ACCT 1207 · Accounting Policies, Estimates, and Errors

Led by Dorothy Edith Rigour Simulacrum

1. Module 7 ○ Open

   Accounting Policies, Estimates, and Errors

   Led by Dorothy Edith Rigour Simulacrum

   The question

   How IAS 8 and FRS 1020 Section 10 distinguish three things often confused: an accounting policy (a principle or rule chosen, e.g. cost vs revaluation model for PPE), an accounting estimate (a judgement about an uncertain future, e.g. useful life), and an error (a material misstatement from a past period). The module covers the treatment for changes in each — retrospective application for policy changes and errors, prospective for estimates — the disclosure requirements for significant policies and key estimation uncertainties, and the cases where management may try to recharacterise an estimate as a policy change to alter the accounting effect. The closing scenario picks apart a real example.

   Outcome

   The student can distinguish accounting policy from accounting estimate from error, apply the correct treatment for changes in each, identify the disclosure requirements for significant policies and key estimation uncertainties, and recognise the cases where management may try to recharacterise the type of change. (Policies, estimates, errors)

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   Practice scenarios

   Policy or Estimate?

   Your company has been depreciating its production equipment on a straight-line basis over ten years. The new operations director is arguing for a change to seven-year reducing-balance, on the basis that the equipment "actually loses value faster than that, especially in the early years". The CFO is happy because seven-year reducing-balance produces lower profit this year (which helps with a tax planning point) — but the CFO wants to characterise it as an *estimate change* (prospective only, no restatement of comparatives) rather than a *policy change* (retrospective restatement required). Your job is to determine the correct classification and treatment.

   Your goals

   • Identify what is changing. Two things are at stake: (a) the depreciation method (straight-line vs reducing-balance), and (b) the useful life (ten vs seven years).
   • The method is an *accounting policy* — straight-line is a policy, reducing-balance is a different policy. Changing the method is a *policy change*, retrospective.
   • The useful life is an *accounting estimate* — the choice between ten and seven years is a judgement of expected useful life, not a principled difference in how depreciation is calculated. Changing the life is an *estimate change*, prospective.
   • The CFO's position is incorrect. The change in method is a policy change, not just an estimate change.
   • Apply the consequence: under IAS 8, changing the policy requires retrospective restatement of prior-year comparatives, with disclosure of the change and its rationale. Changing the life is prospective, applied from the date of the change.
   • Push back on the CFO honestly: recharacterising the policy change as an estimate change to avoid restatement is incorrect, and the auditor will catch it. Recommend either keeping straight-line and just adjusting the useful life (estimate change, prospective) or changing both as a justified policy revision (with retrospective restatement).

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