CHANGE IN
ACCOUNTING POLICY
OR ESTIMATE, OR
CORRECTION OF AN
ERROR (IAS 8)
Mr TR Motimele
IAS 8 2
INTRODUCTION
Determining whether a change is a change in accounting pOLICY, a change in
estimate, or the correction of an error can be difficult and require judgment.
Reporting entities can elect from more than one acceptable accounting
principle. As defined in IAS 8, a change in accounting policy is a change from
one acceptable accounting policy to another when there are two or more
generally accepted accounting policies.
Examples include changing the accounting method for depreciating fixed
assets cost model and revaluation model and changing the method of
inventory valuation (LIFO, FIFO & WA).
In contrast, as defined in IAS 8, a change in accounting estimate results from
incorporating new information or modifying the estimating techniques
affecting the carrying amount of assets or liabilities as of the date the change
is made. Changing inputs for estimating useful life of an asset is an example
of a change in the estimating technique.
IAS 8 3
INTRODUCTION
The distinction between a change in accounting policy and a change in
accounting estimate is important because a change in accounting policy is
generally applied retrospectively (by recasting prior periods), while a change
in accounting estimate is applied prospectively, affecting only current and
future periods. In addition, reporting entities cannot change accounting
policies unless the new method is preferable.
Distinguishing a change in accounting estimate from the correction of an error
is also important and can be challenging. While a change in accounting
estimate results from new information since a previous financial reporting
date, an error reflects the misapplication of information that was available at a
previous financial statement reporting date. If the information was known, or
could have been known, as of the prior period, it is generally indicative of an
error in the previous accounting.
IAS 8 includes examples of errors in previously issued financial statements,
such as mathematical mistakes, mistakes in the application of IFRS principles,
or oversight or misuse of facts that existed at the time the financial
statements were issued.
Additionally, a change from an accounting policy that is not generally
accepted to one that is generally accepted is the correction of an error.
IAS 8 4
INTRODUCTION
Reporting entities should consider the following questions to help
differentiate among a change in accounting policy, a change in
estimate, or the correction of an error:
•What was the rationale for the accounting change?
•Did the estimation model change, or just the inputs?
•Why did the inputs to the estimation model change and when was the change in
inputs supportable?
•Is the reporting entity applying the accounting principle to a new business, new
balances, or new transactions, or is the accounting principle applicable to
balances and transaction streams to which it should have been applied in the
past?
•If the accounting results have changed significantly, can the changes be
substantiated by developments in the business?
