International Accounting Standard 8
Accounting Policies, Changes in
Accounting Estimates and Errors
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 8
Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies replaced IAS 8 Unusual and Prior Period Items and Changes in Accounting Policies (issued in February 1978).
In December 2003, the IASB issued a revised IAS 8 with a new title—Accounting Policies, Changes
in Accounting Estimates and Errors. This revised IAS 8 was part of the IASB's initial agenda of technical projects. The revised IAS 8 also incorporated the guidance contained in two
related Interpretations (SIC-2 Consistency—Capitalisation of Borrowing Costs and SIC-18 Consistency—Alternative Methods).
Other IFRSs have made minor consequential amendments to IAS 8. They include IFRS 9
Financial Instruments (issued November 2009 and October 2010), IFRS 13 Fair Value Measurement (issued May 2011) and IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013).
CONTENTS
INTRODUCTION
INTERNATIONAL ACCOUNTING STANDARD 8
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
OBJECTIVE
SCOPE
DEFINITIONS
ACCOUNTING POLICIES
Selection and application of accounting policies
Consistency of accounting policies
Changes in accounting policies
Applying changes in accounting policies
Retrospective application
Limitations on retrospective application
Disclosure
CHANGES IN ACCOUNTING ESTIMATES
Disclosure
ERRORS
Limitations on retrospective restatement
Disclosure of prior period errors
IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE APPLICATION AND
RETROSPECTIVE RESTATEMENT
EFFECTIVE DATE
WITHDRAWAL OF OTHER PRONOUNCEMENTS
APPENDIX
Amendments to other pronouncements
from paragraph
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IAS 8 ISSUED IN DECEMBER 2003
BASIS FOR CONCLUSIONS
IMPLEMENTATION GUIDANCE
International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) is set out in paragraphs 1-56 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 8 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting.
International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) replaces IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is
encouraged. The Standard also replaces the following Interpretations:
● SIC-2 Consistency—Capitalisation of Borrowing Costs
● SIC-18 Consistency—Alternative Methods.
Reasons for revising IAS 8
The International Accounting Standards Board developed this revised IAS 8 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 8, the Board's main objectives were:
to remove the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement
to correct prior period errors;
to eliminate the concept of a fundamental error;
to articulate the hierarchy of guidance to which management refers, whose applicability it considers when selecting accounting policies in
the absence of Standards and Interpretations that specifically apply;
to define material omissions or misstatements, and describe how to apply the concept of materiality when applying accounting policies and
correcting errors; and
to incorporate the consensus in SIC-2 and in SIC-18.
The Board did not reconsider the other requirements of IAS 8.
Changes from previous requirements
The main changes from the previous version of IAS 8 are described below.
Selection of accounting policies
The requirements for the selection and application of accounting policies in
IAS 1 Presentation of Financial Statements (as issued in 1997) have been transferred
to the Standard. The Standard updates the previous hierarchy of guidance to which management refers and whose applicability it considers when selecting accounting policies in the absence of International Financial Reporting Standards (IFRSs) that specifically apply.
Materiality
The Standard defines material omissions or misstatements. It stipulates that:
the accounting policies in IFRSs need not be applied when the effect of
applying them is immaterial. This complements the statement in IAS 1 that disclosures required by IFRSs need not be made if the information is immaterial.
financial statements do not comply with IFRSs if they contain material errors.
material prior period errors are to be corrected retrospectively in the
first set of financial statements authorised for issue after their discovery.
Voluntary changes in accounting policies and
corrections of prior period errors
The Standard requires retrospective application of voluntary changes in
accounting policies and retrospective restatement to correct prior period errors.
It removes the allowed alternative in the previous version of IAS 8:
(a) to include in profit or loss for the current period the adjustment
resulting from changing an accounting policy or the amount of a
correction of a prior period error; and
(b) to present unchanged comparative information from financial
statements of prior periods.
As a result of the removal of the allowed alternative, comparative information for prior periods is presented as if new accounting policies had always been applied and prior period errors had never occurred.
Impracticability
The Standard retains the 'impracticability' criterion for exemption from
changing comparative information when changes in accounting policies are applied retrospectively and prior period errors are corrected. The Standard now includes a definition of 'impracticable' and guidance on its interpretation.
The Standard also states that when it is impracticable to determine the
cumulative effect, at the beginning of the current period, of:
(a) applying a new accounting policy to all prior periods, or
(b) an error on all prior periods
the entity changes the comparative information as if the new accounting policy
had been applied, or the error had been corrected, prospectively from the earliest date practicable.
Fundamental errors
The Standard eliminates the concept of a fundamental error and thus the
distinction between fundamental errors and other material errors. The Standard defines prior period errors.
Disclosures
The Standard now requires, rather than encourages, disclosure of an impending
change in accounting policy when an entity has yet to implement a new IFRS that has been issued but not yet come into effect. In addition, it requires disclosure of known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity's financial statements in the period of initial application.
The Standard requires more detailed disclosure of the amounts of adjustments resulting from changing accounting policies or correcting prior period errors. It requires those disclosures to be made for each financial statement line item affected and, if IAS 33 Earnings per Share applies to the entity, for basic and
diluted earnings per share.
Other changes
The presentation requirements for profit or loss for the period have been
transferred to IAS 1.
The Standard incorporates the consensus in SIC-18, namely that:
an entity selects and applies its accounting policies consistently for similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which
different policies may be appropriate; and
if an IFRS requires or permits such categorisation, an appropriate
accounting policy is selected and applied consistently to each category.
The consensus in SIC-18 incorporated the consensus in SIC-2, and requires that when an entity has chosen a policy of capitalising borrowing costs, it should apply this policy to all qualifying assets.
The Standard includes a definition of a change in accounting estimate.
The Standard includes exceptions from including the effects of changes in accounting estimates prospectively in profit or loss. It states that to the extent that a change in an accounting estimate gives rise to changes in assets or liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.
International Accounting Standard 8
Accounting Policies, Changes in Accounting Estimates and
Errors
Objective
Scope
The objective of this Standard is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. The Standard is intended to enhance the relevance and reliability of an entity's financial statements, and the comparability of those financial statements over time and with the financial statements of other entities.
Disclosure requirements for accounting policies, except those for changes in
accounting policies, are set out in IAS 1 Presentation of Financial Statements.
This Standard shall be applied in selecting and applying accounting policies, and accounting for changes in accounting policies, changes in accounting estimates and corrections of prior period errors.
The tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with IAS 12 Income Taxes.
Definitions
The following terms are used in this Standard with the meanings
specified:
Accounting policies are the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount
of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.
International Financial Reporting Standards (IFRSs) are Standards and
Interpretations issued by the International Accounting Standards Board
(IASB). They comprise:
(a) International Financial Reporting Standards
(b) International Accounting Standards
(c) IFRIC Interpretations; and
(d) SIC Interpretations.1
Material Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.
Prior period errors are omissions from, and misstatements in, the entity's
financial statements for one or more prior periods arising from a failure
to use, or misuse of, reliable information that:
was available when financial statements for those periods were
authorised for issue; and
could reasonably be expected to have been obtained and taken
into account in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Retrospective application is applying a new accounting policy to
transactions, other events and conditions as if that policy had always been applied.
Retrospective restatement is correcting the recognition, measurement
and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.
Impracticable Applying a requirement is impracticable when the entity
cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement
to correct an error if:
the effects of the retrospective application or retrospective
restatement are not determinable;
the retrospective application or retrospective restatement requires assumptions about what management's intent would have been in
that period; or
the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to
distinguish objectively information about those estimates that:
(provides evidence of circumstances that existed on the
date(s) as at which those amounts are to be recognised,
measured or disclosed; and
1 Definition of IFRSs amended after the name changes introduced by the revised Constitution of the IFRS
Foundation in 2010.
(would have been available when the financial statements
for that prior period were authorised for issue from other information.
Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively,
are
applying the new accounting policy to transactions, other events
and conditions occurring after the date as at which the policy is
changed; and
recognising the effect of the change in the accounting estimate in
the current and future periods affected by the change.
Assessing whether an omission or misstatement could influence economic
decisions of users, and so be material, requires consideration of the characteristics of those users. The Framework for the Preparation and Presentation of Financial Statements states in paragraph 252 that 'users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.' Therefore, the assessment needs to take into account how users with such attributes could reasonably be expected to be influenced in making economic decisions.
Accounting policies
Selection and application of accounting policie