Accounting Policies and Error Correction (IAS 8)
Accounting Policies and Error Correction (IAS 8): Consistency, Change, and Professional Disclosure
Consistency is the secret to the credibility of financial reports. If a company changes its way of calculating inventory or depreciation every year, comparing its performance becomes impossible. The international standard IAS 8 provides a strict framework for choosing and changing Accounting Policies, handling Accounting Estimates, and correcting Prior Period Errors. In this article, we explain how to deal with these changes professionally: When is retrospective application mandatory? How do you distinguish between a policy and an estimate? And how do you restate figures when a material error is discovered?
- Defining Accounting Policies and the criteria for selecting them.
- The Consistency Principle: Why you shouldn’t change your policies without justification.
- The difference between a Change in Policy vs. a Change in Estimate.
- Visual model (SVG) of the treatment flow: Retrospective vs. Prospective.
- How to correct Prior Period Errors and restate comparative figures.
- Practical examples: Switching inventory methods vs. updating asset useful life.
- A professional checklist for mandatory disclosures in the notes.
1) What are Accounting Policies?
Accounting Policies are the specific principles, bases, conventions, rules, and practices applied by a company in preparing and presenting financial statements.
2) The Consistency Rule and Justified Changes
A company must select and apply its accounting policies consistently for similar transactions. You can only change a policy if:
- It is required by a new IFRS Standard.
- The change results in financial statements providing more reliable and relevant information about the company’s position.
3) Change in Policy vs. Change in Estimate
| Feature | Change in Policy | Change in Estimate |
|---|---|---|
| Definition | Change in the measurement Basis. | Adjustment based on New Info. |
| Example | FIFO ➡ Weighted Average. | Updating the useful life of a car. |
| Accounting Treatment | Retrospective (Past + Present). | Prospective (Present + Future). |
| Impact | Restating opening Retained Earnings. | Affects current and future P&L. |
4) Visual Flow: The Decision Logic
5) Correcting Prior Period Errors
Errors are omissions or misstatements in financial statements for one or more prior periods. If the error is Material (significant enough to affect decisions), it must be corrected by:
IFRS Comparison Guide - PDF File
- Restating the comparative amounts for the prior period(s) presented.
- Restating the opening balance of Retained Earnings for the earliest period presented if the error happened before that.
6) Retrospective Application (Fixing the Past)
When applying a new policy retrospectively, you act as if the new policy had always been applied.
8) Professional Disclosure Checklist
According to IAS 8, you must disclose the following in the notes:
- The nature of the change (Policy, Estimate, or Error). ✅
- The reasons why the new policy provides more reliable info. ✅
- The amount of adjustment for each financial statement line item affected. ✅
- The amount of the adjustment relating to periods before those presented. ✅
9) Frequently Asked Questions
If I change the depreciation method, is it a policy or estimate?
Under IAS 8, changing a depreciation method (e.g., from SL to DDB) is considered a Change in Accounting Estimate and is handled prospectively.
What happens if I find an error from 5 years ago?
You must adjust the opening balance of Retained Earnings for the earliest year shown in your current comparative reports (usually last year).
10) Conclusion
The summary is simple: IAS 8 ensures that financial statements are a consistent “Video” of the company’s life, not just a series of disconnected “Photos.” By mastering the distinction between policies, estimates, and errors, you build a transparent reporting system that earns the trust of investors and regulators.