The key difference under IAS 8 is the method of accounting: a change in accounting policy is applied retrospectively to prior periods (unless another Standard specifies otherwise), while a change in accounting estimate is recognised prospectively only, in the period of change and any future periods it affects, with no restatement of prior periods.
What Is an Accounting Policy and What Is an Accounting Estimate?
- Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
- Accounting estimates are monetary amounts in financial statements that are subject to measurement uncertainty.
When May an Entity Change an Accounting Policy?
The Standard provides that an entity shall change an accounting policy only if the change:
- is required by an IFRS Accounting Standard; or
- results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows.
When an entity changes an accounting policy upon initial application of an IFRS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, the Standard requires it to apply the change retrospectively.
When Does a Change in Accounting Estimate Arise?
The Standard provides that an entity may need to change an accounting estimate if changes occur in the circumstances on which the estimate was based, or as a result of new information, new developments or more experience. It clarifies that, by its nature, a change in an accounting estimate does not relate to prior periods and is not the correction of an error.
The Standard also clarifies that a change in the measurement basis applied is a change in an accounting policy, not a change in an accounting estimate, and that when it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in an accounting estimate.
How Is Each Type of Change Accounted For?
The Standard provides that the effect of a change in an accounting estimate (other than a change to which paragraph 37 of the Standard applies) shall be recognised prospectively by including it in profit or loss, either in the period of the change alone if the change affects only that period, or in the period of the change and future periods if the change affects both. A change in accounting policy, by contrast, is applied retrospectively as described above, that is, as if the new policy had always been applied.
Illustrative Example
If an entity changes the depreciation method for an asset from straight-line to a reducing-balance method because the new method better reflects the pattern of consumption of the asset's economic benefits, this is a change in accounting estimate, applied prospectively to the asset's remaining carrying amount only, with no restatement of prior periods. This is a purely illustrative example and is not based on figures in the Standard's text.
Why Does the Standard Insist on This Distinction?
The Standard insists on separating a change in accounting policy from a change in accounting estimate because each has a fundamentally different effect on the comparability of financial statements across periods: restating prior periods when a policy changes preserves historical comparability, while confining a change in estimate to prospective treatment avoids rewriting the results of prior periods that were based on the best information available at the time. Correctly classifying any accounting adjustment between the two categories is therefore an essential first step before determining how it should be accounted for.
Legal References
- IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors (2024 edition; applies until IFRS 18 becomes effective on 1 January 2027) — Paragraphs 5, 14, 19, 34, 35 and 36.
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