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Disclosure Initiative — IAS 8

Date recorded:

Review of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors- Distinction between changes in accounting policies and changes in accounting estimates- Agenda paper 25A

Background

In September 2014 the IFRS Interpretations Committee informed the Board about divergent practices in assessing whether a change constituted a change in an accounting policy, or a change in an accounting estimate, in applying IAS 8. At that time the Board decided to add this issue to its agenda, as part of the Disclosure Initiative. In May 2015 the Board supported amending IAS 8 to clarify that: (a) changes in the measurement bases that were specified in relevant Standards were changes in accounting policies; (b) changes in the measurement bases include changes in cost measures and, therefore, changes in the methods used to determine different cost measures were changes in accounting policies; and (c) changes in inputs, assumptions and methods that were used to make an accounting estimate are changes in accounting estimates. However, the Board asked the staff to perform further analysis on the recommendations.

The purpose of this paper was to: (a) recommend how to clarify the existing distinction between a change in an accounting policy and a change in an accounting estimate in IAS 8; and (b) recommend including this clarification in the next Exposure Draft of Annual Improvements.

Staff analysis

Firstly, the staff analysed why the distinction between a change in an accounting policy and a change in an accounting estimate was important. The staff indicated that entities applied voluntary changes in accounting policy retrospectively whereas; changes in accounting estimates were applied prospectively. A change in accounting policy was only allowed if the change was required by an IFRS Standard or resulted in financial statements providing reliable and more relevant information. Changes in accounting estimates resulted from new information or new developments.

After having considered various approaches, the staff recommended to the Board that it should amend IAS 8 as follows: (a) clarify the definitions of accounting policies and of changes in accounting estimates with the objective of making them more concise and distinctive; (b) clarify how accounting policies and estimates related to each other; (c) add guidance about whether changes in valuation techniques and in estimation techniques were changes in accounting estimates; and (d) update examples of estimates provided in IAS 8. The agenda paper included the recommended wording of the proposed amendments. The staff believed that the recommendations would result in an improvement on the existing guidance on IAS 8.

Staff recommendation

The staff recommended issuing the amendments described above as part of the Annual Improvement process and the project should no longer be part of the Disclosure Initiative project.

Discussion

The Board approved the staff recommendations. However, the Board decided that the amendments should not be included as part of the annual improvement process. Instead, the amendments should be exposed in a separate project under the umbrella of the Disclosure Initiative.

The majority of the Board members indicated that they agreed with the direction of the project. Although some Board members cautioned about the wording of the proposal (for instance the definitions were too narrow).

Several Board members asked the staff to go back to the examples that had been analysed at the beginning of the project and test the application of the proposed definitions. In addition, it was agreed that the examples would only be used for testing (by the staff and potentially in the ED). The staff cautioned about including examples in the ED. The concern was that the examples could give an indication that there should be a change in practice.

The staff was also asked (i) to analyse the potential implication of the proposed amendments with existing Standards and (ii) develop guidance about transitional requirements.

Few Board members asked for more research and input from investors. In general, it was agreed that no further research was needed.

There was extensive discussion about the usefulness of distinguishing accounting principles vs accounting estimates. For instance, one Board member pointed out that the analysis should focus on which situations would require retrospective vs prospective application. The analysis should be done on a case by case basis. That approach would be more useful in developing future Standards. He indicated that a change in an economic scenario that would trigger changes in accounting policies and estimates should not require retrospective application. He said that this change was caused by a new event.

The staff was asked about different terminology used in the proposal (i.e. valuation techniques and estimations techniques) which seemed confusing. The staff noted that it was a particular challenge in this project because the Standards use different terms with similar meaning.

Review of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors- Changes in accounting estimates: disclosure- Agenda paper 25B

Background

This paper was part of the discussion presented in agenda paper 25A and it focused on whether additional disclosures should be added in IAS 8 in relation to accounting estimates.

The agenda paper included an analysis of existing disclosure requirements in accounting policies and accounting estimates and the proposals discussed in the May 2015 meeting.

Staff recommendation

The staff recommended: (i) not adding any new disclosure requirements to IAS 8 for changes in accounting estimates; and (ii) not doing any further work on the disclosure requirements for changes in accounting estimates in IFRS Standards.

The reasons provided by the staff to support their recommendations were (i) IFRS Standards already required a sufficient volume of disclosures; (ii) amending IAS 8 without amending other IFRS Standards might have little practical effect; and (iii) IAS 8 already required disclosure of the nature of a change in an accounting estimate.

Discussion

There was general support for the staff recommendation. Only one Board member expressed disagreement.

There were no significant comments or concerns raised. The Board member who disagreed indicated that it would be important to know the nature of the changes. He said that a change in estimates without changes of facts and circumstances could lead to misleading information.

The staff and other Board members responded that the Standards already required disclosures of those judgements (including IFRS 13 and IAS 8)

The Chairman called a vote and 12 members approved the staff recommendation.

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