1 International Accounting Standard 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) replaces IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. The Standard also replaces the following Interpretations:
SIC-2 Consistency—Capitalisation of Borrowing
SIC-18 Consistency—Alternative Methods.
Reasons for revising IAS 8
2 The International Accounting Standards Board developed this revised IAS 8 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
3 For IAS 8, the Board’s main objectives were:
(a) to remove the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors;
(b) to eliminate the concept of a fundamental error;
(c) to articulate the hierarchy of guidance to which management refers, whose applicability it considers when selecting accounting policies in the absence of Standards and Interpretations that specifically apply;
(d) to define material omissions or misstatements, and describe how to apply the concept of materiality when applying accounting policies and correcting errors; and
(e) to incorporate the consensus in SIC-2 and in SIC-18. 4 The Board did not reconsider the other requirements of IAS 8.
Changes from previous requirements
5 The main changes from the previous version of IAS 8 are described below.
Selection of accounting policies
6 The requirements for the selection and application of accounting policies in IAS 1 Presentation of Financial Statements (as issued in 1997) have been transferred to the Standard. The Standard updates the previous hierarchy of guidance to which management refers and whose applicability it considers when selecting accounting policies in the absence of International Financial Reporting Standards (IFRSs) that specifically apply.
7 The Standard defines material omissions or misstatements. It stipulates that:
(a) the accounting policies in IFRSs need not be applied when the effect of applying them is immaterial. This complements the statement in IAS 1 that disclosures required by IFRSs need not be made if the information is immaterial.
(b) financial statements do not comply with IFRSs if they contain material errors.
(c) material prior period errors are to be corrected retrospectively in the first set of financial statements authorised for issue after their discovery.
Voluntary changes in accounting policies and corrections of prior period errors
8 The Standard requires retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It removes the allowed alternative in the previous version of IAS 8:
(a) to include in profit or loss for the current period the adjustment resulting from changing an accounting policy or the amount of a correction of a prior period error; and
(b) to present unchanged comparative information from financial statements of prior periods.
9 As a result of the removal of the allowed alternative, comparative information for prior periods is presented as if new accounting policies had always been applied and prior period errors had never occurred.
10 The Standard retains the ‘impracticability’ criterion for exemption from changing comparative information when changes in accounting policies are applied retrospectively and prior period errors are corrected. The Standard now includes a definition of ‘impracticable’ and guidance on its interpretation.
11 The Standard also states that when it is impracticable to determine the cumulative effect, at the beginning of the current period, of:
(a) applying a new accounting policy to all prior periods, or
(b) an error on all prior periods,
the entity changes the comparative information as if the new accounting policy had been applied, or the error had been corrected, prospectively from the earliest date practicable.
12 The Standard eliminates the concept of a fundamental error and thus the distinction between fundamental errors and other material errors. The Standard defines prior period errors.
13 The Standard now requires, rather than encourages, disclosure of an impending change in accounting policy when an entity has yet to implement a new IFRS that has been issued but not yet come into effect. In addition, it requires disclosure of known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application.
14 The Standard requires more detailed disclosure of the amounts of adjustments resulting from changing accounting policies or correcting prior period errors. It requires those disclosures to be made for each financial statement line item affected and, if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share.
15 The presentation requirements for profit or loss for the period have been transferred to IAS 1.
16 The Standard incorporates the consensus in SIC-18, namely that:
(a) an entity selects and applies its accounting policies consistently for similar transactions, other events and conditions, unless an IFRS specifically requires or permits categorisation of items for which different policies may be appropriate; and
(b) if an IFRS requires or permits such categorisation, an appropriate accounting policy is selected and applied consistently to each category.
The consensus in SIC-18 incorporated the consensus in SIC-2, and requires that when an entity has chosen a policy of capitalising borrowing costs, it should apply this policy to all qualifying assets.
17 The Standard includes a definition of a change in accounting estimate.
18 The Standard includes exceptions from including the effects of changes in accounting estimates prospectively in profit or loss. It states that to the extent that a change in an accounting estimate gives rise to changes in assets or liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.