Estimates, policy changes and errors

IAS 8 sorts changes into three groups, because each one tells users something different and needs a different treatment.

1. Change in accounting policy — a change in the principles, bases, conventions, rules or practices applied (for example moving from FIFO to weighted average, or from the cost model to the fair value model for investment property). It's allowed only if a standard requires it or it gives reliable and more relevant information. Apply it retrospectively: restate comparatives and adjust the opening balance of each affected component of equity for the earliest period presented, as if the policy had always applied — unless that is impracticable, or a new standard's transition provisions say otherwise.

2. Change in accounting estimate. Since the amendment issued in February 2021 (effective for annual periods beginning on or after 1 January 2023), accounting estimates are defined as monetary amounts in financial statements that are subject to measurement uncertainty. A policy may require an item to be measured in a way that involves uncertainty; the estimate is the output of the technique and inputs used. A change in a measurement technique or an input is a change in estimate unless it corrects an error. Apply it prospectively — in the current period and future periods affected. Revisions of useful lives, residual values, depreciation methods (IAS 16.61), loss rates and warranty assumptions are all estimates. If you can't tell whether a change is in policy or estimate, IAS 8 treats it as a change in estimate.

3. Prior-period error — an omission or misstatement in prior financial statements from failing to use (or misusing) reliable information that was available, including mistakes in arithmetic, misapplied policies, oversights and fraud. Correct material errors retrospectively in the first set of financial statements authorised after discovery: restate the comparatives (or, if the error occurred earlier, the opening balances of the earliest period presented). The correction never passes through current-year profit or loss.