International financial reporting standard
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International Accounting Standard 8: Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). [1] The standard prescribes the criteria for selecting and changing accounting policies, along with the accounting treatment and disclosure of changes in accounting estimates and corrections of prior period errors. [2] IAS 8 is designed to enhance the relevance and reliability of an entity's financial statements and the comparability of those statements over time and with the financial statements of other entities. [3]
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. [4] When an IFRS specifically applies to a transaction, the accounting policy for that item must be determined by applying the relevant standard. [5] In the absence of a specific IFRS, management must use judgment to develop a policy that results in relevant and reliable information. [6] Such judgment should consider the requirements in IFRSs dealing with similar issues and the definitions and recognition criteria in the Conceptual Framework . [7]
Changes in accounting policies are generally applied retrospectively by adjusting the opening balance of each affected component of equity for the earliest prior period presented. [8] An entity shall change an accounting policy only if the change is required by an IFRS or results in the financial statements providing more reliable and relevant information. [9]
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability resulting from new information or developments. [10] These changes are recognized prospectively by including them in profit or loss in the period of the change and future periods. [11] Unlike accounting policies, changes in estimates do not require the restatement of prior periods because they do not relate to errors. [12]
Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods. [13] Material prior period errors must be corrected retrospectively in the first set of financial statements authorized for issue after their discovery. [14] This involves restating the comparative amounts for the prior period(s) presented in which the error occurred. [15]
The following examples illustrate the difference between prospective and retrospective adjustments.
IAS 8 requires prospective application: the new rate applies from the date of change without restating prior years. [16]
Scenario: Cost: $100,000 (Jan 1, 2021) | Original Life: 10 years ($10k/yr) | Revision: On Jan 1, 2024, life reduced to 5 years total (2 years remaining).
Calculation: Carrying Amount (2024): $100,000 - $30,000 = $70,000. [17] | New Depreciation: $70,000 / 2 years = $35,000/yr. [18]
Journal Entry (Dec 31, 2024):
| Account | Debit | Credit | Rationale |
|---|---|---|---|
| Depreciation Expense (P&L) | $35,000 | Applied to remaining book value. [19] | |
| Accumulated Depreciation | $35,000 | No restatement of 2021–2023. [20] |
Scenario: In 2024, a company discovers it failed to record $50,000 of expenses in 2023.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Error Correction | Retained Earnings (Opening Balance) | Accrued Liabilities / Cash | The opening balance of equity is adjusted to reflect the error as if it had never occurred. [21] |
IAS 8 outlines the criteria for selecting and changing accounting policies, along with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of errors. The following disclosures are required: [22]
| Paragraph | Category | Disclosure Requirement | Description / Examples |
|---|---|---|---|
| IAS 8.28 | Accounting Policies | Initial Application of an IFRS | Disclosures required when a new standard is first applied (title of the standard, nature of the change, and any transitional provisions). |
| IAS 8.29 | Voluntary Changes | The reasons why applying the new accounting policy provides reliable and more relevant information (e.g., changing from Weighted Average to FIFO). | |
| IAS 1.30 | Future Standards | Standards Not Yet Effective | Known or reasonably estimable information relevant to assessing the possible impact of new standards issued but not yet applied. |
| IAS 8.39 | Accounting Estimates | Nature and Amount of Change | The nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods. |
| IAS 8.40 | Impracticability of Future Impact | If the amount of the effect on future periods is not disclosed because estimation is impracticable, that fact must be stated. | |
| IAS 8.49(a) | Prior Period Errors | Nature of the Error | A description of the nature of the prior period error (e.g., mathematical mistakes, oversights, or misinterpretation of facts). |
| IAS 8.49(b) | Amount of Correction | To the extent practicable, the amount of the correction for each financial statement line item affected and for basic and diluted earnings per share. | |
| IAS 8.49(c) | Restated Opening Balance | The amount of the correction relating to periods before those presented in the comparative information. |