Last reviewed: July 2026.
Accounting policies and accounting estimates both involve judgement, but they are not treated in the same way. IAS 8 explains how an entity selects accounting policies, accounts for changes in those policies, updates estimates when new information becomes available, and corrects material prior-period errors.
What does IAS 8 cover?
Current IFRS materials refer to IAS 8 as Basis of Preparation of Financial Statements. It continues to contain the core requirements for accounting policies, changes in accounting estimates and corrections of errors. Following the issue of IFRS 18, some general preparation requirements were also moved from IAS 1 to IAS 8. IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, so entities should check which version of the requirements applies to their reporting period.
Accounting policy, estimate and error: the difference
| Item | What it means | Typical example | Usual treatment |
|---|---|---|---|
| Accounting policy | The principles, bases, conventions, rules and practices used to prepare and present financial statements. | The policy selected for measuring a class of assets when the relevant IFRS Standard permits a choice. | A voluntary change is normally applied retrospectively when it provides more reliable and relevant information. A change required by a new Standard follows that Standard's transition rules. |
| Accounting estimate | A monetary amount in the financial statements that is subject to measurement uncertainty. | Useful life, residual value, warranty provision, impairment estimate or expected credit-loss allowance. | Recognised prospectively in the period of change and, when relevant, future periods. |
| Prior-period error | An omission or misstatement caused by failing to use, or misusing, reliable information that was available when earlier statements were authorised. | An arithmetic mistake, omitted accrual or incorrect application of an existing accounting policy. | A material error is normally corrected retrospectively by restating comparative information, unless retrospective correction is impracticable. |
How to select an accounting policy
The first question is whether an IFRS Accounting Standard specifically applies to the transaction, event or condition. When it does, the entity applies that Standard and any relevant interpretation.
When no Standard deals directly with the issue, management develops a policy using judgement. The objective is information that is relevant to users' decisions and faithfully represents the economic substance of the transaction. IAS 8 directs management to consider, in order:
- requirements and guidance in IFRS Standards dealing with similar or related matters; and
- the definitions, recognition criteria and measurement concepts in the Conceptual Framework for Financial Reporting.
The selected policy should then be applied consistently to similar transactions unless an IFRS Standard requires or permits separate categories for which different policies are appropriate.
When may an accounting policy change?
An entity changes an accounting policy only when the change is required by an IFRS Standard or when the new policy produces financial information that is more reliable and more relevant. A change made merely to improve a reported result is not acceptable.
Retrospective application means presenting the financial statements as if the new policy had always been used. In practice, this may require adjustment of opening equity for the earliest comparative period presented and restatement of comparative amounts. When a new Standard includes specific transition rules, those rules take priority.
How accounting estimates are updated
Estimates are necessary because many amounts cannot be measured with complete precision. They are based on the latest available reliable information. As circumstances change, an estimate may need to be revised.
A revised estimate does not mean that the original estimate was wrong. For example, a machine may initially have an estimated useful life of ten years. After several years, new usage data may show that it will last longer. The revised depreciation charge is recognised from the date of the change onward; previously reported depreciation is not restated simply because better information has become available.
When it is difficult to distinguish a change in policy from a change in estimate, the change is treated as a change in estimate.
Worked classification examples
| Situation | Classification | Reason |
|---|---|---|
| A new IFRS Standard requires a different accounting basis. | Accounting policy change | The underlying accounting principle changes and the Standard's transition requirements apply. |
| The expected useful life of equipment changes after new maintenance data becomes available. | Accounting estimate change | The accounting policy is unchanged; the estimated consumption pattern has been updated. |
| An invoice received before the previous statements were authorised was accidentally omitted. | Prior-period error | Reliable information was available but was not used. |
| An allowance is revised because customer default experience has changed. | Accounting estimate change | The new amount reflects updated information rather than correction of an earlier mistake. |
What should be disclosed?
Material policy changes generally require disclosure of the nature of the change, the reason it provides reliable and more relevant information, and the amount of the adjustment for affected line items and periods. Material estimate changes require disclosure of their nature and amount when the effect is material. Material prior-period errors require disclosure of the nature of the error and the correction made to each affected period, subject to impracticability provisions.
Entities should focus on material accounting-policy information, not long boilerplate descriptions that merely repeat the wording of a Standard. Useful disclosures explain how the entity applied the requirements to its own transactions and judgements.
A practical decision checklist
- Identify the transaction and the relevant IFRS Standard.
- Ask whether the underlying recognition or measurement principle is changing.
- Ask whether new information merely updates a monetary estimate.
- Check whether reliable information available in an earlier period was omitted or misused.
- Determine retrospective or prospective treatment.
- Assess materiality and prepare the required disclosures.
- Document the judgement and the evidence supporting it.
Frequently asked questions
Is a change in depreciation method a policy change?
It is generally treated as a change in accounting estimate because it reflects a revised expectation about the pattern in which the asset's economic benefits will be consumed.
Does every prior-period mistake require restatement?
IAS 8 focuses on material prior-period errors. Immaterial errors still need appropriate correction, but the form of correction depends on the facts and the entity's materiality assessment.
Can management create a policy when no IFRS Standard applies directly?
Yes. Management uses judgement, considers Standards dealing with similar matters and applies the concepts in the Conceptual Framework. The resulting information must be relevant and faithfully represent the transaction.
Related accounting lessons
- Going Concern Concept: Assessment and Disclosures
- Prudence Concept in Accounting
- Events after the Reporting Period
- Money Measurement Concept
Official sources
- IFRS Foundation: IAS 8 Basis of Preparation of Financial Statements
- IFRS Foundation guide to selecting and applying accounting policies
This article is for education and general information. Apply the complete Standards and obtain professional advice for a specific reporting issue.
Free IFRS learning resource
Keep the key IFRS concepts and policy principles close at hand
Use our concise, practical PDF as a quick reference while you study or review this topic.