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IAS 8 — Accounting policies and accounting estimates

Date recorded:

Background

The International Accounting Standard Board (Board) published the Exposure Draft Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8) (Exposure Draft) in September 2017, that aims to help entities distinguish accounting policies from accounting estimates. At the Board’s March 2018 meeting, the staff presented a summary of feedback on the Exposure Draft. The paper is prepared to provide the Committee with an analysis of the feedback on the Exposure Draft in four areas, namely (a) proposed definition of accounting estimates, (b) proposed definition of accounting policies, (c) proposed amendment regarding inventory cost formulas and (d) proposed deletion of IAS 8:IE3 and request for other examples; and obtain advice from the Committee on the next steps for this project.

Staff analysis and recommendation

With regard to (a) above, the Exposure Draft proposed adding a definition of accounting estimates and removing the definition of a change in accounting estimate. Some respondents said accounting estimates are not judgements or assumptions themselves, but rather the output (i.e. a numerical or monetary amount) of a measurement technique (such as a valuation technique or an estimation technique) that requires an entity to use judgements and assumptions and some said accounting estimates should be defined as monetary amounts. With respect to the proposed definition of accounting estimates, the staff recommend the Board:

  1. Revise the definition to specify that, a. accounting estimates are monetary amounts in the financial statements that are subject to measurement uncertainty; b. these monetary amounts are outputs of measurement techniques used in applying accounting policies; and c. an entity uses judgements and assumptions in selecting and applying the applicable measurement techniques.
  2. 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.
  3. Specify that estimation techniques and valuation techniques are examples of measurement techniques an entity uses to develop an accounting estimate.

With regard to (b) above, the Exposure Draft proposed clarifying the definition of accounting policies by replacing "bases" by "measurement bases" and removing "conventions, rules" in the definition. Some feedback said such replacement could unintentionally narrow the scope of an accounting policy and some disagree the removal of "conventions, rules" as there is no improvement to the definition. Accordingly, the staff recommend that the Board not amend the definition of accounting policies.

With regard to (c) above, the Exposure Draft proposed clarifying that, in applying IAS 2 Inventories, selecting the FIFO cost formula or the weighted average cost formula for interchangeable inventories constitutes selecting an accounting policy. However, several respondents disagree with the Board's rationale and said selecting a cost formula requires the use of judgements and estimates and is an attempt to estimate the actual flow of inventories and the rationale for the proposed clarification does not align with the proposed definitions of accounting policies and accounting estimates. The staff also agree with respondents who say that IAS 2:36(a) already states that selecting a cost formula constitutes selecting an accounting policy. Hence, the staff recommend the Board not address whether selecting an inventory cost formula constitutes the selection of an accounting policy.

With regard to (d) above, the Exposure Draft proposed deleting Example 3 in the Guidance on Implementing IAS 8 (IE3). The staff continue to agree with the Board's rationale for deleting IE3. The staff analyse that the Board should provide illustrative examples to help entities distinguish between an accounting policy and an accounting estimate. The illustrative examples should be simple and have wide applicability across a range of different situations and different entity types. The staff consider it is difficult to develop such illustrative examples based on their experience because assessing whether a change is a change in accounting policy, a change in accounting estimate or the correction of an error depends on facts and circumstances and the staff think it is not possible to consider all relevant facts and circumstances while at the same time keeping the example simple and ensuring it continues to be widely applicable. Accordingly, the staff recommend the Board confirm deletion of IE3 and not develop additional illustrative examples.

Discussion

Some Committee members were concerned about how to deal with overlaps in "policy" and "estimates" and suggested it is a good opportunity to make consistency of the definition of "estimates" with the IAASB. A Committee member questioned that the term "new developments" in paragraph 34 of the staff paper is not clear and suggested to make clear that one has to improve the relevance of information before making a change in accounting estimate. On the other hand, some Committee members expressed their views that they cannot see the benefit of making the changes to the definition of accounting policy.

In respect of the illustrative examples in illustrating IAS 8, some Committee members are unsure why it is challenging to find examples to explain the differences in "accounting policies" and "accounting estimates". A few members suggested that examples published in some education publications may help but cannot last long.

There is no decisions made in respect of the matter in the meeting.

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