Accounting Science

Comprehensive Examination of IAS 8 Standard: Accounting Policies, Changes in Accounting Estimates and Errors

Posted by

mariam elghandour

March 15, 2025

On February 17, 2025

IAS 8 Standard, “Accounting Policies, Changes in Accounting Estimates and Errors,” governs how companies deal with changes in accounting policies, how to make adjustments to accounting estimates, and the treatment of errors discovered in prior periods. IAS 8 Standard is one of the important International Financial Reporting Standards (IFRS) that aims to enhance the consistency, reliability, and comparability of financial information over time. In this article, we will provide a comprehensive examination of IAS 8 Standard, discussing its objectives, scope, and key requirements, focusing on how to distinguish between changes in accounting policies and changes in accounting estimates, the treatment of errors, and highlighting the importance of this standard and its impact on financial statements.

What is IAS 8 Standard: Accounting Policies, Changes in Accounting Estimates and Errors?

IAS 8 Standard is an international accounting standard that specifies how to deal with changes in accounting policies, changes in accounting estimates, and the correction of errors in financial statements. This standard aims 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.

Objectives of IAS 8 Standard:

Specify the Criteria for Selecting and Changing Accounting Policies: IAS 8 Standard provides guidance on how to select and apply accounting policies, and how to account for and disclose changes in those policies.
Specify How to Account for Changes in Accounting Estimates: IAS 8 Standard clarifies how to account for changes in accounting estimates, such as changes in estimates of the useful lives of assets or their depreciation rates.
Specify How to Correct Errors: IAS 8 Standard specifies how to account for and disclose errors relating to prior periods.
Enhance the Consistency and Reliability of Financial Statements: IAS 8 Standard helps ensure that financial statements are prepared consistently over time, enhancing their reliability and usefulness to users of those statements.
Improve the Comparability of Financial Statements: IAS 8 Standard contributes to improving the comparability of financial statements between companies by standardizing how changes in accounting policies, estimates, and errors are treated.

Scope of IAS 8 Standard:

IAS 8 Standard applies to all entities that prepare financial statements in accordance with IFRS when:

Selecting and applying accounting policies.
Accounting for changes in accounting policies.
Accounting for changes in accounting estimates.
Correcting prior period errors.

Key Definitions in IAS 8 Standard:

Accounting Policies: The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.
Change in Accounting Policy: A change from one generally accepted accounting policy to another generally accepted accounting policy, or a change to the measurement basis used.
Change in Accounting Estimate: 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.
Prior Period Errors: 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 and could reasonably be expected to have been obtained.
Retrospective Application: Applying a new accounting policy to transactions, other events, and conditions as if that policy had always been applied.
Retrospective Restatement: Correcting the recognition, measurement, and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.
Prospective Application: Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed and recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.

Accounting Policies:

Selection of Accounting Policies: When an IFRS Standard specifically addresses a transaction or event, the entity must apply that standard. In the absence of a specific standard, management must use its judgment in developing and applying an accounting policy that results in information that is:
- Relevant: Meets the decision-making needs of users of the financial statements.
- Reliable: Faithfully represents the entity’s financial position, financial performance, and cash flows, reflects the economic substance of transactions, is neutral, prudent, and complete in all material respects.
Consistency of Accounting Policies: An entity must select and apply its accounting policies consistently for similar transactions, other events, and conditions, unless an IFRS Standard specifically requires or permits categorization of items for which different policies may be appropriate.

Changes in Accounting Policies:

When is a Change in Accounting Policy Permitted? A change in accounting policy is permitted only in the following two cases:
- The change is required by a new IFRS Standard or an amendment to an existing standard.
- The change will result in more reliable and relevant information about the effects of transactions, other events, or conditions on the entity’s financial position, financial performance, or cash flows.
How to Account for Changes in Accounting Policies:
- Retrospective Application: As a general rule, changes in accounting policies must be applied retrospectively, i.e., adjusting the financial statements of prior periods as if the new policy had always been applied. This is intended to enhance the comparability of financial statements over time.
- Adjustment to the Opening Balance of Retained Earnings: The opening balance of retained earnings in the statement of changes in equity is adjusted for the effect of the change in accounting policy.
- Restatement of Comparative Financial Statements: Comparative financial statements for prior periods must be restated to reflect the application of the new accounting policy.
- Disclosure: The nature of the change in accounting policy, the reasons for the change, and its impact on the financial statements for both the current and prior periods must be disclosed.
Limitations on Retrospective Application
- In some instances, it may be impracticable to apply the change in accounting policy retrospectively to all prior periods. In these cases, the change is applied retrospectively to the earliest period practicable.

Changes in Accounting Estimates:

Definition of Accounting Estimates: Accounting estimates are approximations of financial amounts that cannot be determined precisely and require the use of professional judgment. Examples of accounting estimates include: estimating the useful life of fixed assets, estimating the value of allowance for doubtful accounts, and estimating the value of warranty obligations.
How to Account for Changes in Accounting Estimates: The effect of a change in an accounting estimate is recognized prospectively, i.e., in the period in which the change occurred and future periods affected. Financial statements of prior periods are not adjusted.
Disclosure: The nature and amount of any change in an accounting estimate that has a material effect in the current period or is expected to have a material effect in future periods must be disclosed.

Errors:

Definition of an Error: An error is an omission from, or misstatement 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 and could reasonably be expected to have been obtained.
Correction of Errors: Material prior period errors must be corrected as soon as possible after their discovery.
How to Account for Errors: Prior period errors are corrected by restating the comparative financial statements for those periods as if the error had never occurred (retrospective restatement). The opening balance of retained earnings for the earliest prior period presented is adjusted.
Disclosure: The nature of the error, the amount of the correction for each affected financial statement line item, and the amount of the correction relating to periods prior to those presented in the comparative financial statements (if practicable) must be disclosed.

Examples of Applying IAS 8 Standard:

Example 1: Change in Accounting Policy: Company “A” decided to change its inventory valuation method from First-In, First-Out (FIFO) to the weighted-average method. This change is considered a change in accounting policy. Company “A” must apply this change retrospectively and restate the comparative financial statements for the previous year as if the weighted-average method had always been used. The company must also disclose the nature of the change and its impact on the financial statements.
Example 2: Change in Accounting Estimate: Company “B” decided to increase the useful life of one of its fixed assets from 5 years to 7 years. This change is considered a change in accounting estimate. Company “B” must recognize the impact of this change prospectively, i.e., by reducing the depreciation expense in the remaining years of the asset’s life. Restatement of the financial statements for prior years is not required.
Example 3: Correction of Error: Company “C” discovered that it had not recorded a sales transaction of $10,000 in the previous year. This discovery is considered a material error. Company “C” must correct this error by restating the financial statements for the previous year and showing the impact of this correction on the opening balance of retained earnings for that year.

Importance of IAS 8 Standard for Companies:

IAS 8 Standard is one of the important IFRSs that helps companies to:

Ensure Consistency and Reliability of Financial Statements: IAS 8 Standard helps ensure that financial statements are prepared consistently over time, enhancing their reliability and usefulness to users of those statements.
Improve the Quality of Financial Information: Applying IAS 8 Standard leads to improved quality and relevance of financial information provided to stakeholders.
Enhance the Comparability of Financial Statements: IAS 8 Standard contributes to improving the comparability of financial statements between companies by standardizing how changes in accounting policies, estimates, and errors are treated.
Comply with IFRS: IAS 8 Standard ensures that companies comply with the requirements of IFRS regarding accounting policies, accounting estimates, and errors.

Role of Technology in Applying IAS 8 Standard:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IAS 8 Standard more efficiently and accurately through:

Automating the process of recording changes in accounting policies and accounting estimates.
Automatically making the necessary adjustments to the financial statements.
Generating the reports needed to comply with disclosure requirements.
Improving the accuracy and comprehensiveness of financial information related to changes in accounting policies, estimates, and errors.

Conclusion

IAS 8 Standard provides a clear and structured framework for dealing with changes in accounting policies, and estimates, and errors. Applying this Standard helps enhance the consistency, reliability and comparability of financial information over time and across different companies. Understanding of IAS 8 Standard is essential for accountants, auditors, investors, and anyone seeking to understand how the changes in accounting policies, estimates, and errors affect the financial statements. Complying with the IAS 8 Standard requirements, also enhances transparency and credibility in financial reporting, and supports efficient capital markets.