Objective
IAS 8 prescribes:
-
How to select and apply accounting policies,
-
How to account for changes in accounting policies and estimates, and
-
How to correct prior period errors.
The goal is to ensure consistency and comparability of financial statements over time.
1. Key Definitions
| Term | Meaning |
|---|---|
| Accounting Policies | Principles, bases, conventions, rules, and practices applied in preparing and presenting financial statements. |
| Accounting Estimates | Adjustments of the carrying amounts of assets or liabilities based on new information or developments. |
| Errors | Omissions or misstatements in financial statements due to mistakes, fraud, or misuse of accounting policies. |
2. Accounting Policies
Selection of Accounting Policies
When IFRS specifically applies, follow that standard.
If no specific IFRS applies, management uses judgment to develop and apply a policy that:
-
Provides relevant and reliable information, and
-
Considers the Conceptual Framework for Financial Reporting.
Consistency
Apply accounting policies consistently for similar transactions unless:
-
A new standard requires a change, or
-
The change provides more reliable and relevant information.
Example:
A company has always valued inventory at FIFO.
It now changes to Weighted Average because it better reflects actual flow of goods.
→ This is a change in accounting policy.
→ Must apply retrospectively (adjust prior year figures).
3. Changes in Accounting Policies
A change in accounting policy is allowed only if:
-
Required by a new IFRS or interpretation; or
-
Results in more relevant and reliable information.
Accounting Treatment: Retrospective Application
-
Adjust opening balances of affected assets, liabilities, and equity for the earliest prior period presented.
-
Restate comparative figures as if the new policy had always been applied.
Example:
In 2025, a company changes inventory valuation from FIFO to Weighted Average.
→ Inventory (2024 closing) would have been $95,000 under FIFO and $90,000 under Weighted Average.
→ Decrease retained earnings by $5,000 in 2024 comparative figures.
4. Changes in Accounting Estimates
Definition
Changes in accounting estimates result from new information or developments — not corrections of errors.
Examples:
-
Useful lives or residual values of assets
-
Allowance for doubtful debts
-
Fair value of assets or liabilities
Accounting Treatment: Prospective Application
-
Apply the change from the period of change onward.
-
Do not restate prior periods.
Example 1:
Machine cost = $100,000
Useful life = 10 years → Depreciation = $10,000/year
After 3 years, reassessed useful life = 8 years total (5 years remaining).
→ Remaining carrying amount = $70,000
→ New depreciation = $70,000 / 5 = $14,000 per year (prospective change).
Example 2:
Bad debt allowance was 5%, but based on new data, it should be 8%.
→ Adjust provision prospectively in current year only.
5. Errors
Definition
Errors are mistakes or omissions in prior period financial statements.
Examples:
-
Mathematical mistakes
-
Misapplication of accounting policies
-
Oversight of facts
-
Fraud or intentional misstatement
Accounting Treatment: Retrospective Restatement
-
Correct the error retrospectively by:
-
Restating comparative amounts for prior periods, or
-
Adjusting opening balances of retained earnings (if before the earliest period presented).
-
Example 1:
In 2025, the company discovers that depreciation for 2023 was understated by $10,000.
→ Restate 2023 comparative figures to increase depreciation expense by $10,000.
→ Adjust opening retained earnings (if applicable).
Example 2:
Revenue of $20,000 earned in 2024 was omitted.
→ Restate 2024 comparative financials to include that revenue.
6. Distinguishing Between Policy, Estimate, and Error
| Situation | Type | Treatment |
|---|---|---|
| Change from FIFO to Weighted Average | Change in policy | Retrospective |
| Revision of asset useful life | Change in estimate | Prospective |
| Correction of missed depreciation | Error | Retrospective |
| Adoption of new IFRS | Change in policy | As required by standard |
| New method for doubtful debts (new data) | Change in estimate | Prospective |
7. Disclosure Requirements
When a change in policy, estimate, or error occurs, disclose:
-
Nature and reason for the change
-
Amount of adjustment for each financial statement line affected
-
For estimates: the effect on current and future periods, if possible
-
For errors: restated comparative information
Example (Disclosure Format):
Note 25 – Change in Accounting Estimate
During 2025, the company revised the useful life of its plant from 10 years to 8 years. The effect of this change increased depreciation expense by $4,000 for the year ended 31 December 2025. The impact on future periods is expected to be similar.
8. Summary Table
| Type | Cause | Accounting Treatment | Example |
|---|---|---|---|
| Change in Accounting Policy | New IFRS or better info | Retrospective | FIFO → Weighted Average |
| Change in Accounting Estimate | New info or experience | Prospective | Useful life or bad debts |
| Error Correction | Mistake or fraud | Retrospective | Omitted revenue or wrong depreciation |
✅ In Summary
-
Accounting Policies: Apply consistently and change only for valid reasons → retrospective adjustment.
-
Accounting Estimates: Arise from new information → adjust prospectively.
-
Errors: Must be corrected retrospectively.
IAS 8 ensures transparency, comparability, and reliability of financial information across periods.