ias 8 changes in accounting policies and estimates

yes, it is a change in accounting policy. Actually, it’s a change in accounting base, but that equates to a change in policy.

In the context of inventory, a change in estimate could be, for example, in the area of work in progress.

Historically we have valued part finished work in progress as being 60% complete for material and 40% complete for labour but, with effect from this year, we have amended our estimates. Now we consider the material content to be the same at 60% but labour content is now considered to be 50%

That would be a change in estimate

Hope that helps

Below is a recently written article on policies by a P2 tutor. It will help you.

WORD BLIND

I’m in the mood to deliver a sermon. The subject will be ‘the same word can mean
different things to different people’. The word I am going to use to illustrate the point is
‘policy’. The particular problem with the word policy shows itself in stark relief when a student
asks this deceptively tricky question: “I have changed my depreciation policy from straight
line to reducing balance. Why does the text say this is not a change in policy? It obviously is a change in policy!” Goodness, I can feel myself quake. It is a horrible question with an even
more horrible answer

.
The word policy comes to us from the mists of time long before anyone had the bold idea of
inventing accounting standards and trying to impose consistency. Back then, accountants
had a wide range of choices for their financial reporting and the choices they made became
known as ‘policies’. For example, in the context of leasing, there was a choice between ignoring all finance resulting in pure operating lease accounting and accommodating some finance resulting in the mixed model of operating and finance lease accounting like we do today. Back before standards most companies chose pure operating lease accounting and that was their lease policy. But others chose the mixed model and that was their lease policy.

Then, one-by-one, standards were issued and choices were closed. To continue the leases
example, after IAS 17 a company previously applying pure operating leases had to swap to
the mixed model and the policy choice disappeared. As each standard was issued the
choice disappeared and companies had to align their policies with the standard. The idea of a policy as a choice has effectively gone. ‘Policy choice’ has disappeared.

But as this was going on, a new and different meaning of ‘policy’ sprang into use. This
meaning is nowhere in the standards and everywhere in real life, and this conflict is the
root of the confusion.

This very different animal is all about volume, compromise and materiality. It is true to say that IAS 16 on depreciation contains no policy choice. You must depreciate an asset on an
individual asset-by-asset basis over its life to match the cost with use. And many companies
do just that. They simply look at each asset on an individual basis and estimate its use, and
thereby derive depreciation for each asset. But in big companies with lots of similar assets, a little trick called a ‘formula’ is used. Say there are hundreds of machines that are similar and all last roughly five years (some more and some less). In that company the accountant might say: “I shall depreciate all of them over five years.” Now this is in direct contradiction to IAS 16, which says that depreciation must be on an asset-by-asset basis. But here is the trick. The accountant comes back and says: “I know that, but if I do as I propose, the error will be immaterial and therefore I can.” Neat trick. Now this becomes the big company ‘formula’. So the big company policy is to match cost with use and the formula is the five-year life compromise used to deliver that policy.

Now say that same big company realises that reducing balance would better reflect the
matching of cost with use. Well, then that company will keep its ‘policy’ of matching cost to
use and change its ‘formula’ to reducing balance.

Obviously, that is a change of formula and not a change of policy. But, as you know,
accountants who routinely use these ‘formula’ in their accounting do not call them ‘formula’. They call them ‘policies’. You can now see this meaning is in direct contradiction to the
standards. But these ‘formula’ are still called ‘policies’ just the same.

Hence the problem. The original meaning of ‘policies’ is in the context of ‘choice’. The newer
meaning of ‘policies’ is in the context of ‘formula’. So the standards have one meaning
and people in the real world have another meaning for the same word. This is common. So
when someone uses a word and the context seems skewed, then ask them to explain a little
more and you might find they are using that word to mean something quite different to what
you understand by that word. You can now understand them and save yourself a whole load
of heartache. Here endeth the lesson.

Thanks to you Mike for putting your time and effort to help all of us pass the exams.

I am sorry Mike, I actually know nothing about Tolstoy & I am not very English-stic but I did tend to write about it in my last post I don’t know how I forgot it. In simple words I would say Peace be upon you too.

I don’t know about all 5 but I do know about you and John Moffat, I mostly find the answers of all my questions in your forum and I am also a big fan of John Moffat. I loved his lectures and passed my F5 and F9 with them.

You’re both welcome 🙂