Review of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: changes to wording — Agenda paper 26A

Background

In April 2016, the Board tentatively decided to amend IAS 8 to clarify, inter alia, the definitions of accounting policies and of changes in accounting estimates with the objective of making them more concise and distinctive, subject to seeking further feedback on the wording of the proposed amendments.

The purpose of this session was to (1) discuss the proposed changes to wording resulting from feedback received and (2) ask the Board for permission to begin the balloting process for the Exposure Draft.

Staff recommendation

In the April 2016 proposals, the Staff recommended adding a threshold for changes in estimation techniques and valuation techniques to assess whether such a change is appropriate. The feedback received indicated that introducing such a threshold would impose unjustifiable burdens and costs on preparers and might be perceived as intending to change the existing guidance in IAS 8, which is not the intention of the project. Accordingly, the Staff now recommends removing such a threshold.

The Staff also recommends stating in IAS 8 that a change in cost formulas for interchangeable inventories is a change in accounting policy. The Staff believes that the interchangeable nature of inventories means that the order in which they flow through a transaction cycle has no economic consequences. As the cost determination process does not involve an attempt to estimate the actual order of flow of inventory items, there is no estimation uncertainty to address and hence selecting a particular cost formula is an accounting policy choice. The Staff believes that such an explicit statement is necessary as they have been asked about this issue repeatedly and that the recommended amendment to IAS 8 will not, by itself, be sufficient to enable people to answer this specific issue.

The Staff recommends requiring prospective application of the proposed amendments to IAS 8 due to cost/benefit reasons (see agenda paper 26B), and publishing the ED with a comment period of 120 days (see agenda paper 26C).

Discussion

The Board approved all the Staff recommendations, subject to redrafting of the section on the change in a cost formula.

As regards the removal of the threshold, the Board generally agreed that such removal would reduce unnecessary complexity that would otherwise arise.

As regards the change in cost formulas, one Board member questioned the sufficiency and appropriateness of the proposed amendments to IAS 8 if they could not help answer this issue. Another Board member asked whether the proposed paragraph (IAS 8.18A) was an exception, a rule, an interpretation, or some form of guidance on whether something was a change in accounting estimates or policies – i.e. what would be the basis for adding similar paragraphs for all other issues? Could one apply this paragraph by analogy? Despite the aforegoing, however, the Board generally supported the inclusion of an explicit statement on changes in cost formulas due to repeated requests for this clarification. However, it would need to be redrafted to explain the reasoning behind the conclusion by to apply the amended definitions and guidance on accounting policies and accounting estimates to the case at hand. They believed that this would also help practitioners resolve other cases.

Next Steps

The Staff will test a list of examples against the new wording on accounting policies and accounting estimates and report to the Board on an exceptions basis.