IAS 8 Accounting Policies, Changes in Estimates and Prior Period Errors

Financial statements are only useful if a reader can compare this year with last year and one company with another. That comparison breaks down if a company quietly changes the way it measures things, or if last year’s figures turn out to be wrong.

International Accounting Standard (IAS) 8 Accounting Policies, Changes in Accounting Estimates and Errors sets out how policies are chosen, and how the three things that can change the numbers are handled: a change of policy, a change of estimate and a prior period error. Each has its own rule, and the exam tests whether you can tell them apart. The next topic covers the presentation of financial statements.

The topic is examined directly. In May Diet, 2024, Question 5 (15 marks) asked for an explanation of prior period errors and their correction (7 marks) and for restated statements of profit or loss and retained earnings for an inventory error (8 marks). In November Diet, 2025, Question 1(a) asked for two limitations of retrospective application of an accounting policy (5 marks). Read translating financial statements and exchange differences first.

Accounting policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Where an IFRS Accounting Standard specifically applies to a transaction, the policy is determined by applying the Standard.

Where none applies, management uses its judgement to develop a policy that gives information that is relevant to users’ decisions and reliable: faithfully representing the entity’s results and position, reflecting economic substance, neutral, prudent and complete in all material respects.

It considers, in descending order, the requirements for similar issues in the Standards, the definitions, recognition criteria and measurement concepts in the Conceptual Framework, and, optionally, the latest pronouncements of other standard-setters that use a similar framework.

Policies are applied consistently to similar transactions, unless a Standard permits categorisation for which different policies are appropriate. For example, IAS 16 allows the cost model or the revaluation model, each applied to a whole class of assets. The standards need not be applied to immaterial items.

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users make on the basis of the statements.

Changes in accounting policy

Users need to compare an entity over time, so frequent changes are undesirable. A change is permitted only if it:

• is required by an IFRS Accounting Standard; or
• results in the financial statements providing reliable and more relevant information.

A change in recognition (for example capitalising rather than expensing borrowing costs), measurement basis (cost to fair value for investment property) or presentation (classifying a cost as cost of sales rather than administrative expense) is a change in policy. Applying a policy to a new kind of transaction that differs in substance from earlier ones is not a change.

The first revaluation of property under IAS 16 is a change in policy, but is dealt with under IAS 16, not IAS 8.

Retrospective application

Unless the Standard that requires the change has its own transitional provisions, the change is applied retrospectively: as if the new policy had always been applied. The entity adjusts the opening balance of each affected component of equity for the earliest prior period presented, and the other comparative amounts for each prior period presented.

IAS 1 then requires a third statement of financial position, at the start of the earliest comparative period. A company that presents one year of comparatives and changes policy in 20X9 presents statements of financial position at 31 December 20X9, 31 December 20X8 and 1 January 20X8.

For example, a company changes from weighted average cost to first-in, first-out (FIFO) for inventory. Closing inventory at 31 December 20X8 would have been ₦14,000,000 under FIFO against ₦12,500,000 under weighted average, and at 31 December 20X9 ₦16,000,000 against ₦13,800,000. Tax is 30%. At 31 December 20X8 inventory is increased by ₦1,500,000, tax payable by ₦450,000, and equity (opening retained earnings of 20X9) by ₦1,050,000.

For 20X9 the difference rises to ₦2,200,000, so profit before tax is ₦700,000 higher, tax is ₦210,000 higher and profit is ₦490,000 higher. The cumulative effect at 31 December 20X9 is ₦2,200,000 × 70% = ₦1,540,000 (₦1,050,000 + ₦490,000).

Impracticability

Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort. For a prior period, retrospective application (or restatement) is impracticable if:

• the effects are not determinable;
• it requires assumptions about what management’s intent would have been in that period; or
• it requires significant estimates and it is impossible to distinguish objectively information that provides evidence of conditions at that date and that would have been available when the statements were authorised, from other information (hindsight).

If the effect on a particular prior period cannot be determined, the new policy is applied to the carrying amounts at the start of the earliest period for which it is practicable (possibly the current one). If the cumulative effect at the start of the current period cannot be determined, it is applied prospectively from the earliest practicable date.

These are the main limitations of retrospective application, together with the cost, effort and the data that may not exist.

Disclosure of a change in policy

The entity discloses the title of the Standard (if the change is due to one) or the nature of the change and the reason it gives reliable and more relevant information, the transitional provisions, the amount of the adjustment for each line item in the current and each prior period presented and for earnings per share, the amount at the start of the earliest period presented, and, if retrospective application is impracticable, why and how the policy has been applied.

Changes in accounting estimates

An accounting estimate is a monetary amount in financial statements that is subject to measurement uncertainty. An entity develops one to achieve the objective set by an accounting policy. Examples are allowances for bad debts and for inventory obsolescence, the fair value of financial assets and liabilities, useful lives and the pattern of consumption of depreciable assets, and warranty provisions.

Using reasonable estimates does not undermine reliability. Selecting a measurement technique or an input (for example a depreciation method) is itself part of making an estimate.

A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or of the periodic consumption of an asset, resulting from new information or new developments. It is not a correction of an error. A change in the measurement basis is a change in policy, not an estimate, and the change of a depreciation method is a change in estimate.

A change in estimate is accounted for prospectively: the effect is recognised in profit or loss in the period of the change if it affects that period only, and in that period and future periods if it affects both. To the extent it changes assets or liabilities, the carrying amount is adjusted in the period of the change.

For example, an asset costing ₦1,200,000 with a ten-year life and no residual value was bought on 1 January 20X5. At 31 December 20X8 four years of depreciation of ₦120,000 (₦480,000 in total) have been charged, leaving ₦720,000. A review finds the total life is eight years, so four years remain. From 20X9, depreciation is ₦720,000 ÷ 4 = ₦180,000 a year instead of ₦120,000. Prior years are not restated.

The nature and amount of the change in estimate with an effect in the current period or expected in future periods is disclosed.

Prior period errors

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or the misuse of, reliable information that was available when those statements were authorised for issue and could reasonably be expected to have been obtained and taken into account.

They include mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Errors found before the statements are issued are corrected before issue.

An entity corrects material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery, by restating the comparative amounts for the prior period(s) presented in which the error occurred, or, if it occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity of the earliest period presented.

The correction is excluded from profit or loss of the period in which the error is discovered. If restatement is impracticable for a period, the error is corrected from the earliest date practicable.

The entity discloses the nature of the error, for each period presented and to the extent practicable the correction for each line item and for earnings per share, the amount of the correction at the start of the earliest period presented, and, where restatement is impracticable, an explanation of how and from when the error has been corrected.

An inventory error

Inventory at 31 December 20X8 was overstated by ₦9,000,000 because items already sold were included. The published 20X8 figures were revenue ₦110,000,000, cost of sales ₦70,000,000, other expenses ₦10,000,000, profit before tax ₦30,000,000, tax ₦9,000,000 and profit ₦21,000,000. The draft 20X9 figures are revenue ₦150,000,000, cost of sales ₦100,000,000 (including the overstated opening inventory), other expenses ₦20,000,000, profit before tax ₦30,000,000, tax ₦9,000,000 and profit ₦21,000,000. Tax is 30%. Retained earnings at 1 January 20X8 were ₦40,000,000.

Cost of sales for 20X8 rises by ₦9 million (closing inventory was overstated), and for 20X9 falls by ₦9 million (opening inventory was overstated). Retained earnings: 1 January 20X8 ₦40m; 31 December 20X8 as restated ₦40m + ₦14.7m = ₦54.7m (previously ₦61m); 31 December 20X9 ₦54.7m + ₦27.3m = ₦82m, the same as before because the error reverses.

The note shows, for 20X8: cost of sales up ₦9m, tax down ₦2.7m, profit down ₦6.3m; closing inventory down ₦9m, tax payable down ₦2.7m, equity down ₦6.3m.

The ideas in more depth

Why estimates are not restated

An estimate reflects what was known at the time. Learning more later is not a mistake, so past figures stand and the effect goes forward. An error, by contrast, is a failure to use information that existed, so the past figures were wrong.

Why errors bypass current profit

If a prior period error were taken through this year’s profit, this year’s profit would be wrong and last year’s would stay wrong. Restating the comparatives puts each correction in the year it belongs.

Looking ahead

IFRS 18 Presentation and Disclosure in Financial Statements, effective for periods beginning on or after 1 January 2027, will rename IAS 8 as Basis of Preparation of Financial Statements and move into it the requirements on fair presentation, going concern and compliance now in IAS 1. The rules on policies, estimates and errors described here continue to apply.

Sources and references

• IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: selection and application of policies, changes in policies, changes in estimates, prior period errors, and impracticability.

These points are stated as at 5 November 2026.

Worked examples

1. 31 December 20X8. Difference ₦1,500,000; after tax ₦1,050,000 added to opening retained earnings for 20X9.
2. 20X9 profit. Difference ₦2,200,000 less ₦1,500,000 = ₦700,000 more profit before tax; ₦490,000 after tax.
3. Cumulative.
   ₦2,200,000 × 70% = ₦1,540,000.

1. Carrying amount.
   ₦1,200,000 − 4 × ₦120,000 = ₦720,000.
2. New charge.
   ₦720,000 ÷ 4 years remaining = ₦180,000, applied from the current year with no restatement.

1. 20X8.
   Profit before tax ₦30m − ₦9m = ₦21m; tax ₦6.3m; profit ₦14.7m.
2. 20X9.
   Profit before tax ₦30m + ₦9m = ₦39m; tax ₦11.7m; profit ₦27.3m.
3. Check.
   ₦14.7m + ₦27.3m = ₦42m, the same as ₦21m + ₦21m.

How to answer in the exam

• Classify first. Is it a policy (recognition, measurement basis, presentation), an estimate, or an error?
• Apply the rule. Policy and error: retrospective. Estimate: prospective.
• For an error, restate both years. Adjust the year with the error and the year it reverses in, with tax, and check that closing retained earnings agree.
• Write the note. Line items affected, with the tax effect.

Common mistakes in the exam

• Treating a change in depreciation method as a change in policy.
• Correcting a prior period error through the current year’s profit.
• Restating prior years for a change in estimate.
• Forgetting the tax effect of the adjustment.
• Adjusting only one of the two years affected by an inventory error.
• Describing impracticability as simply too costly.

Quick revision

• Policy change: required by a Standard or more relevant and reliable; retrospective; third statement of financial position.
• Estimate change: prospective, no restatement. Doubt between policy and estimate: estimate.
• Error: retrospective restatement of comparatives, outside current profit.
• Impracticable: effects not determinable, management’s intent, hindsight; apply from earliest practicable date.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

Spotted a mistake? Tell us and we will check it.