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IAS 8 - Distinction between a change in accounting policy and a change in accounting estimate

Date recorded:

The Committee received a request from the European Securities and Markets Authority (ESMA) to clarify the distinction between changes in accounting policies and changes in accounting estimates. There are divergent practices regarding the assessment of whether a change qualifies as a change in an accounting policy or as a change in an accounting estimate in accordance with IAS 8. The distinction between a change in accounting estimate and a change in accounting policy is important because IFRS requires a different accounting treatment resulting in application of the changes prospectively for a change in accounting estimate and retrospectively for a change in accounting policy. Moreover, IAS 8 sets out stricter criteria for changes in accounting polices than for changes in accounting estimates. According to paragraph 14(b) of IAS 8, in order to change an accounting policy the issuer should be able to justify that the change provides more relevant information, whereas there is no such explicit requirement for a change in accounting estimate.

Staff analysed the issue and noted that existing Standards provide a certain level of guidance to distinguish a change in an accounting policy from a change in an accounting estimate. However, Staff acknowledge that the Standard could benefit from greater clarity and guidance. This should be addressed as part of Conceptual Framework project. Paragraph 35 of IAS 8 recognises that there may be circumstances where it is difficult to distinguish a change in policy from a change in estimate; hence an amendment or an interpretation is needed in the short-term.

Staff recommended the Committee do not take this issue onto its agenda and presented their proposed wording for a tentative agenda decision.

A member agreed with Staff’s recommendation but wanted an amendment to be issued sooner rather than as part of the Conceptual Framework. Another member agreed that this is a difficult issue to be dealt with and explained that there is no clear solution. For example the Committee cannot say that issues x, y and z are clearly changes in accounting policies and assume anything else is a change in estimates.

Another member said that usually a change in one method to another is to bring better value to the methodology/figures presented in financial statements.

Another member disagreed and said that there is not diversity in practice.

A member said the current definition of a change in accounting policy is fairly broad and therefore this issue should not be addressed by IFRIC. The issue has arisen due to the consequences of something being a change in estimate or a change in policy. In particular, it is driven by an entity’s willingness to make retrospective or prospective adjustments and disclose the issue. Generally, a change in estimate is preferred to allow for prospective adjustments.

Another member said that IAS 8 provides adequate guidance in determining whether an issue is a change in estimate or accounting policy. Paragraph 35 of IAS 8 makes it clear that when an issue is hard to determine then the change is to be treated as a change in accounting estimate. In addition, paragraph 122 of IAS 1 requires entities to disclose a summary of significant accounting polices and the judgement around it.

Staff explained to the Committee that paragraph 122 of IAS 1 has also caused problems as firms have found it difficult determine which polices are significant. Clarification of what a significant accounting policy is should be looked in a short term project, this should focus on the concept of materiality. And in a long term project, clarification on the concept of “judgement” should be addressed. 

Another member added that it is clear in the Standard that a change in accounting estimate arises from new information or gaining more experience. He suggested that Staff should focus in their agenda decision on this distinction. Paragraph 39 of IAS 8 requires entities to provide the effect of the change in estimate on future periods, although in practice this is not often provided.

The Chairman concluded that the Committee agreed not to take this issue on to its agenda. In addition, the agenda decision should explain that all estimates are not equal, moving to a worse estimate is not permitted and that disclosure is always preferred. Staff are to take this issue to the IASB to be addressed and also discuss with the IASB the concept of materiality and the disclosure requirements when an issue is a change in estimate. Also the IASB should consider a third category which is the change in a method of application of an accounting policy.

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