What is IAS8

Retrospective effect:
It means that the adjustment will affect past, current and future periods.
Prospective effect:
It means that adjustment will affect only the current and future periods.
Accounting policy:
A change in accounting is permitted only if it is required
By IFRS or
results in a financial statement providing reliable and more relevant financial information.
A new or revised standard usually includes a specific transitional provision to explain how the change required by the new rules should be introduced.
In the absence of transitional provision, a change in accounting policy shall be applied retrospectively.
Change in accounting policy includes the following:

• Valuation of inventory using FIFO or WEIGHTED AVERAGE COST method

• Measurement of financial assets and liabilities

• Methods used to measure noncurrent assets such as historical cost or revaluation model

• Accrual basis of preparation of Financial statements

• Presentation

For example, an entity changes from presenting a classified statement of financial position to a liquidity presentation.
 Accounting Estimates:
An accounting estimate is made for an item in the Finacial statements when the item cannot be measured with precision(basically management's estimates)
Required for the following purposes

• Bad debts

• Inventory obsolescence

• Impairment of noncurrent assets

• the useful life of a noncurrent asset

• depreciation pattern (for example straight-line method or WDV(reducing balance method),sum of year digit etc)

• measurement of warranty provisions

It is important to distinguish between an accounting policy and accounting estimate, sometimes it can be difficult to distinguish between the two so in such cases, any change is treated as a change in accounting estimate.
Example
Accounting policy; Depreciating a plant over its the useful life
Accounting estimate; How to apply the policy ie:- whether to use a straight-line method or WDV method or etc
IAS 8 requires a change in accounting policy to be applied retrospectively, however, a change in accounting estimates shall be applied from the current period(Prospectively).

The effect of change in accounting estimate shall be applied in the following manner
In profit or loss for the period in which the change is made if the change affects the current period only
OR In the profit or loss for the period of change  and future periods if the change affects both
ERRORS:
Broadly speaking errors include the following

• Mistakes in applying the accounting policies

• mathematical mistakes

• fraud

• oversight or misinterpretation of facts

All material prior period errors are corrected retrospectively in the first set of financial statements following the discovery of the error
POINT TO PONDER
If the error occurred before the previous year the opening balance of assets and liabilities and equity for the previous period should be restated at their corrected amount unless that is impracticable.
The correction of a prior period error is excluded from profit and loss in the period when the error was discovered.

Categories: Change in accounting policy, changing in accounting estimate, errors, IAS8