Strategic Business Reporting (International) · Presentation and disclosure in financial statements

IAS 8 Accounting Policies, Changes in Estimates and Errors

Updated 11 October 2026 · Fact-checked

IAS 8 sets how you choose and change accounting policies, how you treat changes in accounting estimates, and how you correct prior period errors. Policy changes and errors are applied retrospectively by restating comparatives. Estimate changes are applied prospectively, in the current and future periods, with no restatement.

Understand IAS 8 Accounting Policies, Estimates and Errors

Financial statements must be comparable across years. IAS 8 protects that comparability. It tells you what to do when something about the numbers or the method changes, or when you find that earlier numbers were wrong.

There are three separate situations. You must classify the situation first, because the treatment differs.

Accounting policy: the specific principles, bases, conventions, rules and practices an entity applies. Examples are cost or revaluation model for property, plant and equipment, and the cost formula for inventory (FIFO or weighted average).
Change in accounting estimate: an adjustment to the carrying amount of an asset or liability, or to the consumption of an asset, that results from new information or new developments. Examples are useful life, residual value, expected credit losses and warranty provisions.
Prior period error: an omission or misstatement in earlier financial statements caused by failing to use, or misusing, reliable information that was available and could reasonably have been obtained. Examples are mathematical mistakes, misapplying a standard, oversights and fraud.

An entity changes a policy only if the change is required by an IFRS Accounting Standard, or if it results in reliable and more relevant information. Applying a policy to transactions that are different in substance from earlier ones, or to ones that did not occur before, is not a change in policy. Where no standard applies, management uses judgement, looking first to standards dealing with similar issues, then to the Conceptual Framework definitions and recognition criteria.

Policy changes and errors are dealt with retrospectively, as if the new policy had always applied or the error had never been made. You adjust the opening balance of each affected component of equity (usually retained earnings) for the earliest period presented, and restate comparatives. Estimate changes go through profit or loss in the period of change and later periods. When it is hard to tell a policy change from an estimate change, IAS 8 says treat it as an estimate change.

Key rules to remember

Change in accounting policy: Retrospective application: adjust opening equity of earliest period presented and restate comparatives; On initial application of a new standard, follow its transitional rules first. Retrospective application is the default only where there are none. Limited exemption if impracticable.
Change in accounting estimate: Prospective: recognise effect in profit or loss in the period of change (and future periods if affected); No restatement. If the change relates to assets, liabilities or equity, adjust the carrying amount in the period of change.
Prior period material error: Restate comparatives retrospectively; if error is before earliest period presented, restate opening balances of that earliest period; Not corrected in current-period profit or loss. Immaterial errors may be corrected in the current period.
Revised depreciation after estimate change: New annual charge = (Carrying amount at start of year − revised residual value) ÷ remaining useful life; Applied from the start of the year of change, with no catch-up for earlier years.
Third statement of financial position: Required when retrospective application or restatement has a material effect on the information in the opening statement of financial position; Presented as at the start of the preceding period, in addition to the minimum comparatives. IAS 1 paragraph 40A requires this third statement.
Tax effect of restatement: Adjustment to retained earnings = error or policy effect × (1 − tax rate); Use only if the question tells you tax applies. Adjust the tax liability or deferred tax balance too.

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

Use this method for any IAS 8 question. Classify first, then apply the matching treatment, then show the effect on the numbers and the disclosures.

1Read the scenario and identify what changed: a method, a figure based on judgement, or a mistake in earlier accounts.
2Classify it as a change in policy, a change in estimate or a prior period error. If it is a new standard, look for transitional provisions.
3If it is a policy change, check it is allowed: required by a standard, or gives reliable and more relevant information. A change to suit management or to improve profit is not allowed.
4State the treatment: retrospective for policies and errors, prospective for estimates. Note any impracticability exemption.
5Calculate. For retrospective items, work out the effect on each prior year, then on opening retained earnings of the earliest period presented, and restate comparatives. For estimates, recompute the current-year charge using the revised figures.
6Adjust for tax if the question gives a rate, and say which statement lines change.
7List the key disclosures: nature of the change, the amount of the adjustment for each line item affected, and the reason. For errors, disclose the nature and the amount of correction.
8Add judgement and professional skills: materiality, whether the change is genuine, and any ethical concerns about earnings management.

Quickest way: Three-question classification

When to use it: Use this at the start of any IAS 8 scenario, especially when the time is short and the requirement is just to explain the treatment.

Ask: was something wrong in the past using information that was available? If yes, it is an error: restate comparatives.
Ask: did the basis of measurement or presentation change? If yes, it is a policy change: restate comparatives, if allowed.
Ask: did the figure change because of new information or circumstances? If yes, it is an estimate: change from now on only.
If still unsure whether it is a policy or an estimate, treat it as an estimate.
Write one line for each: treatment, effect on numbers, disclosure.

Common mistakes in IAS 8 Accounting Policies, Estimates and Errors

Restating prior years for a change in useful life or residual value.
Students link any change to retrospective treatment.
Fix: Useful lives, residual values and provisions are estimates. Apply them prospectively from the start of the year of change.
Treating a mistake in earlier accounts as a change in estimate.
Both involve revised numbers, so they look alike.
Fix: Ask whether reliable information was available at the time. If it was ignored or misused, it is an error and needs restatement.
Calling a change to a new method for transactions that are different in substance a policy change.
Students see a different method and assume the policy changed.
Fix: A new policy for new kinds of transactions, or ones that were previously immaterial, is not a change in policy. Apply the appropriate policy to them.
Putting the correction of a material error through current-year profit or loss.
It feels simpler than restating.
Fix: Adjust opening retained earnings of the earliest period presented and restate comparatives. The current-year profit stays clean.
Forgetting disclosures, or the third statement of financial position.
Students focus on the calculation and run out of time.
Fix: Finish with a short disclosure list: nature, reason, amount of the adjustment per line item, and the opening statement where the effect is material.
Justifying a policy change because it improves reported profit.
Students miss the test of reliable and more relevant information.
Fix: Judge the change by relevance and reliability for users, not by its effect on profit. Flag earnings management concerns.

Worked examples

Example 1

Alpha bought a machine on 1 January 20X1 for $600,000. Depreciation was straight line over 10 years with no residual value. On 1 January 20X4, management reviewed the asset and concluded that the remaining useful life is 4 years more, with a residual value of $40,000. Calculate the depreciation charge for the year ended 31 December 20X4 and explain the treatment.

Show the solution

Classify: a change in useful life and residual value is a change in accounting estimate. Apply prospectively. No restatement.
Original annual depreciation = $600,000 ÷ 10 = $60,000.
Carrying amount at 1 January 20X4 after 3 years = $600,000 − (3 × $60,000) = $420,000.
Remaining depreciable amount = $420,000 − $40,000 = $380,000.
Revised annual charge = $380,000 ÷ 4 = $95,000.
Disclose the nature and amount of the change in estimate that affects the current period, and the effect on future periods if it is practicable to estimate.

Answer: Depreciation for 20X4 is $95,000, charged in the current year with no restatement of 20X1 to 20X3.

Example 2

Beta prepares financial statements to 31 December 20X5 with one comparative year. In preparing them, the finance team finds that closing inventory at 31 December 20X4 was overstated by $50,000 because of a counting error that could have been avoided. Inventory at 31 December 20X5 is correctly stated. Profit as originally reported, with the error still in the figures, was $400,000 in 20X4 and $450,000 in 20X5. Ignore tax. Show the effect and the treatment.

Show the solution

Classify: an avoidable counting mistake in a prior period is a prior period error. Correct it retrospectively.
Effect on 20X4: closing inventory was overstated, so cost of sales was understated and profit overstated by $50,000.
Restated 20X4 profit = $400,000 − $50,000 = $350,000. Restated 20X4 closing inventory is reduced by $50,000.
Effect on 20X5: the overstated 20X4 closing inventory is the 20X5 opening inventory. This made 20X5 cost of sales $50,000 too high, so the originally reported 20X5 profit was understated by $50,000. Closing inventory at 31 December 20X5 is correct, so corrected 20X5 profit = $450,000 + $50,000 = $500,000.
Retained earnings at 31 December 20X4 (the opening balance for 20X5) are restated down by $50,000. Retained earnings at 1 January 20X4 are not affected because the error arose in 20X4. The error reverses in 20X5, so closing retained earnings at 31 December 20X5 are correct overall.
Disclose the nature of the error, the correction for each line item affected in 20X4 and 20X5, and the effect on opening equity at 1 January 20X5. A third statement of financial position is not needed here, because the position at 1 January 20X4 is unaffected.

Answer: Restate the 20X4 comparatives: profit falls to $350,000, and inventory and retained earnings at 31 December 20X4 fall by $50,000. Corrected 20X5 profit is $500,000, because opening inventory is now correct.

Exam tips

Always start your answer with the classification. Markers give marks for naming it correctly as policy, estimate or error.
Quote the treatment in plain words: retrospective means restate comparatives and opening equity, prospective means current and future periods only.
In a scenario with management motives, comment on earnings management and the ethical duty. This earns professional skills marks.
Show a short calculation even for a narrative requirement. A single numbers line proves you applied the rule.
Do not forget disclosures. A two-line list at the end of your answer is often worth marks.

Practice questions from Presentation and disclosure in financial statements

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 accounting estimate?

A policy change alters the basis of measurement or presentation, for example moving from FIFO to weighted average cost. An estimate change revises a figure because of new information, such as a shorter useful life. Policy changes are retrospective. Estimate changes are prospective.

How do I correct a prior period error under IAS 8?

Restate the comparative amounts for the periods affected. If the error occurred before the earliest period presented, restate the opening balances of assets, liabilities and equity for that earliest period. Disclose the nature of the error and the correction for each line item.

What if I cannot tell whether a change is a policy or an estimate?

IAS 8 says that when it is difficult to distinguish a change in policy from a change in estimate, the change is treated as a change in estimate. This avoids restating comparatives without a clear reason.

Can a company change an accounting policy whenever it wants?

No. It can change only if a standard requires it, or if the change gives reliable and more relevant information about the effects of transactions on the financial statements. Changing to improve reported profit is not a valid reason.