Distinguishing between accounting policies and estimates has always been a critical task considering the fact that the former has a retrospective application while the later has a prospective application. Recognizing the practical challenges and realising the diversity that has been created in practice, the International Accounting Standards Board (IASB) has defined and clarified the term ‘Accounting Estimates’ through its recent amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

The amendments, that aim to clearly differentiate accounting estimates from accounting policies, clarify that accounting estimates ‘are monetary amounts in the financial statements that are subject to measurement uncertainty’. The term Measurement uncertainty is already defined in the Appendix to the 2018 Conceptual Framework as the ‘uncertainty that arises when monetary amounts in financial reports cannot be observed directly and must instead be estimated’.

To summarise, the amendments make the following clarifications:

• The terms accounting estimates and accounting policies are related to each other in such a manner that a company develops an accounting estimate to achieve the objective set out by an accounting policy.
• The development of an accounting estimate includes:
  • Selection of a measurement technique (a technique used to estimate or value a particular amount) – e.g. an estimation technique used to measure a loss allowance for expected credit losses when applying IFRS 9 Financial Instruments; and
  • The choice of inputs to be used during the application of the chosen measurement technique – e.g. the expected cash outflows for determining a provision for warranty obligations when applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
• The effects of changes in such inputs or measurement techniques are changes in accounting estimates.

The amendments are effective for periods beginning on or after 1 January 2023, with earlier application permitted, and will apply prospectively to changes in accounting estimates and changes in accounting policies occurring on or after the beginning of the first annual reporting period in which the company applies the amendments.

The direction of all recent amendments to the IFRS have been directed at creating consistency of the accounting treatments and narrowing down the room for creative accounting. This amendment to the IAS 8 appears no different and is hoped to decrease the diversity created in practice and will help plug exploitable gaps in the framework.

Moiz Aslam

Partner – IFRS & BPO Services