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Proposed amendments to IAS 8

Overview

IAS 8 (Accounting policies, Changes in accounting estimates and errors) addresses how entities are to present and disclose all forms of changes in their financial statements. Changes in policies are to be applied retrospectively, while changes in estimates should be applied prospectively.

As a result of diverse ways some entities distinguished a change in accounting policies from a change in accounting estimates, it became clear to the IFRSIC (International Financial Reporting Standard Interpretation Committee) that the issues be addressed, which gave rise to the emergence of Exposure Draft ED/2017/5 Accounting Policies and Accounting Estimates (Proposed amendments to IAS 8) by the IASB.

The new development

This exposure draft/ proposed amendment would clarify these areas:

  • The relationship that exists between accounting policies and accounting estimates:
    • Explaining that accounting estimates are used in applying accounting policies.
      According to the board, the accounting policy is the overall objective and the accounting estimates are inputs used in achieving that objective;

    • Making the definition of accounting policies clearer and more concise.
      With modifications to “measurement bases” as bases and exclusion of ‘convention’ and ‘rule’, the IASB now defines Accounting policies as the specific principles, bases and practices applied by an entity in preparing and presenting financial statements. While changes in accounting estimate is made to bear accounting estimates. The IASB defines Accounting estimates as judgments or assumptions used in applying an accounting policy when, because of estimation or uncertainty, an item in financial statements cannot be measured with precision. These changes according to the board (IASB) would not necessarily make the definition narrower but provide clarity and concision.
  • That selecting an estimation technique, or valuation technique, used when an item in the financial statements cannot be measured with precision constitutes making an accounting estimate; and
  • That, in applying IAS 2 Inventories, selecting the first-in, first-out (FIFO) cost formula or the weighted average cost formula for interchangeable inventories constitutes selecting an accounting policy and not an accounting estimate

Effective date of adoption

The draft does not contain an effective date when entities are to adopt the revised standard. It however proposes 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.