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IFRS Technical Update
Accounting Policies and Accounting Estimates - Proposed Amendments to IAS 8
By Caroline Aggestam Pontoppidan
IASeminars Faculty Member
In September 2017, the International Accounting Standards Board (IASB) published an Exposure Draft of narrow-scope amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. ED/2017/5 remains open for comment until 15 January 2018.
Why is the IASB proposing changes to IAS 8?
The project results from an investigation by the IFRS Interpretations Committee which established that there was diversity in how entities distinguish between accounting policies and accounting estimates. The distinction matters because IAS 8 requires that changes in accounting policy must generally be applied retrospectively by restating comparative information, whereas changes in accounting estimates are applied prospectively and only affect the current (and future periods).
The Board’s proposals are intended to help entities to distinguish between accounting policies and accounting estimates. Fundamentally the accounting policy represents the overall objective and accounting estimates are the inputs required to achieve the objective.
What is proposed?
- Reword the definition of accounting policies to make it clearer, more concise and use only words already in other Standards. It would read: “specific principles, measurement bases and practices applied by an entity in preparing and presenting financial statements”.
- Add a definition of ‘accounting estimates’. Currently IAS 8 only defines a ‘change in accounting estimate’. The ED’s definition focuses on estimation uncertainty: “Judgements or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements cannot be measured with precision”.
- Explaining the distinction
The proposals clarify that when an item cannot be measured with precision, preparers must select an estimation or valuation technique to apply the stated policy. The act of choosing that technique constitutes making an accounting estimate.
- Clarify whether selecting cost formulas in IAS 2 Inventories is a policy choice or an accounting estimate
IAS 2 states that specific identification cost, which requires identifying the actual flow of inventories, is not appropriate for large numbers of inventories that are ordinarily interchangeable. In such cases, IAS 2 approves the use of cost formulas (FIFO and weighted average cost). If an entity changes its formula from FIFO to weighted average cost, is that a change in accounting policy or accounting estimate?
The proposal is that selecting a cost formula is an accounting policy choice: this is because, as stated above, a cost formula does not attempt to estimate the actual flow of inventories. If it did, it would have met the definition of an accounting estimate.
The Exposure Draft (ED/2017/5) specifies five questions for respondents.
The ED can be downloaded through this link:
Note that you can view the content of all incoming comment letters (responses) and other developments via this page: http://www.ifrs.org/projects/work-plan/accounting-policies-and-accounting-estimates/
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