Proposed clarifications aim to reduce diversity in practice
Distinguishing between accounting policies and accounting estimates is important because changes in accounting policies are normally applied retrospectively while changes in accounting estimates are applied prospectively. The approach taken can therefore affect both the reported results and trends between periods.
The IASB has noted some diversity in practice in applying the current definitions so is seeking to clarify them without any intention to narrow or widen them.
“Helping companies to distinguish accounting policies from accounting estimates would be welcomed; and the addition of a definition of an accounting estimate plugs a gap. However, the definition of accounting policies remains ambiguous. Therefore, the proposals may not be sufficient to enable companies to consistently identify changes in accounting policies.”
The proposals establish a new definition for accounting estimates: clarifying that they are judgments or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in the financial statements cannot be measured with precision.
Making an estimate might include either or both of:
Conversely, only limited changes to the definition of accounting policies have been proposed. Without narrowing the definition, accounting policies no longer include “conventions” or “rules”. Accounting policies are now defined as “specific principles, measurement bases and practices”, though these are not clearly defined or used. The proposals do specify that a change in the chosen inventory cost formula – e.g. from FIFO to weighted average – is a change in accounting policy.
Concurrently, the IASB has initiated another project to amend IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to ease the burden on retrospectively applying IFRIC agenda decisions.
An exposure draft is currently expected in the first half of 2018.
The IASB’s comment deadline on the exposure draft is 15 January 2018. We encourage you to take this opportunity to have your say.
In particular, consider whether the proposals give, as the IASB hopes, sufficient clarity to enable companies to consistently determine whether an approach (and any change in that approach) is an accounting policy or an estimate.