IAS 8

ACCOUNTING POLICIES,
CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS

Presented By: Mr. Feysel Takele (ACCA) and Mr. Tilahun Girma(ACCA)
1
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 2
3
1. 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 [IAS 1].
 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
IAS 32/IAS 39/IFRS 9 4
I. ACCOUNTING POLICIES

5
 WHEN
TO
REPORT?

ACOUNTING
WHERE POLICIES WHAT
TO TO
REPORT? USEFULNESS REPORT?
FOR DECISION
MAKING

HOW
TO
REPORT? 6
1. SELECTION OF ACCOUNTING
POLICIES
IAS 8 HIERARCHY
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.
4. Consider the most recent pronouncements of other
standard-setting bodies. 7
2. CHANGES IN ACCOUNTING
POLICIES
 WHEN TO CHANGE AN ACCOUNTING
POLICY?
 MANDATORY: When it is required by another IFRS.
This will be the case when new IFRS is issued and you
HAVE TO apply it mandatorily.
 VOLUNTARY: When new accounting policy provides
better, more faithful and relevant information. In this
case, you apply new accounting policy voluntarily. 8
2. CHANGES IN ACCOUNTING POLICIES
EXAMPLES OF CHANGES IN ACCT
POLICY
−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 weighted average
to FIFO
−Changing the way in which an item is presented in the
accounts, i.e. classifying depreciation expenses as cost
of sales instead of administrative 9
2. CHANGES IN ACCOUNTING POLICIES
 EXCLUSIONS [NOT TO BE ACCOUNTED AS
CHANGES]
−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. PPE
REVALUATION
A CHANGE IN ACCT POLICY METHOD
PPE
COST
METHOD NOT A CHANGE IN ACCT IP
POLICY FAIR VALUE
METHOD
10
2. CHANGE IN ACCOUNTING
POLICIES
ACCOUNTING TREATMENT [HOW]
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 there’s no transitional guidance, change the
accounting policy voluntarily, then apply it
retrospectively as if the new policy had always been in
11

place.
2. 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
12

method provided allow or require prospective application of a new

2. 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 conditions
that caused the impracticality
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 CASE 1
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. Management estimates that the value of its inventory
using FIFO method would be as follows:

20X2 20X1 20X0

Inventory 12 13 10
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. 14
 CASE 1 LIFO FIFO
Statement of Financial Position as at 31 December 20X2
20X2 20X1 20X2 20X1
Current Assets
Cash and Bank 6 4 6 4
Short Term Investments 5 8 5 8
Inventory 10 12 12 13
21 24 23 25
P & L Statement for the year ended 31 December 20X2
20X2 20X1 20X2 20X1
Cost of Sales
Opening Inventory 12 8 13 10
Purchases 48 44 48 44
Closing Inventory (10.00) (12.00) (12.00) (13.00)
50 40 49 41
Statement of Changes in Equity for the year ended 31 December 20X2
20X2 20X1 20X2 20X1
Retained Earnings
Opening Reserves 40 30 40.00 31.00
Net Profit 30 20 31.00 19.00
Dividend (10.00) (10.00) (10.00) (10.00)
Closing Reserves 60 40 61.00 40.00
15
 CASE 2
A company has accounted for its inventory using the average-cost
method since inception. In 2015, the company changes to the FIFO
method because management believes this approach provides a
more appropriate measure of its inventory costs.
Inventory determined under average cost and FIFO for the period 2013-2015
AC FIFO
1-Jan-13 0 0
31-Dec-13 10000 12000
31-Dec-14 20000 25000
31-Dec-15 32000 39000

COGS determined under average cost and FIFO for the period 2013-2015
AC FIFO
2013 80000 78000
2014 100000 97000
2015 113000 111000
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Case 2 Contd.
AC
P & L Stat 2013 2014 2015
COGS 80,000.00 100,000.00 113,000.00
NI 120,000.00 100,000.00 87,000.00
Stat. of RE
RE, BF - 120,000.00 220,000.00
NI 120,000.00 100,000.00 87,000.00
RE, CF 120,000.00 220,000.00 307,000.00
Stat. of FP
Inventory 10,000.00 20,000.00 32,000.00
FIFO
P & L Stat 2013 2014 2015
COGS 78,000.00 97,000.00 111,000.00
NI 122,000.00 103,000.00 89,000.00
Stat. of RE
RE, BF - 122,000.00 225,000.00
NI 122,000.00 103,000.00 89,000.00
RE, CF 122,000.00 225,000.00 314,000.00
Stat. of FP
Inventory (FIFO) 12,000.00 25,000.00 39,000.0017
Case 2 Contd.

ACCOUNTING TREATMENT

Net income

Year AC FIFO Difference

2013 120,000.00 122,000.00 2,000.00

2014 100,000.00 103,000.00 3,000.00

Tot. @ beginning of 2015 220,000.00 225,000.00 5,000.00

CUMULATIVE PRIOR PERIOD ADJUSTMENT

Inventory 5,000.00

Retained earnings 5,000.00

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II. ACCOUNTING ESTIMATES

19
1. DEFINITION
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.

20
2. CHANGES IN 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 incorrect
calculation or wrong application of accounting policies – then
they are NOT changes in accounting estimates, but errors. 21
3. EXAMPLES
− 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
− Impairment of receivables (bad debt provisions)

22
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.

23
APPLYING CHANGES IN ACCOUNTING
POLICY

24
4. ACCOUNTING TREATMENT
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 not restated and simply adjust calculations in
the current and future reporting periods.
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4. ACCOUNTING TREATMENT
 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 accounted for prospectively as an estimate.

26
5. DISCLOSURES

a. the nature of the change;

b. the effect on the current periods financial
statements; and
c. the effect in future periods if this is
practicable.

27
CASE
− 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
periods.

28
CASE
Depreciation expense for the machine would therefore be as
follows:
Accumulate
Depreciation
d Working
Expense
Depreciation
Year 1 20,000 20,000 (100,000/5)
Year 2 20,000 40,000 (80,000/4)
Year 3 30,000 70,000 (60,000/2)
Year 4 30,000 100,000 (30,000/1)
Although expected useful life of the machine has reduced at the
end of third year, depreciation expense recorded in previous years
is not affected. Instead, the depreciation expense is increased
accordingly in years 3 and 4.
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III. CORRECTION OF PRIOR
PERIOD ERRORS

30
1. DEFINITION
Omissions from, and misstatements in, the entity’s FS for
one or more prior periods arising from a failure to use, or
misuse of, reliable information that:
was available when FS 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 FS.
31
2. TYPE OF PRIOR PERIOD ERRORS
Such errors include the effects of:
− 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/misinterpretations of facts, 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/mathematical mistakes
− Oversights: Omission of transactions and events from the financial
statements
32
3. ACCOUNTING TREATMENT

 Accounting Errors discovered after the reporting date but before

the authorization of financial statements are adjusting events after
the reporting date as per IAS 10 and must therefore be corrected
in the current period prior to the issuance of financial statements.
33
 Comparative
Periods
CASE
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 Period Earliest Period
20X6 20X5
Gross profit 600 690
Distribution costs (60) (60)
Administrative expenses (180) (180)
Depreciation (60) Nil
Profit from operations 300 450
Income tax (60) (90)
Net profit 240 36034
CASE
ABC’s 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 [b/fwd] 60
Accumulated depreciation 60
35
CASE
i.e. this will have no impact on the current year income
statement but is shown as a prior period adjustment in the
statement of changes in equity:
20X6
Retained earnings b/fwd as reported previously 450
Prior period adjustment to correct error (60)
Retained earnings, beginning, as restated 390
Net profit 240
Retained earnings c/fwd 630

36
CASE
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 600 690
Distribution costs (60) (60)
Administrative expenses (180) (180)
Depreciation (60) (60)
Profit from operations 300 390
Income tax (60) (90)
Net profit 240 300
37
CASE
The statement of changes in equity will also need comparators:

20X6 20X5
(Restated)
Retained earnings b/fwd as reported previously 450 90
Prior period adjustment to correct error (60) Nil
Retained earnings, beginning, as restated 390 90
Net profit 240 300
Retained earnings c/fwd 630 390

38
CASE
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

39
 4. DISCLOSURES

a. the nature of the prior period error;

b. the amount of the correction for each period
presented;
c. the amount of the correction at the start of the earlier
prior period presented; and
d. if retrospective correction is not practicable, a
description of how and when the error was corrected.
 
SUMMARY

Current Prior Period

Period Adjustment
Adjustment
Change in 
accounting policy

Correction of 
material errors

Change in 
accounting estimate
PRACTICE QUESTIONS
Identify whether the following constitute a change in accounting
policy, a revision in accounting estimate or a correction of prior-
period error. ABC LTD accounted for its non-current assets
A. Previously,
using the historical cost basis. In the current period, however,
ABC LTD has adopted the revaluation model of IAS 16 to
account for its non-current 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 equipment by using the
reducing balance method @ 20% which shall more accurately
reflect the wear and tear of equipment. 42
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 end-
consumers. Management believes the new recognition rule more
accurately reflects the economic substance of the sales and
returns arrangement with retailers. 43
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 have been amended

accordingly.
44
a. Change in Accounting Policy: Basis of measurement of the
elements of financial statements (e.g. historical cost, fair value,
etc.) represent accounting policies. Any change in the basis of
measurement therefore constitutes a change in accounting
policy.
b. Revision of Accounting Estimate: Change in the depreciation
method merely reflects a shift in the management's expectation of
the pattern of periodic consumption of equipment and therefore
represents a revision in accounting estimate.
c. Correction of Prior-Period Error: Misapplication of an
accounting policy represents an accounting error. The
restatement of last year's closing inventory in current period
financial statements therefore represents a correction of prior-
period error rather than a change in accounting policy or 45
d. Change in Accounting Policy: Variation in rules and
practices used in the preparation of financial statements
represents a change in accounting policy.

e. Correction of Prior-Period Error: Failing to consider

material information while developing estimates that was
already available at that time constitutes an accounting
error.

46
PRACTICE QUESTIONS 47 47

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?
PRACTICE QUESTIONS
Our machines are fully depreciated, but we still
use them! What shall we do?

48
It means that you simply set the new remaining useful life,
take the carrying amount and recognize the depreciation
charge based on the carrying amount and new remaining
useful life.

when the carrying amount (net book value) of my

assets is zero?
If you reviewed the useful lives in the past regularly and during the
current reporting period you find out that you’d like to use the
assets even longer, then there’s not much to do. Just leave these
assets as they are and make sure you avoid this situation in the
future.
However, if you really forgot to revise the useful lives in the
previous reporting period, this failure to apply IAS 16 results in the
accounting error.
If this error is material, then you should correct it retrospectively 49in
line with IAS 8.