PAS 8 - Accounting policies, changes in accounting estimate and errors
Rationale:
When people read a company’s financial statements, they rely on the numbers to make
important decisions. Whether it is an investor considering buying shares or a creditor deciding
whether to lend money, all users need the information to be clear, consistent, and correct. PAS 8
helps make that possible.
PAS 8 deals with accounting policies, accounting estimates, and errors. It sets the rules for how
to apply consistent methods, how to adjust estimates when needed, and how to correct
mistakes from the past. Without this guidance, financial statements could easily become
misleading or difficult to compare from year to year.
Recognition:
Accounting Policies
Accounting policies are the specific principles and rules that a company chooses and follows in
preparing its financial reports. This includes things like how inventory is valued, how assets are
measured, or how revenue is recognized. Companies must use the same policies each period
to ensure comparability over time.
A change in accounting policy is only allowed when:
● A new accounting standard requires the change.
● The new policy gives clearer and more reliable information.
Examples of policy changes:
● Switching inventory method from First-In, First-Out to weighted average.
● Changing how property is measured, from cost to revaluation.
● Adopting a new model for investment property based on fair value.
● Applying a new policy due to the introduction of a new accounting standard.
Accounting Estimates
An estimate is used when a precise amount cannot be determined. This often happens when
businesses need to predict or judge the value of certain items.
Examples of estimates:
● Allowance for doubtful accounts.
● Estimated selling price of inventory.
● Fair value of assets or liabilities.
● Depreciation of fixed assets.
● Provisions for warranties.
Estimates are not always exact, but they are necessary when actual values are not immediately
available. As new information comes in, estimates may need to be adjusted.
Measurement:
Change in Accounting Policy
When a company changes its accounting policy, it usually needs to apply the change
retrospectively. This means adjusting the financial records as if the new policy had always been
used.
This involves:
● Revising the opening balance of retained earnings.
● Restating prior-year figures, if previous periods are shown, to match the new policy.
If a standard includes specific instructions on how to transition to a new policy, the company
must follow those instructions. Otherwise, retrospective application is required.
Change in Accounting Estimate
Changes in estimates are different. They are considered a normal part of accounting and do not
require adjusting past financial statements.
Instead, the company applies the change from the date of the change moving forward. This is
called prospective recognition.
For example:
● If the estimated useful life of a machine is changed, the new depreciation is applied from
the current year onward. Past depreciation remains unchanged.
Prior Period Errors
Sometimes, mistakes are found in financial reports after they are published. These are called
prior period errors. They happen due to mistakes, misinterpretations, or failure to use reliable
information that was available at the time.
When an error is discovered, it must be corrected retrospectively, just like a change in
accounting policy.
This involves:
● Adjusting the beginning retained earnings of the earliest period presented.
● Updating all affected accounts such as assets and liabilities.
● Restating the prior year’s financial statements, if comparative figures are shown.
Presentation:
PAS 8 requires transparency in how changes and corrections are reflected in the financial
statements.
● Changes in policy must clearly show how the new method affects each line item and
explain the reason for the change.
● Changes in estimate must be disclosed in the period the change occurs, along with a
description of the change and its impact.
● Errors must be corrected by updating prior period data and explaining the nature of the
error and its effect on key figures.
For all changes, the goal is to make the financial statements comparable, understandable, and
reliable.
Disclosure:
To help users make sense of the numbers, PAS 8 requires proper disclosure in the notes to the
financial statements.
This includes:
● A description of any change in accounting policy or estimate.
● The reasons for the change.
● The amount of any adjustments made.
● If applicable, the fact that prior period figures have been restated.
These disclosures help users see the full picture and trust that the information they are reading
reflects the reality of the business.
