Accounting Policies, Changes in Accounting Estimates and Errors (Ind AS 8): formula sheet

Key formulas

Objective of Ind AS 8

Select and change policies by criteria + prescribe treatment and disclosure for policy changes, estimate changes and prior period errors

Purpose: relevance, reliability and comparability over time and between entities.

Classification rule

Policy change → retrospective; Estimate change → prospective; Prior period error → retrospective restatement

The standard is applied in order: decide the category first, then apply the treatment. Retrospective treatment is subject to the impracticability exception.

Definition of impracticable

Impracticable = cannot apply the requirement after making every reasonable effort

Not the same as difficult, costly or time-consuming. Hindsight cannot be used to establish effects.

Error test

Error = failure to use, or misuse of, reliable information that was available and could reasonably have been obtained when the prior statements were approved

If the information only became available later, it is an estimate change, not an error.

Hierarchy where no Ind AS applies

Management judgement → consider (a) Ind AS dealing with similar issues, (b) Conceptual Framework definitions and recognition criteria

Management may also consider recent pronouncements of other standard-setters using a similar framework, other literature and accepted industry practice, if consistent with the first two.

Rule when an Ind AS applies (para 7)

Specific Ind AS applies → policy = that Ind AS (with its mandatory guidance)

No judgement is needed or allowed to override it.

Judgement when no Ind AS applies (para 10)

Policy must give information that is relevant AND reliable

Reliable = faithful representation, substance over form, neutral, prudent, complete in all material respects.

Hierarchy of sources (para 11)

(a) Ind ASs on similar and related issues → (b) Conceptual Framework definitions, recognition criteria, measurement concepts

Applied in descending order. These are mandatory to consider.

Other sources (para 12)

Latest IASB pronouncements → other standard-setters with similar framework, other accounting literature, accepted industry practice

Permitted (may), only if they do not conflict with para 11 sources.

Consistency (para 13)

Same policy for similar items; separate consistent policy per category if an Ind AS permits categorisation

Categorisation must come from an Ind AS, not from management's preference.

Materiality (para 8)

Immaterial effect → policy need not be applied; but no immaterial departures to achieve a presentation

Intentional or uncorrected immaterial departures to manage presentation are inappropriate.

Retrospective application

Apply new policy as if it had always been applied

Adjust opening equity of the earliest prior period presented and restate comparatives for each prior period presented.

Route on initial application of an Ind AS

Follow specific transitional provisions, if any

If none, or if the change is voluntary, apply retrospectively.

Impracticability limit

Retrospective unless period-specific or cumulative effect cannot be determined

If the cumulative effect cannot be determined, apply prospectively from the start of the earliest period practicable.

Early application of an Ind AS

Not a voluntary change in accounting policy

Do not treat it as voluntary.

Revaluation policy

First revaluation under Ind AS 16 or Ind AS 38 is treated as a revaluation, not under Ind AS 8

Do not restate comparatives under Ind AS 8 for it.

Impracticable estimates

Significant estimate that needs hindsight, where information cannot be distinguished, makes retrospective application impracticable

You must distinguish evidence of conditions existing at the transaction date and information available when that period's statements were approved.

Treatment of change in estimate

Prospective: current period, or current + future periods affected

No restatement of prior periods and no prior period adjustment.

Revised depreciation (straight line)

(Carrying amount at date of change − Revised residual value) ÷ Remaining useful life

Applied from the date of the change; the depreciation method is assumed unchanged. Remaining life is counted from the date of change.

Asset, liability or equity effect

Adjust carrying amount of the related item in the period of the change

Applies to the extent the change gives rise to changes in assets and liabilities or relates to equity.

Policy vs estimate test

Change in measurement basis = policy change; hard to distinguish = estimate

Policy changes are applied retrospectively when voluntary; estimates are applied prospectively.

Input or technique change

Change in input or measurement technique = change in estimate

Unless it results from correction of prior period errors.

Rule for correcting material prior period errors (para 42)

Restate comparatives for the prior period(s) in which the error occurred; if the error is older than the earliest period presented, restate opening assets, liabilities and equity of the earliest period presented

Done in the first set of financial statements approved for issue after discovery. Applies to material errors, subject to impracticability.

Retrospective restatement (para 5)

Correct recognition, measurement and disclosure as if the prior period error had never occurred

Use this definition when an answer asks you to explain the term.

Impracticability: period-specific effects (para 44)

If period-specific effects on comparatives cannot be determined, restate opening balances for the earliest period for which restatement is practicable (may be the current period)

Para 43 is the general limit: correct retrospectively except to the extent impracticable to determine period-specific or cumulative effect.

Impracticability: cumulative effect (para 45)

If the cumulative effect at the start of the current period cannot be determined, restate comparatives to correct the error prospectively from the earliest date practicable

This is the last resort.

No hindsight (para 53)

Do not use information that became available after the prior period statements were approved for issue

Applies to assumptions about management intentions and to estimates.

Disclosures (para 49)

(a) nature of error; (b) correction for each prior period presented, for each line item affected and for basic and diluted EPS if Ind AS 33 applies; (c) correction at start of the earliest prior period presented; (d) if impracticable, the circumstances and how and from when corrected

Subsequent periods need not repeat these disclosures. Amounts are given to the extent practicable.

Quick revision

• Ind AS 8 covers selecting policies, policy changes, estimate changes and prior period error corrections.
• Where an Ind AS specifically applies to an item, the policy is determined by applying that Ind AS.
• Guidance accompanying an Ind AS that is integral to it is mandatory.
• Prior period errors arise from failure to use, or misuse of, reliable information that was available and could reasonably have been obtained.
• Errors include mathematical mistakes, mistakes in applying policies, oversights, misinterpretations of facts and fraud.
• Retrospective restatement corrects recognition, measurement and disclosure as if the error had never occurred.
• Policy changes and errors are dealt with retrospectively; estimate changes are prospective.
• Retrospective application may be impracticable if data was not collected in a usable way.
• Estimates for prior periods must reflect the circumstances that existed when the event occurred.
• Tax effects of corrections and retrospective adjustments follow Ind AS 12.
• Ind AS 8 paragraph 12 allows management to first consider the latest IASB pronouncements when no Ind AS applies.
• Always classify first, then apply the treatment.

Common mistakes

• Treating a change in measurement basis as a change in estimate. Fix: Remember that a change in measurement basis (such as a move from cost to fair value for investment property under Ind AS 40) is a policy change. Estimates revise amounts under an existing basis. A change in cost formula, such as FIFO to weighted average, is also a change in accounting policy. Note that the first adoption of the revaluation model under Ind AS 16 or Ind AS 38 is treated as a revaluation under those standards, not as a policy change under Ind AS 8.
• Calling every incorrect past figure a prior period error. Fix: If the figure was reasonable on the information then available and new facts later changed it, it is an estimate change, applied prospectively.
• Treating industry practice or IASB pronouncements as the first source when no Ind AS applies. Fix: Remember: Ind AS on similar issues, then Conceptual Framework (para 11, mandatory). IASB and industry practice (para 12) only come after and must not conflict.
• Saying para 12 sources are compulsory. Fix: Para 11: management shall refer to and consider. Para 12: management may also consider.
• Applying every change prospectively Fix: Policy changes are retrospective by default. Prospective application is only for impracticability or where transitional provisions say so.
• Treating early application of an Ind AS as a voluntary change Fix: Remember that early application is not a voluntary change in accounting policy.
• Restating prior years' depreciation after revising the useful life. Fix: Estimate changes are prospective. Leave comparatives untouched and revise only the charge from the date of change.
• Dividing the revised total life into original cost instead of using the carrying amount. Fix: Use carrying amount at the date of change, less revised residual value, over the remaining life.
• Passing the correction through current year profit or loss Fix: Under Ind AS 8, restate comparatives or opening balances. Current year profit contains only current year items.
• Treating a change in estimate as an error Fix: Ask what information existed at approval. New information makes it an estimate change, applied prospectively. Overlooked available information makes it an error.

Exam tips

• Write definitions in the standard's own wording. Marks in short notes depend on key phrases such as measurement uncertainty and every reasonable effort.
• In case-based MCQs, classify the item first. The answer options usually differ only in treatment.
• Always test an alleged error against availability of information at approval date.
• For scope questions, mention that a specific Ind AS overrides Ind AS 8 and that tax effects go to Ind AS 12.
• Present your answer as item, category, treatment, conclusion so the examiner can award stepwise marks.
• In MCQs, watch the verbs: 'shall' for para 11 sources, 'may' for para 12 sources.
• In case questions, write the order of sources explicitly and say why each lower source is not reached or is allowed.
• Always check first whether an Ind AS specifically applies; many case answers are decided at this step.