International Accounting Standard (IAS) 8, Accounting policies, Changes in Accounting Estimates and Errors contains different requirements on how to account for changes in accounting policies and for changes in accounting estimates.
International Accounting Standard (IAS) 8, Accounting policies, Changes in Accounting Estimates and Errors contains different requirements on how to account for changes in accounting policies and for changes in accounting estimates. However, the IFRS Interpretations Committee observed that the definitions of ‘accounting policies’ and ‘changes in accounting estimates’ are not sufficiently clear resulting in diversity in the way entities distinguish accounting policies from accounting estimates.
Therefore, the International Accounting Standards Board (IASB) initiated a project to amend IAS 8 in order to provide further clarity on this subject.
On 12 September 2017, the IASB proposed amendments to IAS 8 by issuing an Exposure Draft ED/2017/5 Accounting Policies and Accounting Estimates (ED). The ED is expected to help entities distinguish accounting policies from accounting estimates.
Comments on the ED may be submitted to the IASB by 15 January 2018.
This issue of IFRS Notes provide an overview of the amendments proposed to IAS 8.
Overview of the amendments
The ED proposes following amendments to IAS 8:
Change in the definition of an accounting policy: Currently, IAS 8 defines accounting policies as ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’.
The ED proposes to remove the terms ‘conventions’ and ‘rules’ as their meanings are not clear and these terms are not used elsewhere in International Financial Reporting Standards (IFRS). Additionally, it proposes to add the term ‘measurement’ before bases in the above definition in accordance with the paragraph 35 of IAS 8 which states that a change in the measurement basis applied is a change in an accounting policy.
Accordingly, post amendment, an accounting policy would be defined as ‘the specific principles, measurement bases, and practices applied in preparing and presenting financial statements’.
New definition of an accounting estimate: Currently, IAS 8 defines ‘accounting policies’ and a ‘change in accounting estimate’ but does not define ‘accounting estimates’.
The IASB observed that the combination of a definition of one item (i.e. accounting policies) with a definition of changes in another item (i.e. changes in accounting estimates) obscures the distinction between accounting policies and accounting estimates. In order to make the distinction clear, the ED proposes a definition of ‘accounting estimates’ and removes the definition of ‘a change in accounting estimate’.
Accounting estimates have been defined in the ED as ’judgements or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements cannot be measured with precision’.
The definition includes reference to the inability to measure items in financial statements with precision. In this context, IASB noted that the level of precision associated with accounting estimates would vary with certain cases having a relatively high level of precision.
Clarification for items that cannot be measured with precision: The ED recognises that the selection of an estimation or valuation technique to measure an item in the financial statements that cannot be measured with precision, involves the use of judgements or assumptions in applying the accounting policy for that item.
Therefore, the ED clarifies that selection of such an estimation or valuation technique constitutes making an accounting estimate.
Clarification for inventories: The ED clarified that in applying IAS 2, Inventories, selecting the First-In, First-Out (FIFO) cost formula or the weighted average cost formula for interchangeable inventories would be selection of an accounting policy.
Selecting one of the two cost formulas prescribed by paragraphs 25 - 27 of IAS 2 for ordinarily interchangeable inventories does not involve the use of judgement or assumptions to determine the sequence in which those inventories are sold. For this reason, selecting that cost formula does not constitute making an accounting estimate, it constitutes selecting an accounting policy.
Others: The ED also proposes to delete an example from the guidance on implementing IAS 8. The example deals with the following two simultaneous changes for property, plant and equipment:
The ED proposes that an entity should apply the amendments only to changes in accounting policies and changes in accounting estimates that occur on or after the start of the first annual period in which the entity applies the amendments.
The determination of accounting policies and making estimates in applying those policies is a critical process in the preparation of an entity’s financial statements. Since IAS 8 did not define an accounting estimate and only provided guidance on accounting for a change in an accounting estimate, entities have applied judgement in identifying what constitutes an accounting estimate.
The ED addresses important issues that are relevant in reducing diversity in the way these policies and estimates are defined and identified. Since the manner of accounting for changes in accounting policies and changes in accounting estimates differs, the clarification proposed in the ED is expected to bring greater consistency in financial reporting.
Applicability under Indian Accounting Standards (Ind AS)
In India, this guidance would be applicable to companies that have transitioned or are transitioning to Indian Accounting Standards (Ind AS) when a corresponding amendment is proposed and notified by the Ministry of Corporate Affairs (MCA) to Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
We encourage entities to provide their feedback and comments on the proposed amendments to the IASB.
To access the text of the exposure draft issued by IASB, please click here.
© 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.