IAS 8: accounting policies, changes in estimates and errors

Three things can change the numbers a company reported before. It can decide to use a different accounting method. It can learn something new and revise a judgement, such as how long a machine will last. Or it can find that last year’s accounts contained a mistake. Each case is treated differently, and mixing them up is one of the commonest errors in reporting.

International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors, gives the rules.

This topic covers how accounting policies are chosen, when they may be changed, how retrospective and prospective treatment differ, changes in accounting estimates, prior period errors, the limits on restating earlier years when it is impracticable, the disclosures required, and the main judgements. The previous topics covered presentation. The next topics cover creative accounting and then the standards on revenue, assets and liabilities.

November 2025 Question 1(e) tested a change in a residual value as part of the group statement.

Key terms in plain English

Syllabus check

IAS 8 is examinable at this level. This topic covers:

• B1(c) formulating and evaluating the entity’s accounting policies, including group entities, under IAS 8;
• D1(a) and (b) evaluating the appropriateness of accounting policies and assessing the validity and acceptability of accounting treatments, which uses the policy-estimate-error distinction;
• the first-time effects of new standards, which are applied under IAS 8 (Area F), including IFRS 18.

CAMA 2020 and IAS 8

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view. IAS 8 is part of IFRS, so its rules are part of the legal standard.

Accounting policies

IAS 8 enhances relevance, reliability and comparability. Comparability matters because users want to see trends over time and compare companies, so it helps that entities treat the same kinds of income and expenditure alike and disclose their policies.

Some policies are fixed by a standard. IAS 2 requires inventory at the lower of cost and net realisable value. IAS 37 bars recognition of contingent assets and liabilities. IAS 38 bars internally generated goodwill. Other standards give a choice: FIFO or weighted average for inventory, the cost or revaluation model for property, plant and equipment (IAS 16) and for intangible assets (IAS 38). Policies need not be applied if the effect is immaterial. Significant policies are disclosed in the notes.

Selecting policies

• Where an IFRS applies, follow it and its implementation guidance.
• Where no IFRS applies, management uses judgement to develop a policy that gives information that is relevant and reliable: faithful representation, substance over form, neutrality, prudence and completeness. It considers in descending order (1) IFRS dealing with similar and related issues and (2) the definitions, recognition criteria and measurement concepts in the Conceptual Framework. It may also consider recent pronouncements of other standard setters with a similar framework, accounting literature and accepted industry practice, provided these do not conflict.

Changing a policy

Frequent changes make comparison difficult, so the same policies are applied within each period and from one period to the next. A policy may be changed only if:

1. an IFRS or interpretation requires it; or
2. the change results in statements that give reliable and more relevant information.

A policy has changed if there is a change in recognition (for example, capitalising or expensing a type of cost), measurement basis (cost or revaluation) or presentation (for example, classifying a cost as cost of sales or administrative expense). When IAS 23 stopped allowing borrowing costs to be expensed, it changed recognition and presentation for some companies.

These are not changes in policy:

• applying a policy to transactions that differ in substance from earlier ones
• applying a policy to a new kind of transaction
• a change in depreciation method

The first revaluation of assets is dealt with under IAS 16 or IAS 38 and not IAS 8.

Note: one example in the practice material of the Institute of Chartered Accountants of Nigeria (ICAN) treats a switch from straight-line to units-of-production depreciation as a policy change, while another list treats a change of depreciation method as not being one. IAS 16 and IAS 8 treat a change in depreciation method as a change in accounting estimate, so we follow the standards.

How a change is applied

When a standard has no transitional rules, a change in policy is applied retrospectively: the opening balance of each affected component of equity for the earliest prior period presented is adjusted, and other comparative amounts are restated as if the new policy had always applied. IAS 1 requires a statement of financial position at the start of the earliest comparative period (a third statement) when this happens.

If that is not possible, apply it from the earliest date that is practicable.

Impracticability

Applying a requirement is impracticable when the entity cannot do so after every reasonable effort. This is so if the effects are not determinable, if it would need assumptions about what management intended in the past, or if it needs significant estimates and it is impossible to separate objectively information that provides evidence of conditions at the time and was available then. There are two degrees:

• Period-specific effects cannot be determined for one or more prior periods presented: apply the new policy to the carrying amounts at the start of the earliest period for which it is practicable (possibly the current period).
• The cumulative effect at the start of the current period cannot be determined: apply the new policy prospectively from the earliest practicable date, and ignore the part of the adjustment that arose before.

Disclosure of a change in policy

• The nature of the change.
• For a change required by an IFRS: the title of the IFRS, the transitional provisions and their possible effect on future periods.
• For a voluntary change: why the new policy gives reliable and more relevant information.
• For the current period and each prior period presented, to the extent practicable, the adjustment to each line item affected and to basic and diluted earnings per share.
• The adjustment relating to periods before those presented.
• The fact that comparatives were restated, or that it is impracticable to do so.
• Information on new standards issued but not yet effective, to help users assess their expected effect.

Changes in accounting estimates

An estimate is needed when an item cannot be measured precisely. Using estimates is a necessary part of preparing statements and does not undermine reliability. Examples: irrecoverable debt allowances, useful lives and residual values of assets, depreciation patterns, inventory obsolescence, fair values and warranty provisions.

A change in estimate comes from new information or developments, so it is not the correction of an error. It is recognised prospectively in profit or loss in the period of the change if it affects only that period (a bad debt estimate), or in the period of the change and future periods if it affects both (an asset’s useful life).

It is shown in the same expense line as before, and no restatement of earlier years is allowed. When an item is hard to classify as a policy or an estimate change, treat it as an estimate. Disclose the nature and amount of a material change, or the fact that the amount cannot be estimated.

Prior period errors

Errors can arise through mathematical mistakes, mistakes in applying policies, misreading facts, oversights or fraud. If found before the statements are issued, they are simply corrected.

A material prior period error found later is corrected retrospectively in the first statements issued after the error is found, by (a) restating the comparative amounts for the prior periods in which it occurred, or (b) if it occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for that period, so that the statements show the position as if the error had never happened.

Only where it is impracticable to determine the period-specific or cumulative effect may the error be corrected prospectively from the earliest practicable date.

Disclosure of prior period errors

• The nature of the error.
• For each period presented, to the extent practicable, the amount of the correction for each line item and for earnings per share.
• The amount of the correction at the start of the earliest period presented.
• If restatement is impracticable, how and when the error has been corrected.

Judgements in applying IAS 8

The rules in more depth

Why retrospective for policies and prospective for estimates

A new policy is a different way of presenting the same facts, so earlier years are restated to keep comparison fair. An estimate is new information about the future, so changing the past would pretend the earlier estimate was wrong when it was reasonable at the time.

Why errors are not estimates

An error ignores information that was available. An estimate uses the best information available at the time. If the information was there and was missed or misused, it is an error, and the past must be corrected.

Why a change in depreciation method is an estimate

The method reflects the expected pattern of using up the asset’s benefits, which is an expectation. A change in expectation is a change in estimate, even though the method has a name.

Why disclosure matters more than choice

Because there is room for choice, disclosure tells users what was chosen and what changed, so they can adjust their analysis.

Worked examples

1. Carrying amount at the end of year 3:
   ₦300m − (3 × ₦30m) = ₦210 million.
2. Remaining life:
   7 − 3 = 4 years.
3. New annual depreciation:
   ₦210m ÷ 4 = ₦52.5 million, charged from year 4.
4. No restatement. The ₦30 million charged in years 1 to 3 stays. This is a change in estimate, applied prospectively.

1. Difference at 31 December 2024:
   450 − 440 = ₦10m lower.
   At 31 December 2025: 500 − 470 = ₦30m lower.
2. Opening retained earnings at 1 January 2025:
   reduce by ₦10m × (1 − 30%) = ₦7 million.
3. 2025 profit before tax:
   reduce by the change in the difference, ₦30m − ₦10m = ₦20m.
   After tax, ₦20m × 70% = ₦14 million lower.
4. Retained earnings at 31 December 2025.
   (restated) fall by ₦7m + ₦14m = ₦21 million, which is ₦30m × 70%.
5. Presentation. Restate the 2025 columns, present a third statement of financial position at 1 January 2025, and disclose the nature of the change, why it is more relevant, and the adjustments by line item and earnings per share.

1. The 2025 comparative profit before tax was overstated by ₦24m.
   After tax it was overstated by ₦24m × 70% = ₦16.8 million.
2. Restate the 2025 comparatives: reduce inventory by ₦24m, reduce retained earnings at 31 December 2025 by ₦16.8m, adjust tax by ₦7.2m.
3. Because the comparatives are restated, the 2026 opening balances are correct and the correction is not put through 2026 profit.
4. Disclose the nature of the error and the correction to each line item and to earnings per share.

Under section 374(1) of CAMA 2020 the company’s records must support the restatement, and section 378 requires the corrected statements to give a true and fair view.

How to score full marks

• Classify first. Say whether the item is a policy change, an estimate change or an error, and why. This decides everything else.
• Name the treatment. Retrospective for policy changes and errors, prospective for estimates.
• Calculate. For estimates, use the carrying amount divided by the remaining life. For retrospective changes, start with the opening retained earnings.
• State the hierarchy when no IFRS applies: similar IFRS, then the Conceptual Framework, then other sources.
• Include disclosures. Nature, reasons, amounts by line item, earnings per share and the third statement.
• Mention impracticability only when the facts suggest records or information are missing.

Common mistakes in the exam

• Restating prior years for a change in estimate.
• Treating a change in depreciation method as a policy change.
• Treating an error as an estimate because “it was a judgement”.
• Forgetting the tax effect on restated retained earnings.
• Using the original total life and not the remaining life when recalculating depreciation.
• Forgetting the third statement of financial position when a policy is applied retrospectively.
• Treating a first revaluation as an IAS 8 policy change. It follows IAS 16 or IAS 38.

Quick revision

• Policy: follow IFRS. If none, similar IFRS, then Conceptual Framework, then others.
• Change policy only if an IFRS requires it or the change is more relevant and reliable.
• Policy change: retrospective, restate comparatives, third statement.
• Estimate change: prospective. Error: retrospective restatement.
• Impracticable: apply from the earliest practicable date.
• Disclosure: nature, reasons, line-item and earnings per share effects, restatement or impracticability.
• CAMA 2020: ss. 377(1), 378, 374(1), 406.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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