IAS 8 Accounting Policies, Estimates and Errors: Where Companies Get It Wrong

IAS 8 Accounting Policies, Estimates and Errors: Where Companies Get It Wrong

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

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IAS 8 is one of those standards that accountants think they understand until they have to apply it to a real situation. The concepts seem straightforward: accounting policies are applied consistently, estimates are updated prospectively, errors are corrected retrospectively. Three clean rules.

Then a situation arises. A company changes its depreciation method. Is that a policy change or an estimate change? The treatment and the disclosure requirements are completely different. Get it wrong and the comparative figures in last year's financial statements may need restating, or conversely, you restate when you should not have.

I spend more time on this distinction in class than almost anything else in the IAS 8 syllabus. Not because the rule is complicated, but because the boundary between a policy and an estimate is genuinely blurry in practice, and the consequences of misclassifying are significant. This post covers all three areas of IAS 8 with equal weight, including the one distinction that trips up even experienced professionals.

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What IAS 8 Does

IAS 8 covers three things:

• How to select and change accounting policies
• How to account for and disclose changes in accounting estimates
• How to correct and disclose prior period errors

The standard also provides the hierarchy for selecting accounting policies when no IFRS standard specifically applies to a transaction. That hierarchy matters more than people realise, and I will cover it first because it underpins the rest.

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Part 1: Accounting Policies

What an Accounting Policy Is

An accounting policy is a specific principle, basis, convention, rule, or practice applied by an entity in preparing and presenting financial statements. Examples: using the cost model for property, plant and equipment under IAS 16, measuring inventory using the weighted average cost formula under IAS 2, recognising revenue at a point in time versus over time for a specific type of contract under IFRS 15.

Accounting policies are choices where IFRS permits alternatives, or frameworks an entity establishes for areas that require judgment.

Selecting Accounting Policies: The Hierarchy

When an IFRS standard directly addresses a transaction, the entity applies that standard. No choice involved. If IAS 2 says inventory is measured at the lower of cost and net realisable value, that is the policy. The choice is only in how cost is determined: FIFO or weighted average.

When no IFRS standard directly applies, management exercises judgment to develop a policy that provides:

• Relevant information to economic decision-making needs of users
• Reliable information: faithful representation, reflecting substance over form, neutral, prudent, complete

In making that judgment, IAS 8 specifies a hierarchy. Management must consider, in descending order:

• Requirements of IFRS standards dealing with similar and related issues
• The definitions, recognition criteria, and measurement concepts in the Conceptual Framework

IAS 8 also permits, but does not require, consideration of pronouncements from other standard-setting bodies that use a similar conceptual framework, such as US GAAP or UK GAAP, and accepted industry practice, provided these do not conflict with the above sources.

Indian context example: Carbon credit accounting has no specific IFRS standard. An Indian company in the manufacturing sector that generates and sells carbon credits needs to develop an accounting policy. IAS 8 requires looking first at similar IFRS standards. IAS 38 on intangible assets and IAS 20 on government grants both have relevance to different aspects of carbon credit recognition. The company develops its policy by analogy with these standards and discloses the policy clearly in the notes.

Consistency of Accounting Policies

Once an entity selects an accounting policy, it must apply it consistently across similar transactions and in each reporting period. The consistency requirement exists to ensure comparability across periods. An entity cannot switch between the cost model and the revaluation model for PP&E each year depending on which produces a better result.

This does not mean policies can never change. It means changes require justification.

When Can an Accounting Policy Change?

IAS 8 permits a voluntary change in accounting policy only if it results in financial statements that provide more reliable and relevant information about the effects of transactions, other events, or conditions. Higher bar than it sounds. An entity cannot change policies simply because the new policy produces a more favourable number. The change must genuinely improve the quality of information.

Beyond voluntary changes, a change is also required when a new or amended IFRS standard requires it.

Examples of valid voluntary changes:

• Switching from the cost model to the revaluation model for a class of PP&E, where the entity determines that current values provide more relevant information to users than historical cost
• Changing inventory cost formula from weighted average to FIFO, where the entity can demonstrate FIFO better reflects actual cost flows for its specific inventory

Examples that are not valid policy changes:

• Changing the cost formula for inventory because FIFO produces higher inventory values and improves the balance sheet in a covenant-critical year
• Switching to the revaluation model for PP&E to avoid an impairment charge that would arise under the cost model

The second example is more common in Indian practice than it should be. IAS 36 impairment testing reveals a potential write-down on a manufacturing facility. Management considers switching to the revaluation model because a revaluation would reset the carrying amount upward, eliminating the impairment. IAS 8 requires that the reason for a policy change is that it provides more reliable and relevant information. Avoiding an impairment charge is not that reason, and auditors will challenge it.

Accounting for Policy Changes: Retrospective Application

When an accounting policy changes, the new policy is applied retrospectively as if it had always been applied. This means:

• Restate comparative prior period figures to reflect the new policy
• Adjust the opening balance of each affected equity component for the earliest prior period presented

If the change occurred before the earliest comparative period, the cumulative effect is adjusted in the opening equity of the earliest period presented.

Worked example: TechBuild Ltd, an Indian infrastructure company, changes its policy for measuring its class of investment properties from the cost model to the fair value model under IAS 40, effective for the year ended 31 March 2026.

• Investment property carrying amount at 31 March 2024 (under cost model): Rs. 200 crore
• Fair value at 31 March 2024: Rs. 280 crore
• Tax rate: 25%

The cumulative catch-up adjustment at 1 April 2024 (the earliest comparative period opening balance) is:

The comparative statement of financial position at 31 March 2025 is restated. The comparative income statement for FY2025 reflects fair value movements rather than depreciation. Every line that is affected by the change is restated.

The Impracticability Exception

Retrospective application is required unless it is impracticable to determine the cumulative effect of the change. IAS 8 defines impracticable as when the entity cannot apply the requirement after making every reasonable effort.

This is a high bar. Impracticable does not mean difficult. It means genuinely impossible after all reasonable efforts. If the entity cannot determine what retained earnings would have been at the start of the earliest comparative period under the new policy, even after exhausting all available information, it applies the change prospectively from the earliest date practicable.

In practice, the impracticability exception is legitimately invoked for changes that require fair value or current cost measurements for periods long before the change, where market data from those prior periods no longer exists. It is not legitimately invoked simply because the calculation is complex or time-consuming.

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Part 2: Accounting Estimates

What an Accounting Estimate Is

An accounting estimate is a monetary amount in the financial statements that is subject to measurement uncertainty. Examples: the useful life of a piece of equipment, the residual value of a fleet of vehicles, the expected credit loss rate on a receivable portfolio, the provision amount for a warranty obligation, the fair value of an unlisted equity instrument.

The 2021 amendment to IAS 8 introduced a clearer definition of accounting estimates and clarified the distinction between policies and estimates. A measurement technique or input used in developing an accounting estimate is part of the estimate, not a separate accounting policy choice. This matters for the distinction I am about to explain.

The Critical Distinction: Policy vs Estimate

This is the question I ask students to test their understanding of IAS 8: "A company changes the depreciation method for its machinery from straight-line to units of production. Is this a change in accounting policy or a change in accounting estimate?"

Most students answer: accounting policy, because depreciation method seems like a policy.

The correct answer under IAS 8: change in accounting estimate. Prospective treatment. No restatement.

The reasoning: the objective of depreciation is to allocate the depreciable amount of an asset over its useful life in a way that reflects the pattern of consumption of the asset's future economic benefits. The depreciation method is a means of estimating that consumption pattern. Switching methods reflects a revised assessment of how the asset is consumed, which is a change in estimate. The policy, allocating cost over useful life, has not changed. The estimate of the consumption pattern has.

This distinction has real consequences. A change in estimate is applied prospectively, from the current period onward. No restatement. The current period and future periods absorb the effect of the change. A change in policy requires full retrospective restatement. The distinction therefore determines whether prior period comparatives need to be restated.

Practical test I use in class: ask whether the change involves a different approach to the underlying objective (policy change) or a refined assessment of an uncertain amount under the same approach (estimate change). If TechBuild Ltd changes from measuring investment property at cost to measuring it at fair value, that is a policy change: the objective, the measurement approach, has changed. If TechBuild revises its estimate of the fair value of a specific investment property based on new market evidence, that is an estimate change: the objective is unchanged, only the estimate of the amount has been refined.

Common Accounting Estimates in Practice

Each of these requires judgment at the reporting date. IAS 8 requires that estimates be based on the latest available, reliable information. When new information becomes available that leads management to revise an estimate, the revision is a change in accounting estimate. Prospective. No restatement.

Disclosures for Changes in Estimates

When a change in accounting estimate has a material effect in the current period or is expected to have a material effect in future periods, an entity must disclose the nature of the change and the amount of the change affecting the current period. If quantifying the effect on future periods is impracticable, that fact must be disclosed.

Indian example: An Indian airline changes its estimate of the useful life of its aircraft fleet. Previously, aircraft were depreciated over 20 years. Following a fleet review and consultation with aircraft maintenance data, the airline revises useful lives to 15 years for older narrow-body aircraft. This affects the current and future periods. The change is prospective. The depreciation charge in the current year increases because the carrying amount is being spread over a shorter remaining life. Disclosure must show the nature of the change (revised useful life estimate for narrow-body aircraft), the amount of additional depreciation in the current year, and a statement that the effect on future periods depends on fleet composition changes.

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Part 3: Prior Period Errors

What Constitutes a Prior Period Error

A prior period error is an omission from or misstatement in prior period financial statements arising from failure to use, or misuse of, reliable information that was available and could reasonably have been expected to be obtained and taken into account when preparing those statements.

The definition is precise in one important way: the information must have been available. If circumstances change after the financial statements were issued and new information comes to light, the adjustment to reflect that new information is a change in estimate, not a correction of an error. The error concept requires that the information existed and was accessible at the time, but was missed or misapplied.

Types of prior period errors:

• Mathematical mistakes
• Mistakes in applying accounting policies
• Oversights or misinterpretations of facts available at the time
• Fraud (specifically mentioned in IAS 8)

Correcting Prior Period Errors: Retrospective Restatement

Material prior period errors must be corrected retrospectively in the first set of financial statements approved for issue after discovery. Correction is done by:

• Restating comparative amounts for the period(s) in which the error occurred
• If the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities, and equity for the earliest period presented

Worked example: Mehta Pharma Ltd discovers in preparing its financial statements for the year ended 31 March 2026 that it failed to accrue Rs. 45 crore of returns and refunds liability in the year ended 31 March 2024. The information needed to estimate this accrual was available at the time and should have been captured under IFRS 15's variable consideration requirements.

The correction in the 31 March 2026 financial statements:

The 31 March 2026 financial statements will show restated comparatives for FY2025, and a restated opening balance sheet at 1 April 2024 if the error originated before that date. A disclosure note explains the nature of the error, the correction made, and the impact on each affected line item.

Error vs Estimate: The Line That Gets Crossed

The most common confusion in practice is treating a change in estimate as a correction of an error, or vice versa. The distinction matters because errors require restatement and estimates are prospective.

Consider this scenario: an Indian manufacturing company included a provision for warranty claims in its 31 March 2024 financial statements of Rs. 20 crore. In FY2026, actual claims are Rs. 35 crore. Is the difference an error?

No. The provision was an estimate based on information available at the time. Actual outcomes differing from estimates is the nature of estimation. The revised information about actual claims affects FY2026 (a change in estimate, absorbed in the current period), not a correction of FY2024. Restating FY2024 for the difference would be wrong.

Contrast this: the same company discovers in FY2026 that it had a legal commitment in FY2024 to honour a specific warranty claim of Rs. 15 crore that was documented, known to management, and omitted from the provision entirely. That is an error. The information was available. It was not used. Retrospective restatement of FY2024 is required if material.

The test: was the information available and should it reasonably have been used? If yes and it was not used: error. If no, or if the information only became available later: estimate change.

The AS 5 vs Ind AS 8 Distinction: Why It Matters for Indian Companies

This is one of the most important practical differences for Indian entities that transitioned from Indian GAAP to Ind AS.

Under the old Indian GAAP standard AS 5, prior period items were recognised in the current period profit or loss as a separate line item called "prior period adjustments." The prior period financial statements were not restated. The correction appeared in the current year's income statement.

Under Ind AS 8, prior period errors require full retrospective restatement. The prior period comparatives are restated. The correction does not appear in the current year's profit or loss.

The difference is fundamental. Under AS 5, a large prior period adjustment could hit current year profits and be visible. Under Ind AS 8, it hits the opening balance of retained earnings, restates the comparatives, and does not distort the current year's profit.

This transition caught many Indian companies when they first adopted Ind AS. Items that had historically been handled as current-year adjustments suddenly required restating comparatives and adjusting opening balances. Finance teams that had not prepared for this found the transition period filings significantly more complex than expected.

For Dip IFRS students: know this distinction. Exam questions sometimes give an Indian context scenario involving prior period treatment, and the difference between AS 5 and Ind AS 8 approaches is examinable.

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Disclosure Requirements: What IAS 8 Requires

For Changes in Accounting Policy

When a voluntary change is made:

• Nature of the change
• Reasons why the new policy provides more reliable and relevant information
• The amount of adjustment for the current and each prior period presented, for each financial statement line item affected
• The amount of adjustment relating to periods before those presented, to the extent practicable

When a change is required by a new or revised IFRS standard, the transitional provisions in that standard typically specify what disclosures are required. For example, when IFRS 16 was first applied, the transitional disclosures were governed by IFRS 16's own transition paragraphs rather than a generic IAS 8 disclosure.

For Changes in Accounting Estimates

• Nature of the change
• Amount of the change affecting the current period
• Amount expected to affect future periods (or a statement that estimation is impracticable)

For Prior Period Errors

• Nature of the error
• Amount of correction for each prior period presented, for each affected financial statement line item
• Amount of correction at the beginning of the earliest prior period presented
• If retrospective restatement is impracticable, the circumstances and a description of how the error has been corrected from the earliest practicable date

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Five Situations Where Companies Get IAS 8 Wrong

1. Treating a Change in Useful Life as a Policy Change

An Indian manufacturer extends the estimated useful life of its plant from 10 years to 15 years, following updated engineering assessments showing lower-than-expected wear. This is a change in estimate, not policy. Prospective from the date of revision. No restatement. I see this treated as a policy change repeatedly, triggering unnecessary restatements.

2. Using the Impracticability Exception Without Meeting the Bar

IAS 8's impracticability exception requires that the entity cannot determine the cumulative effect after making every reasonable effort. It is not available simply because the calculation is burdensome or requires significant management time. Indian companies transitioning to new standards sometimes invoke this without sufficient justification. Auditors should challenge impracticability claims rigorously.

3. Correcting Immaterial Errors Retrospectively Unnecessarily

IAS 8 requires retrospective restatement only for material errors. Immaterial errors can be corrected in the current period's profit or loss without restatement. Some finance teams apply full restatement mechanics to every error they find, regardless of materiality. This creates unnecessary complexity and can obscure the current period's performance with small adjustments that do not affect any user's decision.

4. Classifying a Change in Revenue Recognition Approach as an Estimate Change

An Indian real estate developer changes from recognising revenue at a point in time (on completion and handover) to recognising it over time (percentage of completion based on costs incurred). This is a policy change, not an estimate change. The fundamental approach to when control transfers, which drives the performance obligation satisfaction assessment under IFRS 15, has changed. Full retrospective application is required unless impracticable. Treating this as an estimate change and applying it prospectively understates prior year revenues and misrepresents the transition.

5. Failing to Disclose the Quantitative Impact of Estimate Changes

IAS 8 requires disclosure of the amount of the change in estimate affecting the current period, and the expected effect on future periods. I frequently see notes that say "the company revised its estimate of useful lives of certain assets" with no quantification of the impact. That disclosure is inadequate. The standard requires the amount. If the revised depreciation charge is Rs. 80 crore versus Rs. 120 crore before the change, the disclosure must reflect that Rs. 40 crore difference and its expected continuation in future periods.

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Ind AS 8 vs IAS 8: Differences

Ind AS 8 is substantially converged with IAS 8. The practical differences are narrow but worth knowing.

One India-specific addition: Section 131 of the Companies Act 2013 allows a company to voluntarily revise its financial statements or directors' report within prescribed timeframes if they do not comply with the Act. This is separate from IAS 8's error correction mechanism but achieves a similar outcome for legal compliance purposes. NFRA has the authority to direct revision of financial statements in cases of non-compliance with accounting standards. This power was exercised in several cases following NFRA's establishment in 2018.

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What Big 4 Auditors Focus On in IAS 8

Three areas generate the most discussion in audit files.

Policy vs estimate classification. When a client proposes a change, the audit team will challenge the classification. If the client calls something an estimate change to avoid restating comparatives, the auditor asks whether the underlying principle or objective has changed. If it has, it is a policy change regardless of how management characterises it.

Adequacy of impracticability justification. When a client invokes impracticability to avoid full retrospective application, the audit team documents whether every reasonable effort was made to determine the cumulative effect. Impracticability is rare and requires evidence of genuine attempts.

Completeness of error identification. At year end, auditors assess whether any misstatements identified during the audit represent prior period errors or current period misstatements. A misstatement in the current period that arose from information available in a prior period is a prior period error and triggers retrospective restatement requirements, not just a current-year audit adjustment.

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Dip IFRS Exam Angle

IAS 8 appears in Dip IFRS in scenario-based questions. Typically, a situation is described and candidates must identify whether it is a policy change, estimate change, or error, apply the correct treatment (retrospective or prospective), and calculate the impact on financial statements.

The highest-value questions involve the policy vs estimate boundary. Know the depreciation method example cold. Know that measurement techniques and inputs used in developing estimates are part of the estimate, not separate policies. Know the three conditions for a valid voluntary policy change. Know the impracticability exception and its high bar.

For error correction questions, be prepared to show the journal entries to restate opening retained earnings and adjust comparative line items. The calculation is straightforward once you understand the principle. The marks go to students who also describe the disclosure requirements accurately.

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FAQ

Can an entity choose not to restate comparatives when correcting an immaterial error?

Yes. Retrospective restatement is required only for material errors. Immaterial errors can be corrected in the current period profit or loss. The entity must assess materiality carefully and document its conclusion.

What if an error spans multiple prior periods?

The cumulative effect of the error is adjusted in the opening equity of the earliest prior period presented. Each affected period's comparatives are restated individually for the portion of the error attributable to that period.

Is changing from FIFO to weighted average for inventory a policy change or estimate change?

Policy change. The cost formula is an accounting policy under IAS 2, not an estimation technique. A change requires retrospective application and must meet the test of providing more reliable and relevant information.

Can an entity change its accounting policy to the revaluation model mid-life for a class of assets?

Yes. Switching from cost to the revaluation model is a permitted voluntary policy change. However, the revaluation must be applied to the entire class of assets, not selectively to individual assets within the class.

What if a new IFRS standard requires a change in policy but includes its own transitional provisions?

Follow the transitional provisions in the new standard. Those provisions override the general retrospective application requirements of IAS 8 for that specific change. For example, IFRS 16's transitional options overrode IAS 8's general rules for entities adopting IFRS 16.

Is the correction of a fraud always a prior period error under IAS 8?

Yes. IAS 8 explicitly includes fraud within the definition of prior period errors. The correction requires retrospective restatement if material, regardless of whether the perpetrators have been identified or legal proceedings are ongoing.

How does IAS 8 interact with IAS 10 events after the reporting period?

If an error is discovered after the reporting date but before the financial statements are approved for issue, it is corrected before the statements are issued. If new information becomes available after the reporting date that provides evidence of conditions that existed at the reporting date, that information is used to update estimates as an adjusting event under IAS 10. These are different mechanisms with different treatments.

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This is Post 8 of the Global Fin X IFRS Series. Previous: IAS 7: Statement of Cash Flows: Direct vs Indirect Method and Classification Pitfalls. Next: IAS 10: Events After the Reporting Period: Adjusting vs Non-Adjusting.