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IAS 8 Accounting Policies, Estimates and Errors for ACCA FR

Updated 11 October 2026 · Fact-checked

IAS 8 sets out how to choose accounting policies and how to treat changes. A change in policy or a material prior period error is applied retrospectively, restating comparatives. A change in accounting estimate is applied prospectively, in current and future periods. First classify the item, then apply the matching treatment.

Understand IAS 8 Accounting Policies, Estimates and Errors

Every set of financial statements rests on three things: the accounting policies chosen, the estimates made and the accuracy of the numbers. IAS 8 deals with all three. It tells you what to do when any of them changes or turns out to be wrong.

Accounting policies are the specific principles, bases and rules an entity applies, such as measuring inventory at FIFO or measuring property at cost rather than revalued amounts. Where an IFRS applies to a transaction, you follow it. Where none does, management uses judgement to develop a policy that gives relevant and reliable information. It looks first to similar IFRS requirements and the Conceptual Framework definitions.

A change in accounting policy is allowed only if an IFRS requires it, or if it gives reliable and more relevant information. You apply it retrospectively, as if the new policy had always been used. You adjust the opening balance of retained earnings for the earliest period presented and restate the comparatives. Exception: if a new IFRS has its own transition rules, follow those. Retrospective application is also limited where it is impracticable.

A change in accounting estimate is an adjustment to the carrying amount of an asset or liability, or to the consumption of an asset, that results from new information or developments. Examples are useful lives, residual values, bad debt percentages and warranty provisions. You apply it prospectively: you recognise the effect in profit or loss in the period of change, and in future periods if they are affected. You do not restate comparatives.

Prior period errors are omissions or misstatements in earlier statements caused by misusing or failing to use reliable information that was available. Material errors are corrected retrospectively: restate comparatives, or restate opening balances of the earliest period if the error is older than the comparatives. Mistakes in the current year before the statements are authorised are simply corrected in that year. A key skill is telling an estimate change from an error. New information gives an estimate change. Information that was available, but ignored or misread, gives an error. If you cannot tell whether a change is a policy change or an estimate change, treat it as an estimate change.

Key rules to remember

Change in accounting policy: Apply retrospectively: restate comparatives and opening retained earnings; Only if required by an IFRS or if it gives reliable and more relevant information. Follow a new IFRS's own transition rules if it has them.
Change in accounting estimate: Apply prospectively: effect goes in current (and future) profit or loss; No restatement of comparatives. Depreciation changes are estimate changes: new charge = (carrying amount − new residual value) ÷ remaining useful life.
Material prior period error: Restate comparatives (or opening balances of earliest period shown) retrospectively; Not included in current year profit or loss. Disclose the nature of the error and the adjustment to each line item affected.
Change in measurement basis: Treated as a change in accounting policy; For example, moving from cost to a different valuation basis for inventory. The exception is the first revaluation under IAS 16 or IAS 38, which is treated as a revaluation, not under IAS 8.
Unclear classification: If policy change and estimate change cannot be distinguished, treat as an estimate change; This is the IAS 8 default rule.

How to solve IAS 8 Accounting Policies, Estimates and Errors questions

Use this order for any IAS 8 question, whether it is a multiple-choice item or a written adjustment.

1Read the scenario and decide what has happened: new policy, new estimate or error.
2Test for an error: was reliable information available earlier but misused or ignored? If yes, it is an error. If the information is new, it is an estimate change.
3Test for a policy change: has the basis of measurement or presentation changed (for example, from FIFO to weighted average)? A change of basis is a policy change.
4Choose the treatment: retrospective for policies and material errors, prospective for estimates.
5For retrospective items, calculate the effect on each period. Restate the comparative figures and adjust opening retained earnings by the cumulative effect, net of tax if tax is given.
6For prospective items, take the carrying amount at the date of change and spread it over the revised remaining life or use the new estimate from the date of change.
7Show the double entry or the restated figures clearly and label them: comparative restated, opening reserves adjusted, current year charge.
8Add the disclosure points if asked: nature of change, reason, amount of adjustment, and which line items are affected.

Quickest way: Classify, then apply the time rule

When to use it: Use this for Section A and Section B objective questions, where you need the treatment in under two minutes.

Ask: was the information available before? If yes, it is an error. If it arrived now, it is an estimate. If the basis of measuring has changed, it is a policy.
Match the treatment: policy and error mean restate the past. Estimate means change from now on.
For depreciation, take the carrying amount at the start of the year, deduct the residual value, divide by remaining years.
For policy and error figures, work out the difference for each past year and put the total before the comparative year into opening retained earnings.
Check the answer options for the trap: an option that restates comparatives for an estimate change is wrong.

Common mistakes in IAS 8 Accounting Policies, Estimates and Errors

Restating comparatives for a change in useful life or residual value.
Students think any change should be shown as if it was always applied.
Fix: Depreciation changes are estimates. Recalculate from the start of the current year over the remaining life and leave the past unchanged.
Treating a change in inventory cost formula as an estimate.
The numbers change and it looks like a refinement of judgement.
Fix: Moving between FIFO and weighted average changes the measurement basis. It is a policy change, so apply it retrospectively.
Putting a prior period error through current year profit or loss.
It is easier to post the correction in the current ledger.
Fix: Material prior period errors are corrected by restating comparatives and opening retained earnings, not by going through current profit.
Calling a changed provision or bad debt figure an error.
The earlier figure turned out to be wrong, so it seems like a mistake.
Fix: If the earlier figure was a reasonable estimate on the information then available, the revision is an estimate change. It is an error only if the information was available and ignored or misused.
Changing policy simply because the new one gives a better profit.
Students forget that IAS 8 limits voluntary changes.
Fix: A change is allowed only if an IFRS requires it or the result is reliable and more relevant information. Better profit alone is not a valid reason.
Treating the adoption of a policy for a new type of transaction as a change in policy.
Any new policy looks like a change.
Fix: Applying a policy to transactions that differ in substance from earlier ones, or that did not occur before, is not a change in policy.

Worked examples

Example 1

Pearl Co bought a machine on 1 January 20X1 for $500,000. It was depreciated straight line over 10 years with no residual value. On 1 January 20X4, after reviewing technology changes, management estimates the remaining useful life is 4 years (not 7) and residual value is still nil. Calculate the depreciation charge for the year ended 31 December 20X4 and explain the treatment.

Show the solution

Classify: a revision of useful life from new information is a change in accounting estimate.
Treatment: apply prospectively. Do not restate the 20X1 to 20X3 charges.
Original annual depreciation = $500,000 ÷ 10 = $50,000.
Accumulated depreciation at 31 December 20X3 = 3 × $50,000 = $150,000.
Carrying amount at 1 January 20X4 = $500,000 − $150,000 = $350,000.
Revised remaining life = 4 years, residual value nil.
New annual charge = $350,000 ÷ 4 = $87,500.

Answer: The depreciation charge for 20X4 is $87,500, recognised in profit or loss for the year. It is a change in estimate, applied prospectively with no restatement of comparatives. The nature and effect of the change should be disclosed.

Example 2

Opal Co changed its inventory cost formula from FIFO to weighted average on 1 January 20X2, because the new method gives more relevant information. Inventory at 31 December 20X1 was $240,000 under FIFO and $210,000 under weighted average. Ignore tax. Closing inventory at 31 December 20X2 is $300,000 under weighted average. Explain how the change is dealt with and calculate the adjustment to opening retained earnings at 1 January 20X2. Assume the change was impracticable to apply to periods before 20X1.

Show the solution

Classify: a change in the cost formula is a change in measurement basis, so it is a change in accounting policy.
Treatment: apply retrospectively, restating the comparative figures as if weighted average had always been used.
Restate inventory at 31 December 20X1 from $240,000 to $210,000, a reduction of $30,000.
The reduction lowers 20X1 profit (the closing inventory in the comparative year falls), so 20X1 comparative profit falls by $30,000 if opening inventory at 1 January 20X1 is unchanged.
Opening retained earnings at 1 January 20X2 (the closing position of the comparative year) therefore fall by $30,000.
The 20X2 statements use weighted average for both opening inventory ($210,000) and closing inventory ($300,000).

Answer: This is a change in accounting policy applied retrospectively. Comparative 20X1 inventory is restated down by $30,000, and opening retained earnings at 1 January 20X2 are reduced by $30,000 (ignoring tax and assuming no effect before 20X1). Disclose the reason, the nature of the change and the adjustment to each line item.

Exam tips

Start every answer with a one-line classification: policy, estimate or error. Markers give credit for the correct label before the numbers.
In written answers, state the treatment word: retrospective or prospective. Then give the reason from the IAS 8 definition.
In depreciation questions, always find the carrying amount at the date of change first. Many students divide the original cost by the new life by mistake.
For objective questions, watch for options that restate comparatives for estimates. These are the usual wrong answers.
Know the disclosure points: nature, reason, amount of adjustment for each line item, and the effect on earnings per share where relevant.

Practice questions from Reporting financial performance

IAS 8 Accounting Policies, Estimates and Errors in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 8 Accounting Policies, Estimates and Errors: frequently asked questions

What is the difference between a change in accounting policy and a change in estimate?

A change in policy is a change in the principle or basis used, such as moving from FIFO to weighted average. A change in estimate is a revised judgement about an asset, liability or its use, such as a new useful life. Policy changes are applied retrospectively, while estimate changes are applied prospectively.

How is a prior period error corrected under IAS 8?

Correct a material prior period error retrospectively. Restate the comparative amounts for the prior periods presented. If the error occurred before the earliest period shown, restate the opening balances of assets, liabilities and equity for that period. The correction does not go through current year profit or loss.

Can a company change its accounting policy whenever it wants?

No. IAS 8 allows a change only if an IFRS requires it, or if the change results in reliable and more relevant information. Management cannot change policy only to improve reported profit. A consistent policy is expected for similar transactions.

How does IAS 8 appear in the ACCA FR exam?

It most often appears in objective questions where you classify an item or choose the correct treatment. It can also arise in Section C as an adjustment within a statement preparation question, such as correcting an error or changing depreciation. Classification and the retrospective or prospective rule are what earn the marks.