IAS 8
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Overview and Scope
International Accounting Standard 8: Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8) is an international financial reporting standard adopted by the International Accounting Standards Board (IASB).[1] The standard prescribes the criteria for selecting and changing accounting policies, along with the accounting treatment and disclosure of changes in accounting estimates and corrections of prior period errors.[2] IAS 8 is designed to enhance the relevance and reliability of an entity's financial statements and the comparability of those statements over time and with the financial statements of other entities.[3]
Accounting Policies
Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.[4] When an IFRS specifically applies to a transaction, the accounting policy for that item must be determined by applying the relevant standard.[5] In the absence of a specific IFRS, management must use judgment to develop a policy that results in relevant and reliable information.[6] Such judgment should consider the requirements in IFRSs dealing with similar issues and the definitions and recognition criteria in the Conceptual Framework.[7]
Changes in accounting policies are generally applied retrospectively by adjusting the opening balance of each affected component of equity for the earliest prior period presented.[8] An entity shall change an accounting policy only if the change is required by an IFRS or results in the financial statements providing more reliable and relevant information.[9]
Changes in Accounting Estimates
A change in accounting estimate is an adjustment of the carrying amount of an asset or liability resulting from new information or developments.[10] These changes are recognized prospectively by including them in profit or loss in the period of the change and future periods.[11] Unlike accounting policies, changes in estimates do not require the restatement of prior periods because they do not relate to errors.[12]
Prior Period Errors
Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods.[13] Material prior period errors must be corrected retrospectively in the first set of financial statements authorized for issue after their discovery.[14] This involves restating the comparative amounts for the prior period(s) presented in which the error occurred.[15]
Booking Examples for IAS 8
The following examples illustrate the difference between prospective and retrospective adjustments.
1. Change in Accounting Estimate (Prospective)
IAS 8 requires prospective application: the new rate applies from the date of change without restating prior years.[16]
Scenario: Cost: $100,000 (Jan 1, 2021) | Original Life: 10 years ($10k/yr) | Revision: On Jan 1, 2024, life reduced to 5 years total (2 years remaining).
Calculation: Carrying Amount (2024): $100,000 - $30,000 = $70,000.[17] | New Depreciation: $70,000 / 2 years = $35,000/yr.[18]
Journal Entry (Dec 31, 2024):
| Account | Debit | Credit | Rationale |
|---|---|---|---|
| Depreciation Expense (P&L) | $35,000 | Applied to remaining book value.[19] | |
| Accumulated Depreciation | $35,000 | No restatement of 2021–2023.[20] |
2. Correction of a Prior Period Error (Retrospective)
Scenario: In 2024, a company discovers it failed to record $50,000 of expenses in 2023.
| Event | Debit | Credit | Rationale |
|---|---|---|---|
| Error Correction | Retained Earnings (Opening Balance) | Accrued Liabilities / Cash | The opening balance of equity is adjusted to reflect the error as if it had never occurred.[21] |
References
- ^ IASB. IAS 8, Paragraph IN1.
- ^ Deloitte. IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors Summary.
- ^ IASB. IAS 8, Paragraph 1.
- ^ IASB. IAS 8, Paragraph 5.
- ^ Deloitte. IAS 8 — Selection of accounting policies.
- ^ IASB. IAS 8, Paragraph 10.
- ^ IASB. IAS 8, Paragraph 11.
- ^ IASB. IAS 8, Paragraph 22.
- ^ Deloitte. IAS 8 — Voluntary changes in accounting policy.
- ^ IASB. IAS 8, Paragraph 5.
- ^ Deloitte. IAS 8 — Prospective application of changes in estimates.
- ^ IASB. IAS 8, Paragraph 36.
- ^ IASB. IAS 8, Paragraph 5.
- ^ Deloitte. IAS 8 — Correction of prior period errors.
- ^ IASB. IAS 8, Paragraph 42.
- ^ IASB. IAS 8, Para 36.
- ^ Deloitte. IAS 8 Summary.
- ^ IASB. IAS 8, Para 38.
- ^ IASB. IAS 8, Para 37.
- ^ Deloitte. IAS 8 Estimates.
- ^ IASB. IAS 8, Paragraph 42.