As we addressed here, the IASB has published for public consultation proposed narrow-scope amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, open for comment until January 15, 2018.
As the comment period has recently closed, we’ll continue to look at some of the responses. You’ll recall that IAS 8 in its current form defines accounting policies as “the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.” The IASB proposes narrowing that definition, to refer only to “the specific principles, measurement bases and practices…” The change reflects, among other things, the lack of any clear definition in IFRS for the terms “conventions” and (befitting the famous principles-based nature of the standards) “rules.” Then, the IASB proposes fixing the structural peculiarity by which IAS 8 currently contains a definition of “change in accounting estimate” but lacks one for the underlying concept of “accounting estimate.” The proposed definition of accounting estimates is:
- judgments or assumptions used in applying an accounting policy when, because of estimation uncertainty, an item in financial statements cannot be measured with precision.
The Canadian Accounting Standards Board finds a problem there:
- The proposed definition focuses only on when an item cannot be measured with precision and does not contemplate that management also applies judgments or assumptions to determine if an asset or liability exists for recognition purposes. For example, to recognize an intangible asset, management makes an assessment of whether it is probable that the expected future economic benefits attributable to the asset will flow to the entity in order to satisfy part of the recognition criteria.
The AcSB also dislikes that the proposed definition “implies that an accounting estimate is used to achieve an end goal, meaning that it cannot be the end goal itself or the end result.” The International Air Transport Association makes a similar point:
- We agree that accounting estimates are judgements or assumptions, but they are also the values derived from the estimation techniques. The definition should reflect that accounting estimates are the inputs (judgements or assumptions) and outputs (the value), but not the methods used to create the accounting estimates. For example, the carrying value of an aircraft is an accounting estimate (output) based on inputs (assumptions of useful life and residual value) using a methodology (straight-line or accelerated depreciation).
Other respondents make similar or related points; others don’t detect a problem. The main question, no doubt, is whether (notwithstanding possible technical imperfections) the proposed definitions will support a more common understanding of the key concepts – most crucially, a common understanding of when a particular change is applied retrospectively rather than prospectively. But many respondents detect possible overlaps between the new proposed definitions of accounting policies and accounting estimates, suggesting such an understanding might sometimes remain elusive. This leads Huawei Technologies to take a different approach, observing: “it is not necessary to distinguish between a change in accounting policy and a change in accounting estimate if both are accounted for in the same way, with the same disclosure requirements.” On this basis they propose:
- An entity should change an accounting policy or how an accounting estimate is made only if it results in a faithful representation of information that is more relevant.
- All such changes should be applied prospectively, from the start of the current annual reporting period.
- An entity should explain in the financial statements what has changed in both qualitative and quantitative terms, and why the change provides more relevant information.
Although it seems true that this might sidestep some possible problems, it seems to be a more major change to current practice than the IASB is currently contemplating. That being the case, I don’t envy the IASB staff people who have to work their way through all this material. More than with most proposals, a large number of respondents seem to have resorted to their dictionaries, and you know that can only mean trouble. But Ernst & Young seems to doubt that an answer can be found there, or perhaps anywhere:
- … we suggest that the Board explores whether a better approach would be to define accounting policy as a default, i.e., if it is not an estimate and not an error, then it is a policy or, alternatively, if it is not a policy or an error, then it is an estimate. This may potentially take away some of the conceptual and practical challenges of defining accounting policies and estimates independently.
I confess that in the time I allotted to this post, I could not find in myself the concentration and rigour of thinking necessary to consider whether that idea would work. It surely raises some kind of philosophical question though. If an aspect of IFRS can’t be positively defined on its own terms; that is – it can only be defined by setting out the things that it isn’t – then does it actually exist? Does it need to….?
The opinions expressed are solely those of the author