AASB 108 - Accounting Policies, Changes in Accounting Estimates and Errors - August 2015
In ForceCTH
Jurisdiction
Commonwealth
Collection
legislative instrument
Plain English Summary
6/10 complexity
What this Standard does, who it affects, and how it works
What it is: AASB 108 sets the rules for (a) choosing and changing accounting policies, (b) recognising and disclosing changes in accounting estimates, and (c) correcting prior-period errors in financial statements (Objective: paragraph 1; Scope: paragraph 3).
Who it affects: Any entity preparing financial statements under Australian Accounting Standards — including for‑profit and not‑for‑profit reporting entities. The Standard contains Australian‑specific paragraphs that apply to certain entities (AusCF paragraphs) and provides a simplified disclosure route for Tier 2 entities (Comparison with IAS 8; AusCF1; Appendix A; AusA1).
Mechanical effect (how it works):
Selection of policies: If an Australian Accounting Standard specifically applies, that Standard determines the accounting policy (paragraph 7). If none applies, management must develop a policy that produces relevant and reliable information and should consult listed sources in descending order (paragraphs 10–12; AusCF11).
Consistency: Apply accounting policies consistently for similar transactions unless a Standard allows categories with different policies (paragraph 13).
When policies can change: A change is allowed only if required by a Standard or if the new policy yields more reliable and relevant information (paragraph 14). Voluntary changes are treated as changes in policy and generally require retrospective application (paragraphs 19–21).
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Retrospective application and limits: Generally, changes in policy are applied retrospectively — adjust opening balances and prior comparatives as if the policy had always applied (paragraphs 22–22). Retrospective application or restatement is limited where it is impracticable to determine period‑specific effects or the cumulative effect (paragraphs 23–27; 43–47). The Standard defines when retrospective application is impracticable (Definitions; paragraph 5; paragraphs 50–53).
Accounting estimates: Estimates are measurement judgments based on the latest reliable information (paragraph 32 and 32A–32B). Changes in estimates are recognised prospectively in the period of change and future periods as appropriate (paragraphs 34, 36–38). The Standard distinguishes changes in estimates from changes in accounting policy (paragraphs 34–35, 34A).
Errors: Material prior‑period errors must be corrected by retrospective restatement in the first financial statements authorised after discovery (paragraph 42). Limits apply where retrospective restatement is impracticable (paragraphs 43–47). Disclosures about the nature and effect of corrections are required (paragraph 49).
Disclosures: Detailed disclosure obligations exist for changes in policy (paragraphs 28–31), changes in estimates (paragraphs 39–40), and prior‑period error corrections (paragraph 49). Entities must also disclose pending Standards they have not yet applied (paragraphs 30–31). Tier 2 simplified disclosures exempt certain paragraphs for Tier 2 entities (AusA1).
Interaction with other Standards and dates: The Standard cross‑references other Australian Accounting Standards and the Conceptual Framework (paragraphs 11, AusCF11). It includes transitional rules and effective dates and records a history of amendments (paragraphs 54, 54F, 54I and Compilation Details).
Purpose statements and practical trade‑offs: The Standard states its purpose is to improve relevance, reliability and comparability of financial statements (paragraph 1). Practically, this imposes the following mechanical trade‑offs and incentive effects:
Who pays and who decides: Reporting entities (preparers) bear the direct compliance costs of applying the rules — management decides policies and applies judgement (paragraphs 10–12; AusCF11). Auditors and users (creditors, investors, regulators) receive the information benefits.
Compliance burden and implementation risk: Retrospective application and restatement require historical data, remeasurement and sometimes significant estimates; where data are unavailable or distinguishing historical evidence is impossible, the Standard permits prospective application and sets out impracticability tests (paragraphs 22–27; 43–53). Those tests shift some implementation risk onto preparers and auditors to demonstrate impracticability.
Discretion and judgement: The Standard explicitly permits management judgement when no specific Standard applies (paragraphs 10–12) and provides scope for different outcomes depending on the sources consulted and assumptions made (paragraph 11; paragraph 12). The impracticability and estimates rules (paragraph 5; paragraphs 50–53) give management and auditors discretion in practice.
Effects on private choice and markets: By requiring consistent policies, retrospective adjustments (where practicable) and detailed disclosures (paragraphs 28–31; 39–49), the Standard changes reported results and comparatives that market participants and contract counterparties use. Those mechanical effects can affect prices, covenants and performance metrics; the Standard itself prescribes how those numbers must be derived and disclosed but does not mandate downstream commercial responses.
Opportunity costs and administrative implications: Entities may choose not to change policies to avoid costly retrospective work unless a Standard requires change (paragraph 14). Tiered disclosure relief (Appendix A; AusA1) reduces administrative burden for eligible Tier 2 entities.
Implementation points to note (concrete mechanics):
Early application is permitted in specified date ranges (Compilation Details; paragraph 54 and related amendments 54F, 54I).
For AusCF entities, the Conceptual Framework references differ slightly (AusCF1; AusCF11; 54G handles regulatory account balances).
Where a change to a revaluation policy is made under AASB 116 or 138, those Standards’ revaluation rules, not AASB 108’s change‑in‑policy rules, apply (paragraphs 17–18).
This summary describes what the Standard requires and the concrete mechanisms through which it affects financial reporting. It notes where discretionary judgements, compliance costs, and practical limits on retrospective application arise, and cites the relevant paragraphs referenced above.