The International Accounting Standards Board (IASB) has released proposed amendments to International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors.
The amendments are intended to help companies understand the difference between accounting policies and accounting estimates. That’s vital because changes in accounting estimates can affect profits or losses. But changes in policies typically don’t. What’s more, there are different requirements for how to account for changes in policies and for changes in estimates.
Comments about the exposure draft will be taken until Jan. 15. They can be submitted to the addresses listed in the draft.
According to the exposure draft, the proposal would provide the following explanations:
How accounting policies and accounting estimates relate to each other by explaining that estimates are used in applying accounting policies, and making the definition of accounting policies more clear and concise.
Selection of an estimation technique or valuation technique — used when an item in financial statements can’t be precisely measured — is considered to be an accounting estimate.
In applying IAS 2, Inventories, selecting the first-in, first-out cost formula or the weighted average cost formula for interchangeable inventories constitutes selection of an accounting policy.
The exposure draft defines accounting policies as the specific principles, measurement bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
Accounting estimates are defined as judgments or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements can’t be precisely measured. A change in the accounting estimate is an adjustment of the carrying amount of an asset or liability, or the amount of the periodic consumption of an asset that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.
Changes in estimates are the result of new information or developments — and, therefore, aren’t corrections of errors.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.