Yes! IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ one of the oldest International Financial Reporting Standard (IFRS), which was first conceived way back in 1976 as an exposure draft and has been amended from time to time has did not included the definition of an accounting estimate. In February 2021, after almost 45 years, the International Accounting Standard Board has amended the standard to explain accounting estimates.
Before the amendments, IAS 8 contained a definition for accounting policies and a definition for a change in accounting estimates. The combination of one item (accounting policies) with a definition of a change in another item (change in accounting estimates) obscured the distinction between both items. To make the distinction clearer, the Board decided to replace the definition of a change in accounting estimates with a definition of accounting estimates.
The amended IAS 8 defines the accounting estimates as:
“Monetary amounts in financial statements that are subject to measurement uncertainty”.
The accounting estimate change definition has been deleted; however, the accounting estimate framework has been retained with some clarifications. The amendment elaborates that a change in accounting estimate that results from new information or new developments is not correcting an error. Further, the effect of a change in input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors.
The IASB amendment included the following two examples for clarity of understanding:
Fair value of an investment property
Example 4 refers to an entity which applies the fair value model in IAS 40 Investment Property and has elected to change its valuation technique consistent with the income approach to one consistent with the market approach due to a change in market conditions as permitted by IFRS 13 Fair Value Measurement.
The example states that the fair value of the investment property is an accounting estimate because:
- the fair value of the investment property is a monetary amount in the financial statements that is subject to measurement uncertainty;
- the fair value of the investment property is an output of a measurement technique used in applying the accounting policy; and
- in developing its estimate of the fair value of the investment property, the entity uses judgements and assumptions.
The change in the valuation technique is a change in the measurement technique applied to estimate the fair value of the investment property. The effect of this change is a change in accounting estimate because the accounting policy (i.e. to fair value investment property) has not changed.
Cash-settled share-based payment liability
Example 5 refers to an entity that changes the estimate of the expected share price volatility in its option pricing model for its previously issued share appreciation rights, as a result of changes in the market conditions.
The example states that the fair value of the liability is an accounting estimate because:
- the fair value of the liability is a monetary amount in the financial statements that is subject to measurement uncertainty;
- the fair value of the liability is an output of a measurement technique used in applying the accounting policy; and
- to estimate the fair value of the liability, the entity uses judgements and assumptions.
The change in the expected volatility of the share price is a change in an input used to measure the fair value of the liability. The effect of this change is a change in accounting estimate because the accounting policy (i.e. to measure the liability at fair value) has not changed.
The amendment is effective for annual reporting periods beginning on or after 1 January 2023, with earlier application permitted. IASB[1] believes that the new definition and related amendments will improve accounting policy disclosures to provide more helpful information to investors and other primary users of the financial statements and help distinguish accounting estimates changes from changes in accounting policies.
[1] https://www.ifrs.org/news-and-events/2021/02/iasb-amends-ifrs-standards-accounting-policy-disclosures-accounting-policies-accounting-estimates/
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