Policy, estimate or error?

Learning objectives

• Classify a change as a change in accounting policy (including a change in measurement basis), a change in accounting estimate (including a change in an input or a measurement technique) or a correction of an error.L2, L3
• Assess a case that is difficult to classify and apply the rule under which it is treated as a change in accounting estimate.L3, L4
• Calculate the difference between prospective treatment and retrospective restatement of the same change in order to measure what is at stake.L3

Normative references

• IAS 8 §32An accounting policy may require items to be measured at monetary amounts that cannot be observed directly and must be estimated: the entity then develops an accounting estimate to achieve the objective set out by the policy, using judgements or assumptions based on the latest available reliable information. Examples: loss allowance for expected credit losses (IFRS 9), net realisable value of inventory (IAS 2), fair value of an asset or liability (IFRS 13), depreciation expense for an item of property, plant and equipment (IAS 16), provision for warranty obligations (IAS 37).
• IAS 8 §34An accounting estimate may need to be changed as a result of changes in the circumstances on which it was based, new information, new developments or more experience; by its nature, such a change does not relate to prior periods and is not the correction of an error.
• IAS 8 §34AThe effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors.
• IAS 8 §35A change in the measurement basis applied is a change in accounting policy, not a change in accounting estimate; when it is difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in accounting estimate.
• IAS 8 §48Corrections of errors are distinguishable from changes in accounting estimates: estimates are by their nature approximations that may need revision as additional information becomes known. For example, the gain or loss recognised on the outcome of a contingency is not the correction of an error.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

26 questions

• Laivot moves from the cost model to the fair value model for its investment property. How should this change be described?L2
• With no recent comparable transactions, Mundac moves from a market approach to an income approach to measure the fair value of an asset. How should the effect of this change be treated?L2
• After analysis, Nimède's accounting team cannot tell whether a change is a change in policy or a change in estimate. What does IAS 8 require?L3
• Gautia replaces the straight-line method with a units-of-production method to depreciate its presses, to better reflect their consumption. How should this change be treated?L3
• Sostia had provided 250,000 for a lawsuit on the basis of the best information of the time. The lawsuit is settled in 2025 for 340,000. How should the difference of 90,000 be described?L2
• Which of Laurvorn's following changes are changes in accounting estimates?L3
• Which statements about revising an accounting estimate are correct?L2
• The Paulouël group reviews five changes made during the year. Which ones are dealt with prospectively, as changes in estimates?L4
• Note by Lotine's controller: 'We are moving to the fair value model for our investment property; since fair value is an estimate, we are treating this move prospectively.' Where is the error?L2
• Kirvore replaces its receivables provision matrix with a more granular model fed by recent data. Its accountant restates comparatives 'for the change in policy'. What is the error?L3
• After long debates, Plairgence's technical committee concludes that a change cannot be classified with certainty as either a policy or an estimate. It decides to treat it retrospectively, 'for prudence'. What is the error?L3
• Ruvane's file: 'Move from diminishing balance to straight-line depreciation for vehicles: change in accounting policy, applied retrospectively with 2024 restated.' What is the error?L3
• Arvane acquired a machine for {cost} on 1 January 2023, depreciated on a straight-line basis over {initial_life} years with no residual value. At 1 January 2025, the total useful life is reduced to {revised_total_life} years. Compute 2025 depreciation under the prospective treatment, the amount an erroneous retrospective restatement would give (new life applied from the start) and the gap.L3
• To measure what a misclassification would cost, Velbor's controller compares two computations: equipment costing {cost} brought into use on 1 January 2022, expected to last {initial_life} years (straight-line, no residual value), has its total life revised to {revised_total_life} years at 1 January 2025. What is 2025 depreciation under each approach, and what is the gap?L3
• Laivot updates the discount rate of a provision at the 2025 reporting date: at the previous rate, the provision would be {provision_old_rate}; at the new rate, {provision_new_rate}. What amount is recognised as a 2025 expense for this change?L3
• Pomède acquired a press for {cost} on 1 January 2024, depreciated on a straight-line basis over 5 years with no residual value. At 1 January 2025, it adopts units-of-production depreciation: {remaining_units} units expected over the remaining life, of which {units_2025} produced in 2025. Compute 2025 depreciation and its increase compared with keeping straight-line.L3
• Quoline measures unlisted shares at fair value. This year, observable transactions in comparable shares appear and the company replaces its discounted cash flow model with a market approach. How is the effect treated?L2
• The Fosore group used to measure its agricultural raw material inventories at cost; it decides to measure them from now on at fair value less costs to sell, as allowed by the standard applicable in its industry (context data). The finance director calls this a 'new estimate'. What do you think?L3
• At the end of 2024, Jilval provided 180,000 for a commercial dispute, based on its lawyers' advice. In 2025, a settlement ends the dispute for 120,000. The internal auditor proposes to 'correct the 2024 error'. What should be done?L3
• Vaindorn changes the way it allocates certain costs between inventories and expenses. The experts consulted disagree: for some, it is a new policy; for others, a revision of estimation assumptions. No analysis can settle it (case data). Which treatment should be used?L4
• At the end of 2025, Puscanne revises the discount rate of its decommissioning provision to reflect market conditions at the reporting date. Last year's rate had been properly determined at the time. How is the effect treated?L3
• In 2025, Zainois discovers that the discount rate of its decommissioning provision had been keyed in wrongly at the end of 2024 (4% instead of 2.5%), whereas the right rate was in the file at the time. How should the correction be described?L3
• In 2025, Cardane refines its expected credit loss model thanks to a longer default history that became available this year. The loss allowance increases significantly. The finance director wants to split the effect between 2024 (restated) and 2025. What should he be told?L4
• Brissane changes, for its maintenance contracts, the way it measures progress on costs incurred. The finance director sees a change in technique; the auditor suggests a change in policy. Write a classification note for the audit committee.L4
• In 2025, Lavrine increases a warranty provision and, in the same year, settles a lawsuit for less than the provision set up. The finance director wants to treat both differences as corrections of 2024 errors. Write a reasoned reply.L3
• The Orsevane group is preparing an internal manual for classifying accounting changes. Write the section explaining how to distinguish a change in policy from a change in estimate, with two examples of each.L4