IASB clarifies how to distinguish between a change in accounting policy and a change in accounting estimate
It is important to distinguish between changes in accounting policies and changes in accounting estimates because they are accounted for differently. The table below shows the difference in the accounting treatment required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors:
|Type of change
IAS 8 requirement
Change in accounting estimate
Recognise prospectively in period of change if the change affects that period only, or in future periods if the change affects future periods as well.
Change in accounting policy
Retrospective restatement of comparatives, unless a new standard includes specific transitional requirements.
IAS 8 currently only defines ‘changes in accounting estimates’ and not an ‘accounting estimate’. The recent IASB amendments introduce a definition of ‘accounting estimates’ as follows:
Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.
Accounting policies require transactions and balances to be measured in financial statements. Sometimes these values are easily observable (e.g. from a supplier invoice), but in many cases values are not directly observable and need to be measured at monetary amounts that must be estimated. In such cases, accounting estimates are developed to achieve the objective set out by the accounting policy. This typically involves the use of judgements and asusmptions.
Examples of accounting estimates
The amendments include the following examples of accounting estimates:
- Expected credit loss allowances (IFRS 9 Financial Instruments)
- Net realisable value of inventories (IAS 2 Inventories)
- Fair value of an asset or liability (IFRS 13 Fair Value Measurement)
- Depreciation expense (IAS 16 Property, Plant and Equipment)
- Provision for warranty obligation (IAS 37 Provisions, Contingent Liabilities and Contingent Assets).
How does an entity develop an accounting estimate?
Entities use measurement techniques and inputs to develop accounting estimates. Measurement techniques include:
- Estimation techniques, typically used to estimate expected credit losses and value in use of a cash-generating unit, and
- Valuation techniques used to determine fair value, e.g. an income approach or a market approach.
What is a ‘change in accounting estimate’?
Following on from the diagram above, the amendments clarify that there is a change in an accounting estimate when there is a change in either of the following:
- An input, or
- A measurement technique.
However, if changes in the above result from the correction of a prior period error, then they are accounted for retrospectively, rather than prospectively.
The amendments apply to annual reporting periods beginning on or after 1 January 2023, but only to changes in accounting estimates and accounting policies that occur on or after the beginning of the first annual reporting period to which these amendments first apply.
For more information, please read our International Financial Reporting Bulletin IFRB 2021 07 IASB issues amendments to IAS 1, IAS 8 and IFRS Practice Statement 2 – Disclosure of Accounting Policies and Definition of Accounting Estimates.