Overview of IAS 8

IAS 8 provides a framework for selecting accounting policies, accounting for changes in accounting estimates and policies, and correcting prior-period errors. Its objective is to ensure consistent application of standards, reliable financial reporting, and proper disclosure to enable users to make informed decisions.

1. Accounting Policies

What Are Accounting Policies?

Accounting policies include principles, rules, conventions, and practices adopted in preparing financial statements. They are fundamental to presenting an entity’s true financial position.

How Are They Selected?

1. Follow specific IFRS standards, where applicable.
2. In the absence of a specific standard, use:

• IFRS guidance for similar transactions or events.
• The Conceptual Framework for Financial Reporting.
• Authoritative financial reporting standards from similar jurisdictions.

When Can They Be Changed?

Changes to accounting policies are allowed:

• When mandated by new or revised IFRS.
• When they result in more relevant and reliable financial information.
  Example: Switching from the cost model to the revaluation model under IAS 16 or adopting the expected credit loss model under IFRS 9.

How to implement the changes in Accounting policies?

Transitional provisions of new IFRS or, where applicable, applied retrospectively by restating prior transactions as though the new policy had always been in effect.

2. Changes in Accounting Estimates

What Are Accounting Estimates?

Estimates involve uncertain monetary amounts in financial statements. 

Examples include:

• Depreciation rates based on useful life.
• Expected credit losses under IFRS 9.
• Warranty provisions under IAS 37.

When Do Changes Occur?

Changes arise from updated information, new developments, or changing circumstances. For example, revising the useful life of an asset due to technological advancements.

How Are Changes Handled?

Changes in estimates are applied prospectively. This means adjustments impact only the current and future reporting periods without altering prior reports.
Example: If the estimated warranty expense increases, the higher expense is recorded in the current and future periods without altering prior reports.

3. Errors and Their Correction

What Are Errors?

Errors include mathematical mistakes, misapplication of accounting policies, omissions and misstatements in financial statements or oversight of facts.

How Are Errors Corrected? 

These errors should have been identified and reflected in the financial statements for current period. If the error is determined to be material, it should be reported in the current period. In such cases, the financial statements for the prior period are restated retrospectively to correct the error. However, if the error is not material, no restatement is required, and the error does not need to be reflected in the current period’s financial statements.

Material prior-period errors are corrected retrospectively by:

1. Restating prior-period financial statements, if practicable.
2. Adjusting opening balances of equity for the earliest period presented.
   Example: Correcting understated revenue in a previous year by adjusting retained earnings and prior-period figures.

4. Proper Disclosure

IAS 8 emphasizes transparency through disclosure, requiring entities to explain:

• The nature and facts of the changes introduced by the Transitional provisions, including adjustments made to the financial statements for the current and prior periods, with the amount of adjustment in the current period and adjustments in prior periods.
• The nature and reason for accounting policy changes.
• The effect of changes on prior periods, or why retrospective application is impracticable.
• Details of significant accounting estimates and changes, including their financial impact.
• The title of the new IFRS, the nature of the future changes it will introduce, the required date of adoption, the planned date of adoption, and either an estimate of the expected changes or a statement indicating that no significant change is anticipated, if early adoption of the new standard is not elected on a financial reporting date.
• The nature of the change, the reason for the change, the amount of adjustment resulting from the change, and whether the change has been applied retrospectively should be disclosed, if there is a voluntary change in accounting policy.

A Quick Disclosure Checklist:

5. Case Study: Retrospective vs. Prospective Application

Scenario:

Company A revises its depreciation estimate from 10 to 8 years due to updated machinery efficiency data.

• Prospective (Estimate): The new depreciation rate applies only to current and future periods.

Scenario:

Company B discovers revenue misclassification in the previous year’s financial statements.

• Retrospective (Policy): Prior-period statements are restated, and opening retained earnings are adjusted.

*  Under IAS 8, if it is difficult to distinguish between a change in accounting policy and a change in accounting estimate, the change should be treated as a change in accounting estimate.

Conclusion

IAS 8 ensures transparency, consistency, and accuracy in financial reporting. It establishes the framework for selecting and applying accounting policies, handling changes in those policies, and correcting errors. IAS 8 requires that changes in accounting policies be applied retrospectively unless it is impracticable, and changes in estimates be recognized prospectively. The standard also emphasizes the importance of clear disclosures regarding changes, errors, and estimates to maintain the reliability and comparability of financial statements. By following its principles, entities can manage changes in policies and estimates effectively while ensuring compliance with local regulations like UAE corporate tax. Proper disclosure of these changes builds trust with stakeholders and enhances the reliability of financial information.

Key Takeaways

• Understand the distinction between policy changes (retrospective) and estimate changes (prospective).
• Always disclose the nature and impact of changes, even if exact quantification is impracticable.
• Align accounting policies with local tax laws to ensure compliance and minimize disputes.

Article by PARVATHI B
AUDIT &TAX EXECUTIVE