Change in accounting policy or change in estimate?
How to tell a change in accounting policy from a change in estimate under IAS 8, why it decides whether comparatives are restated, and how to record it.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Two clients, two changes. One switches from first-in, first-out to weighted average cost for its stock. The other decides its delivery vans will last longer than it first thought. Both changes move profit. Only one reaches back into last year's figures.
The difference lies in how IAS 8 sorts the change. Get the category wrong and the firm either restates comparatives that should have been left alone, or leaves alone comparatives that should have been restated.
Three categories in IAS 8
IAS 8 deals with three kinds of change, each with its own treatment:
- Changes in accounting policy. The client changes how it accounts for a type of transaction or balance: the basis or method itself.
- Changes in accounting estimates. IAS 8 states that these result from new information or new developments and, accordingly, are not corrections of errors.
- Prior period errors. IAS 8 defines these as omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use, or misuse of, available reliable information.
A practical sorting table:
| Ask | If yes |
|---|---|
| Did the client change the method or basis it applies? | Probably a policy change |
| Did it keep the method but revise an input because of new information? | An estimate change |
| Was last year's figure wrong on information available at the time? | An error |
Retrospective or prospective
Under IAS 8, changes in an accounting policy are applied retrospectively unless this is impracticable or unless another IFRS Standard sets specific transitional provisions. Retrospective application means the client applies the new policy as if it had always applied it: the comparatives are restated and the cumulative effect on earlier years goes to opening equity.
Under IAS 8, the effect of a change in an accounting estimate is recognised prospectively in profit or loss: in the period of the change if it affects that period only, or in the period of the change and future periods if it affects both. The comparatives are not touched.
Errors follow their own route, covered in restating for a prior period error. Where a restatement reaches back far enough, an extra opening balance sheet may be needed; see the third statement of financial position.
Worked examples in words
A new inventory cost formula
The client moves from first-in, first-out to weighted average cost because the new formula better reflects how its stock moves through the warehouse. The method itself has changed, so this is a change in policy. The client recalculates the closing stock of the comparative year on the new basis, restates the comparatives, and adjusts opening retained earnings for the effect on years before that. The note explains what changed, why, and the effect on each line.
A revised useful life
ACCA explains that IAS 16 requires useful life and residual value estimates to be reviewed at the end of each reporting period, with significant changes accounted for over the remaining useful life as a change in accounting estimate. So when the vans are now expected to last longer, the client spreads their remaining carrying amount over the new remaining life from the current year onwards. Last year's depreciation stands. This year's charge falls, and so do future charges. The annual review is explored in reviewing useful lives and residual values.
A "revision" that is really an error
Suppose the vans' original life was set without looking at the client's own replacement records, which showed plainly that its vans always lasted much longer. Then the "revision" may be the correction of an error rather than a change in estimate. The test is whether reliable information was available, and ignored, when the earlier figure was set.
Recording the decision and updating policy wording
Write the classification down with its reasoning: what changed, why, which category it falls into, and what that means for the comparatives. A reviewer will look for this before anything else.
In Achekam's Financials Studio, the standard policy wording is based on IFRS for SMEs and labelled for review before issue, and staff can write their own policies. A change in policy means the policy text itself must be updated, and the explanation of the change is the firm's to write. The Studio's notes take their figures from the mapped trial balance and leave facts it does not hold as "[to be completed]".
How rolled-forward sets and comparatives handle each case
Staff can roll a set of statements forward to the next year in Achekam, carrying settings, policies, notes and wording, and rebuilding every figure from the new trial balance. Adjusting entries, typed comparatives and signatures are not carried forward.
The two kinds of change play out differently:
- An estimate change needs nothing special in the comparatives. The current year's figures reflect the new estimate through the client's ledger or a current-year adjusting entry.
- A policy change needs restated comparatives. In the Studio, comparatives can come from a person's figures, last year's issued statements or a prior-year set a person reviews. For a restatement, last year's issued figures are the wrong starting point, so the firm enters the restated comparatives itself and keeps the working. Because typed comparatives are not carried forward, next year's set starts afresh, by which time the comparatives are already on the new basis.
The cash flow statement's current-year column is worked out from the change in balances, and staff can type their own figure for any line. A restated opening balance changes those movements, so look at the cash flow lines again after restating.
The IFRS Foundation's page on IAS 8 summarises the standard, now titled Basis of Preparation of Financial Statements, including the criteria for changing accounting policies and the treatment of changes in estimates and corrections of errors.
The category decides everything that follows, so decide it first, write it down, and only then start changing figures.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
