Background

The requirements in IFRSs, in particular in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, make a distinction between how an entity should present and disclose different types of accounting changes in its financial statements. Changes in accounting policies must be applied retrospectively while changes in accounting estimates are accounted for prospectively.

Companies sometimes struggle to distinguish between accounting policies and accounting estimates and enforcers have identified divergent practices. Therefore, the Interpretations Committee received a request to clarify the distinction. The Interpretations Committee observed that it would be helpful if more clarity were given and brought the issue to the IASB’s attention for future consideration.

Suggested changes

The changes proposed in ED/2017/5 Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8) are focused on three areas:

• Relation of accounting policies and accounting estimates to each other.
  • The ED proposes to clarify the exisiting definition of accounting policies by removing the terms ‘conventions’ and ‘rules’ as the Board feels that their meanings are not clear and because these terms are not used elsewhere in IFRSs. Also, the Board proposes to clarify the term ‘bases’ by using ‘measurement bases’ instead.
  • The ED proposes to add a definition of accounting estimates because so far a defintion has not been provided. The definition makes clear that accounting policies are the overall objectives and accounting estimates are the inputs used in achieving that objective by stating that "accounting estimates are judgements or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements cannot be measured with precision".
• Selecting an estimation technique or valuation technique. The ED proposes to clarify that selecting an estimation technique or valuation technique (the ED deliberately uses both terms as both terms are used in IFRSs) used when an item cannot be measured with precision constitutes making an accounting estimate.
• IAS 2 Inventories. In developing the ED, the Board concluded that that selecting one of the two cost formulas for interchangeable inventories is not an attempt to estimate the actual flow of these inventories, therefore it does not constitute making an accounting estimate but selecting an accounting policy.

In addition, the ED proposes deleting an example form the implementation guidance for IAS 8, namely Example 3 – Prospective application of a change in accounting policy when retrospective application is not practicable.

Effective date

The exposure draft does not contain a proposed effective date which the IASB intends to decide on after the exposure. However, the Board has already concluded that an entity should apply the amendments only to changes in accounting policies and changes in accounting estimates that occur on or after the start of the first annual period in which the entity applies the amendments.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Our UK Accounting Plus project page on Changes in accounting policies and estimates
• Our related Need to know publication