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Amendments to IAS 8

Date recorded:

Background

The requirements in IFRS Standards, in particular in IAS 8, 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.

Preparers sometimes struggle to distinguish between accounting policies and accounting estimates and enforcers have identified divergent practices. In September 2017, the Board published an Exposure Draft (ED) to provide some clarification in that area. Since then, a number of matters have been identified through feedback. In this paper, the staff summarises and analyses these views, as well as providing amendments to the proposals in the ED.

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

This paper is split between the key views and the analysis of those views, and the analysis of other matters.

Preliminary views included concerns about:

  • a) The role of judgements and assumptions:

Respondents said that estimates are not judgements or assumptions, but rather the numerical output of a measurement technique that requires judgement and assumptions. Defining estimates as monetary amounts would be more consistent with the wording of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and ISA 540 Auditing Accounting Estimates and Related Disclosures. The staff noted it would also be consistent with the use of the term estimate within IAS 8:32 and IAS 36:30(a). The staff recommend revision to the definition of accounting estimates.

  • b) Use of terms “estimation uncertainty”, and “precision”:

Some respondents thought the use of “estimation uncertainty” would lead to the definition being circular. Staff agree, and note that the terms “estimation uncertainty” and “precision” are not defined in IFRS Standards. As such, the staff suggest an amendment to use the term “measurement uncertainty”, which is defined in paragraph 2.19 of the Conceptual Framework.

  • c) Deleting the definition of “change in accounting estimate”:

Some respondents note that the “change in accounting estimate” paragraph was helpful in distinguishing between changes in estimate and errors, and so requested this should not be deleted (as is currently proposed in the ED). The staff’s basis for the deletion was that IAS 8:34 is similar to the deleted section. The staff note that the wording is slightly different and conclude that practical application could differ. As such, a number of small amendments (see below) have been suggested.

  • d) Limiting the definition of accounting estimates to measurement:

Some respondents noted that it was not clear why the proposed definition of accounting estimates focuses only on measurement, when an entity may also use estimates in other aspects, such as determining whether to recognise an item (e.g. recognition of a liability under IAS 37). The staff acknowledge that an entity uses estimates in other situations, but note that the definition of accounting estimates should focus on measurement, as other areas of IAS 8 specify how an entity accounts for changes in amounts reported in the financial statements, resulting from a change in accounting estimates.

Staff recommendation

Staff recommend 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 assumptions in selecting and applying the applicable measurement techniques.
  • b) Clarify that the effects of a change in an input and/or measurement technique used to develop an accounting estimate are part of the change in accounting estimate and not the correction of an error if that change results from new information or new developments.
  • c) Specify that estimation techniques and valuation techniques are examples of measurement techniques an entity uses to develop an accounting estimate.

Discussion

The Board generally agreed with the analysis and the direction of the project. One Board member supported the use of the term monetary amounts when defining an estimate.

Another Board member said that the wording around practical expedients allowed under several other Standards (such as IFRS 16 Leases) is currently unclear, and it should be clarified that these are valuation techniques in making an accounting estimates. The broader point is that calculation of estimates include both complex and simple techniques.

A Board member indicated that they agree with the suggestion that examples of applying the amended guidance in practice should also be included with the amendments. Another Board member noted that the clarification that an estimate is the output of a calculation is helpful to users. They also noted that some information contained in the proposed amendments for which deletion has been suggested, should be extracted and retained. They thought that the notion of a change in estimate being due to a change in information available should be made explicitly clear, as this is an area which causes confusion for regulators.

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

This paper sets out other views, not in relation to the proposed changes to the definition of accounting estimates. Views and analysis were provided by staff, on the following areas:

  • a) Removing the terms “conventions” and “rules” and replacing the term “bases” with “measurement bases”:

Many respondents agreed with the proposed amendments, which would remove the terms “conventions” and “rules”, however a number of respondents questioned if this would improve the definition given the remaining terms are not defined either, and so are open to interpretation. The staff had subsequently suggested amended wording to enhance clarity. However, the Board did not intend to narrow or broaden the scope or nature of accounting policies and suggested that, given the number of respondents with differing opinions, the suggested amendments are removed.

  • b) Suggested clarification that selection of first-in-first-out or weighted average cost formula in IAS 2 Inventories is a choice of accounting policy, not an estimate:

A number of respondents felt that this did not align with the proposed definition of accounting policy and accounting estimate, as the selection of a cost formula requires the use of judgements and assumptions, and that the methods allow for an estimation of cash flows related to inventories. Some respondents also noted that inclusion of a specific “rule” in this area would go against the IAS 8 principals-based approach. Given IAS 2:36(a) already states that selecting a cost formula constitutes an accounting policy choice, staff recommend that the proposal to include a specific point on this should be removed.

  • c) Proposal to remove IE3 from the Guidance on Implementing IAS 8:
    • i. Several respondents suggest that IE3 is updated as opposed to deleted, as the implementation examples are helpful in determining situations which represent changes in estimates or changes in policy. However, the staff do not propose updating IE3 as in doing so the example would become either too obvious to be of use or too complex, and difficult to draft.
    • ii. A number of respondents agree with the removal of IE3, but note that new illustrative examples would help entities to apply the amendments. This view was confirmed in feedback from the Accounting Standards Advisory Forum and the Interpretations Committee members. The staff therefore suggest that illustrative examples should be added and suggest one such example for comment by the Board.

Staff recommendation

Based on the analysis, staff recommend that the Board should:

  • a) Not amend the definition of accounting policies (i.e. retain the existing definition of accounting policies in IAS 8);
  • b) Not add any discussion of whether selecting an inventory cost formula constitutes selecting an accounting policy (thus not adding the material proposed in paragraph 32B of the ED);
  • c) Confirm the deletion of IE3 in the Guidance on Implementing IAS 8; and
  • d) Develop some examples to illustrate the application of the definition of accounting estimates.

Discussion

A Board member suggested adding some words to the accounting policies definition. This is to make clear that if an entity can classify something as an accounting estimate, it cannot be an accounting policy. This proposal is to ensure that there is no confusion over the definitions and the terminology used.

A minority of Board members disagreed with the staff recommendation and thought that the originally proposed amendments to the definition of accounting policies should be finalised. This was on the basis that similar to the proposed changes to accounting estimates, any clarification to such a fundamental area as accounting policies is helpful for users of the Standards, as it leads to time and financial savings. It would become easier to determine if items are changes in policy or estimates, or if they are error.

Project Direction (Agenda Paper 26D)

Background

Agenda Paper 26D discusses the project direction in the light of the feedback on the Exposure Draft. The staff think that, on balance, the expected benefits of proceeding with the proposed amendments outweigh the costs. However, they also acknowledge that the amendments will not address all identified application questions. If the Board concludes that the expected benefits would not outweigh the costs the staff think the Board should stop the project and not proceed with any amendments. 

Discussion

The majority of members noted that any clarification of such fundamental principles as accounting estimates, which affect many balances reported, provides valuable benefits to preparers, users and regulators. It is therefore worth the costs of implementation.

Decision

As in this session, the staff was only seeking comments on their preliminary views, no decisions have been made.

Correction list for hyphenation

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