United States

Distinguishing accounting policies from accounting estimates

FINANCIAL REPORTING INSIGHTS  | 

There currently is diversity in the way entities distinguish accounting policies from accounting estimates, which has financial statement consequences because changes in accounting estimates often affect a company’s profit or loss, while changes in accounting policies generally do not. To help entities distinguish accounting policies from accounting estimates, the International Accounting Standards Board recently published proposed narrow-scope amendments to International Accounting Standard (IAS) 8, Accounting Policies, Changes in Accounting Estimates and Errors. The proposed amendments:

  • Explain that accounting estimates are used in applying accounting policies
  • Make the definition of accounting policies clearer and more concise
  • Clarify that selecting an estimation technique, or valuation technique, used when an item in the financial statements cannot be measured with precision, constitutes making an accounting estimate
  • Clarify that, in applying IAS 2, Inventories, selecting the first-in, first-out cost formula or the weighted average cost formula for interchangeable inventories constitutes selecting an accounting policy

The Exposure Draft, Accounting Policies and Accounting Estimates – Proposed amendments to IAS 8, is available for comment until January 15, 2018.