Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

Indian equivalent: Ind AS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

Objective and scope

IAS 8 governs three things: how you choose accounting policies, what happens when you change a policy or an estimate, and how you correct prior-period errors - and, crucially, whether each change is applied backwards (restating the past) or forwards (only future periods).

Core principle

The headline distinction: a change of policy or an error is fixed retrospectively (rewrite the comparatives as if it had always been that way), but a change of estimate is handled prospectively (only current and future periods). Getting this split right is one of the most tested points in all of IFRS.

Defined terms and technical terminology

Term	Technical meaning
Accounting policy	The specific principles and methods an entity applies in preparing statements (e.g., FIFO vs weighted average, cost vs revaluation model).
Change in accounting estimate	An adjustment to an amount from new information (e.g., revising an asset's useful life or a bad-debt provision). Not a correction of error.
Prior-period error	An omission or misstatement in past statements from failing to use, or misusing, reliable information that existed then.
Retrospective application	Apply the new policy as if it had always been used - restate opening balances and comparatives.
Prospective application	Apply the change only from now on; leave past figures untouched.
Retrospective restatement	Correcting an error by restating comparatives as if it never happened.

Application and worked illustrations

Choosing and changing policies

You must apply the specific IFRS that covers a transaction. Where none exists, management uses judgement to give relevant and reliable information. A policy is changed only if an IFRS requires it, or the change gives more reliable and relevant information. A voluntary change is applied retrospectively - you restate prior periods as though the new policy had always applied, adjusting the opening balance of retained earnings for the earliest period presented.

Worked example 1 - change of policy (retrospective)

A company switches inventory valuation from weighted average to FIFO because FIFO better reflects its actual flow. This is a change of policy → retrospective. Suppose FIFO would have made last year's closing inventory ₹40,000 higher. The company restates last year's figures (higher inventory, higher profit) and increases opening retained earnings accordingly, so the two years remain comparable.

Worked example 2 - change of estimate (prospective)

A machine costing ₹10,00,000 was being depreciated over 10 years (₹1,00,000/year). After 4 years (carrying amount ₹6,00,000), engineers now expect only 3 more years of life. This is a change of estimate → prospective. You do not touch past years; you simply spread the remaining ₹6,00,000 over 3 years = ₹2,00,000/year going forward. No restatement.

Worked example 3 - prior-period error (retrospective restatement)

Last year a company forgot to record a ₹1,50,000 supplier invoice - a prior-period error. It is corrected by restating last year's comparative figures (higher expense, higher payable) and adjusting opening retained earnings - not by dumping the whole ₹1,50,000 into the current year's profit.

Common mistake: treating a change of depreciation method or useful life as a policy change. Revising useful life, residual value, or depreciation method is a change of estimate → prospective.

Common mistake: correcting a prior-period error through current-year profit. Material errors must be fixed by retrospective restatement of comparatives.

IND AS LINK

Ind AS 8 is aligned with IAS 8 - the same retrospective/prospective split. A practical Indian nuance: retrospective restatement interacts with the Companies Act's rules on reopening/revising accounts, so disclosure is emphasised.

Further worked illustrations

Extra numeric example - restating for a policy change

A company changes from the cost model to the revaluation model for land (a policy change). Actually - trick: revaluation is applied prospectively as a revaluation under IAS 16, an exception. So take a cleaner case: it changes inventory costing from weighted average to FIFO. Last year's closing inventory would have been ₹40,000 higher under FIFO, and the year before ₹25,000 higher. It restates: increases last year's profit by ₹40,000, and increases opening retained earnings of the earliest period shown by ₹25,000, so all periods are on the new basis and remain comparable.

INDIAN REGULATORY CONTEXT

When Indian companies first moved from old Indian GAAP to Ind AS, they applied Ind AS 101 (first-time adoption), which is a structured, one-off retrospective application with specific exemptions - a large-scale cousin of the IAS 8 retrospective principle. Many companies restated years of comparatives on transition.

TECHNICAL EDGE CASE

A company discovers that last year's inventory was overstated. If it was overstated because staff used information wrongly that was available then → it's a prior-period error (retrospective restatement). But if it was based on the best estimate at the time and new facts only emerged later (e.g., stock later found to be obsolete due to a new market event) → it's a change of estimate (prospective). The dividing line is whether reliable information existed at the time.