IAS 8 establishes guidelines for selecting and applying accounting policies, managing changes in policies and estimates, and correcting prior errors in financial reporting. It differentiates between accounting policies, which are principles used in financial statements, and accounting estimates, which involve subjective estimations when precise measurement is not possible. The standard also outlines disclosure requirements for changes and corrections made in the financial statements.

1. IAS 8
ACCOUNTING POLICIES,
CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS
1

2. 2
It prescribes the criteria for:
• How to select and apply 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
• How to disclose the changes.
OBJECTIVE OF IAS 8

3. 3

4. 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/IFRS 9 4

5. 5
I. ACCOUNTING POLICIES

6. IAS 8 establishes the way to write accounting policy
manual in dealing with an accounting issue
(transaction or item).
If there is applicable IFRS standard
1. Apply specifically relevant standards (IASs,
IFRSs, Interpretations).
If there is no an applicable IFRS Standard use IAS
8 Hierarchy
1. Refer to other IASB standards. (Analogize)
2. Refer to the IASB Framework for guidance.
3. Consider the most recent pronouncements of
other standard-setting bodies, practices... 6
1. SELECTION OF ACCOUNTING
POLICIES

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 7

8. 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 inventory valuation from weighted
average to FIFO
8
2. CHANGES IN ACCOUNTING POLICIES

9. 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
COST
METHOD
PPE
REVALUATION
METHOD
A CHANGE IN ACCT POLICY
NOT A CHANGE IN ACCT
POLICY
IP
FAIR VALUE
METHOD

10. 10
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 place.
2. CHANGE IN ACCOUNTING
POLICIES

11. 11
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
method provided allow or require prospective application of a
2. CHANGES IN ACCOUNTING POLICIES

12. 12
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

13. 13
II. ACCOUNTING ESTIMATES

14. 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 14

15. 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 15

16. 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)
16

17. 17
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.
DIFFERENCE BETWEEN ACCOUNTING
POLICY AND ACCOUNTING ESTIMATE

18. 18
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.

19. 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
19

20. 20
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.
5. DISCLOSURES

21. 21
CASE
− LIB 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.
− Two years later, the remaining useful life of the machine
was estimated to be only 2years.
− LIB 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.

22. 22
Depreciatio
n
Expense
Accumulat
ed
Depreciatio
n
Working
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)
Depreciation expense for the machine would therefore
be as follows:
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.
CASE

23. 23
III. CORRECTION OF PRIOR
PERIOD ERRORS

24. 24
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.

25. 2. TYPE OF PRIOR PERIOD ERRORS
25
Such errors include the effects of:
− Misapplication of accounting policies: e.g. failure to apply IAS 16
review assets’ useful lives at least at each financial year-end.
− 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: Overlook/Omission of transactions and events from
the financial statements

26. 26
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.

27. 27
CASE
LIB 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 240 360
Comparativ
e Periods

28. 28
LIB’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 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
CASE

29. 29
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
CASE

30. 30
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
Comparative information should be restated unless it is
‘impracticable’ to do so. The statement of profit or loss will be
presented thus:
CASE

31. 31
The statement of changes in equity will also need
comparators:
20X6 20X5
(Restate
d)
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
CASE

32. 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.

33. 33
A. Previously, ABC LTD accounted for its non-current assets
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.
Identify whether the following constitute a change in accounting
policy, a revision in accounting estimate or a correction of prior-
period error.
PRACTICE QUESTIONS

34. 34
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
PRACTICE QUESTIONS

35. 35
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.
PRACTICE QUESTIONS

36. 36
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

37. 37
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.