This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Accounting policies and accounting estimates

Date recorded:

Cover note (Agenda Paper 26A)

In September 2017, the Board published ED/2017/5 Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8). The proposed amendments aim to help entities distinguish accounting policies from accounting estimates. More specifically, the proposed amendments would clarify:

  • (a) how accounting policies and accounting estimates relate to each other, by:
    • (i) explaining that an entity uses accounting estimates in applying accounting policies; and
    • (ii) making the definition of accounting policies clearer and more concise.
  • (b) that selecting an estimation or valuation technique, used when an item in the financial statements cannot be measured with precision, constitutes making an accounting estimate; and
  • (c) that, in applying IAS 2, selecting the first-in, first-out (FIFO) cost formula or the weighted average cost formula for interchangeable inventories constitutes selecting an accounting policy.

Several respondents to the ED said the proposed amendments would help clarify the distinction between accounting policies and accounting estimates. However, several respondents also raised concerns on particular aspects of the proposed amendments, suggested providing additional clarity in particular areas, and suggested adding illustrative examples.

Before the staff developed their recommendations, they analysed the feedback received on the ED and formed preliminary views on how the Board could address that feedback, including the possible project direction. They obtained input on their preliminary views from members of various committees at the IASB.

In this session, the staff presented their analysis and recommendations reflecting this input.

Analysis of feedback—definition of accounting estimates (Agenda Paper 26B)

This paper analyses feedback on the proposed definition of accounting estimates which was included in the ED and presents the staff’s recommendations on how to address that feedback.

Staff recommendations

The staff recommended that the Board:

  • (a) revise the definition of accounting estimates to specify that:
    • (i) accounting estimates are monetary amounts in the financial statements that are subject to measurement uncertainty;
    • (ii) these monetary amounts are outputs of measurement techniques used in applying accounting policies; and
    • (iii) an entity uses judgements and/or assumptions in developing an accounting estimate.
  • (b) clarify that:
    • (i) the effects of a change in an input and/or in a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors; and
    • (ii) changes in accounting estimates that result from new information or new developments are not the correction of an error.
  • (c) specify that estimation techniques and valuation techniques are examples of measurement techniques an entity uses to develop accounting estimates.

Board discussion

Board members generally supported the recommendation by the staff. Staff provided a clarification on the term “estimation uncertainty” per IAS 1:125 and “measurement uncertainty” used in this project.

Board decision

All 14 Board members voted in favour of the staff recommendation.

Analysis of feedback—other aspects (Agenda Paper 26C)

This paper analyses feedback on all other aspects of the ED and presents the staff recommendations on how to address that feedback.

Staff recommendation

The staff recommended that the Board:

  • (a) not amend the definition of accounting policies (i.e. retain the existing definition of accounting policies in IAS 8);
  • (b) clarify that if a change is a change in accounting estimate, it cannot also be a change in accounting policy;
  • (c) not add discussion of whether selecting an inventory cost formula constitutes selecting an accounting policy (thus not adding material proposed in paragraph 32B of the ED);
  • (d) confirm deletion of IE3 from the Guidance on Implementing IAS 8; and
  • (e) add to the Guidance on Implementing IAS 8 examples that illustrate how an entity would apply the definition of accounting estimates. This material would accompany, but not be part of, IAS 8.

Board discussion

Board members generally supported the staff recommendations. The main point of discussion was recommendation (b), which was based on feedback to provide more clarity.

Board members appreciated the examples given in Appendix 4 of the agenda paper. The staff acknowledged the overlap between the perceived definition of both, accounting estimate and accounting policy. They concluded that the definition of accounting estimate should be tested first, before looking at the definition of accounting policy, as the latter was broader. Staff members provided a clarification to the Board that examples given in the agenda paper are an illustration of applying the accounting policy/estimate test rather than applying the disclosure requirements.

Board decision

13:1 Board members voted in favour of the staff recommendation.

Project direction (Agenda Paper 26D)

This paper presented the staff’s analysis and recommendations on project direction.

Staff recommendation

The staff recommended that the Board:

  • (a) finalise the amendments with the modifications set out in the agenda paper; and
  • (b) not re-expose the amendments.

Board discussion

There was no significant discussion on this agenda paper.

Board decision

14 Board members voted in favour of the staff recommendation.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.