
In the 20X6 accounts (ignoring all tax
implications):
Correcting Entry
Retained earnings
60
[b/fwd]
Accumulated
60 34

CORRECTIONS OF ERRORS
i.e. this will have no impact on the current year
income
statement but is shown as a prior period adjustment
20X6
in the statement of changes in equity:
Retained earnings b/fwd as reported
450
previously
Prior period adjustment to correct error
(60)
Retained earnings, beginning, as restated
390
Net profit
240
Retained earnings c/fwd
630

35

CORRECTIONS OF ERRORS
Comparative information should be restated unless it
is impracticable to do so. The statement of profit or
loss will be presented thus:
20X6
20X5
(restated)
Gross profit
Distribution costs
Administrative expenses
Depreciation
Profit from operations
Income tax
Net profit

600
(60)
(180)
(60)
300
(60)
240

690
(60)
(180)
(60)
390
(90)
300
36

CORRECTIONS OF ERRORS
The statement of changes in equity will also need
comparators:
20X6
20X5
(Restat
ed)
Retained earnings b/fwd as reported
450
90
previously
Prior period adjustment to correct
(60)
Nil
error
Retained earnings, beginning, as
390
90
restated
Net profit
240
300
Retained earnings c/fwd
630
390
37

CORRECTIONS OF ERRORS
The statement of financial position statement
extracts of the company would appear as follows
after the retrospective correction of the prior period
accounting error.
Statement of Financial Position as at 31
December 20X6
20X6
20X5
Non Current Assets
Cost
xxx
xxx
Accumulated
(60+x)
(60)
Depreciation
xxx
xxx
38

PRACTICE
QUESTIONS
TEST YOURSELF

39

A. PRACTICE QUESTIONS
The Braker Division of ABC Co. (HC) has consistently
shown an increasing profit over each of the past four
years. On closer examination of the divisions
operating reports, HCs controller noticed that the bad
debt expense and inventory obsolescence charges are
not in line with the level of activity or with other
divisions. In discussing this with the divisional
accountant, the controller learned that the accountant
used estimates related to the write-off of receivables
and inventory to manage the divisions bottom line
and the amount of profit reported.
Instructions
Discuss what HCs controller should do. Explain
whether any type of accounting change40 is needed
and, if so, how it should be accounted for.

B. PRACTICE QUESTIONS
At a recent conference on financial accounting and
reporting, three participants provided examples of
similar accounting changes they had just encountered.
They all relate to changes involving the accounting for
development costs.
A.The first participant explained that it had recently
come to her attention that capitalized product
development costs incurred three years ago had not
been adjusted or amortized since they were incurred.
These costs should have been amortized over three
years, but had been incorrectly coded and were
missed in the annual adjustment process.
B.The second participant explained that his company
was switching to a policy of expensing development
41
costs as incurred because changing technologies
were making the product life cycles so short.

B. PRACTICE QUESTIONS
C. The third participant also reported a change in
accounting for development costs. In this case,
instead of amortizing development costs on a
straight-line basis over the estimated product life
as in the past, her company was changing to an
activity-based method. The new method charges
an equal amount of development cost amortization
to each inventory item produced. The change was
made because the new approach better represents
the benefits received from the development cost
assets.
Instructions
1. Advise each participant whether the situation
described is a change in accounting policy, a change
42
in accounting estimate, or a correction of
a prior

D. PRACTICE QUESTIONS
Identify whether the following constitute a change in
accounting policy, a revision in accounting estimate or
aA.correction
of ABC
prior-period
error. for its non-current
Previously,
LTD accounted
assets using the historical cost basis. In the
current period, however, ABC LTD has adopted the
revaluation model of IAS 16 to account for its noncurrent assets.
B. ABC LTD previously had a policy of calculating
depreciation on equipment using the straight line
method @ 10%. However, In light of significant
losses recognized on recent disposals the
management has decided to depreciate
43
equipment by using the reducing balance method

D. PRACTICE QUESTIONS
C. ABC LTD has a policy of valuing inventory using the
FIFO method.
The value of inventory brought forward in the
current period (i.e. last year's closing inventory
balance) has been changed because it had
erroneously been valued using the LIFO method last
year.
D. ABC LTD has a past practice of recognizing sales
revenue at the time of dispatch of goods to the
retailers. In the current period, however, sales
revenue has not been recognized by ABC LTD until
the goods sold to retailers have been re-sold
to the
44
end-consumers. Management believes the new

D. PRACTICE QUESTIONS
E. In estimating the employee benefits obligations of
ABC LTD at the previous year end, the actuary
failed to take into account ABC LTD's plan to
discontinue operations in one of its geographic
segments. Management had announced its plan
three years ago.
Recently, the actuary furnished revised estimates
of ABC PLC's liability with respect to employee
benefits of the current and prior periods taking into
account the plans for discontinuation.
Financial statements of this year have45been
amended accordingly.

E. PRACTICE QUESTIONS
DEF PLC has been valuing inventory on the basis of
Average Cost Method (AVCO) until 30 June 2013. DEF
PLC is involved in a seasonal business and the use of
AVCO method dilutes the effect of seasonal fluctuation
on the cost of inventory.
Management believes FIFO Method will provide
more relevant information regarding the value of
inventory held by DEF PLC and has decided to apply it
for the first time starting from the current period.
Value of inventory calculated using the two basis is as
follows:
As at 30 June '14 As at 30 June '13
What amount of inventory should be presented in
FIFO
Br275,000
Br250,000
the financial statements under consideration as
AVCO
Br300,000
Br200,000
46
at 30 June 2013 & 2014?

E. PRACTICE QUESTIONS
30 June '14

30 June '13

Correct
Br275,000 Br250,000
Answer:
Change in inventory valuation method constitutes a
change in the accounting policy. A change in
accounting policy is acceptable where it results in the
presentation of more relevant and reliable financial
statements. As per IAS 8, the change is applied
retrospectively whereby the prior period comparative
figure of inventory balance should be restated in
accordance with the new valuation method.

47

G. PRACTICE QUESTIONS
DEF PLC has a policy of recognizing revenue upon the
sale of their goods by its distributors to the retailers.
This year has been particularly hard for the Company's
business. In order to improve the profitability of DEF
PLC, Steve has suggested recognizing sales revenue
upon the delivery of goods to the Company's distributors
instead of delaying it until the sales are made to
retailers. Comparison of the sales revenue using the
different revenue recognition policies is as follows:
Sales for the
Sales for the comparative
current
year ended
year ended
30 June '13
What amount 30
of revenue
June '14 should be presented in
thepolicy
financial statements
for 30
Old
Br2,500,000under consideration
Br3,000,000
48
June 2013/14?
New

H. PRACTICE QUESTIONS
EFG PLC has been valuing its buildings on the historical
cost basis until last year. From the current period,
management has planned to apply the revaluation
model of IAS 16 to account for its buildings.
The carrying values of buildings calculated using the
two basis of valuation are as follows:
As at 30 June '14
As at 30 June '13
Historical
Br800,000
Br900,000
Cost
Revalued
Br2,700,000
Br2,200,000
What
carrying
values
of
buildings
should
be presented
Cost
in the Statement of Financial Position as at 30 June for
current and comparative year end?:
49

L. PRACTICE QUESTIONS

50

In which order must an entity account for multiple

changes with respect to a single asset? Choose 1 of:
1) 1st change of accounting policy, 2nd change in
accounting estimate, and 3rd correction of a prior
period error;
2) 1st change in accounting estimate, 2nd change of
accounting policy, and 3rd correction of a prior
period error; or
3) 1st correction of a prior period error, 2nd change
of accounting policy, and 3rd change in
accounting estimate.
Why is only one order correct?

50