1. What IND AS 8 Covers — Objective and Scope
IND AS 8 prescribes the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and corrections of prior period errors. Its objective is to enhance the relevance and reliability of an entity's financial statements, and their comparability over time and with other entities.
2. Selecting and Applying Accounting Policies
When a specific IND AS applies to a transaction, the accounting policy applied is determined by that standard. Where no standard specifically addresses a transaction, management uses judgement to develop a policy that results in information that is relevant and reliable — referring first to the requirements in IND AS dealing with similar issues, then to the Framework's definitions and recognition criteria for assets, liabilities, income and expenses, and finally, if useful, to other GAAP pronouncements and accepted industry practices, to the extent these don't conflict with IND AS.
3. When and How Accounting Policies Can Be Changed
An entity changes an accounting policy only in two circumstances: the change is required by an IND AS or an interpretation, or the change results in the financial statements providing reliable and more relevant information about the effects of transactions on the entity's financial position, performance or cash flows.
A change made purely because a different policy is easier to apply, or because a new external auditor prefers a different method, does not meet this test. Applying a new IND AS to a transaction that previously wasn't specifically addressed by any standard, or applying an accounting policy for a transaction that didn't previously occur or was previously immaterial, are not changes in accounting policy under IND AS 8 — they're simply the first application of an appropriate policy.
A voluntary change is applied retrospectively: the opening balance of each affected component of equity for the earliest prior period presented is adjusted, and other comparative amounts are restated for each prior period presented, as if the new policy had always been applied.
4. Changes in Accounting Estimates
Many items in financial statements cannot be measured with precision and can only be estimated — the collectability of receivables, inventory obsolescence, the useful life and residual value of a depreciable asset, warranty obligations, and the fair value of financial assets or liabilities. A change in accounting estimate is an adjustment to the carrying amount of an asset or liability, or the periodic consumption of an asset, resulting from reassessing expected future benefits and obligations, based on new information or new developments — it is not a correction of an error.
A change in accounting estimate is applied prospectively — recognised in the period of the change (if it affects only that period) or the period of change and future periods (if it affects both), by including it in profit or loss in the appropriate period. Prior period figures are never restated for a change in estimate.
5. Policy Change vs Estimate Change — The Critical Distinction
Where it's difficult to distinguish a change in accounting policy from a change in accounting estimate, the change is treated as a change in accounting estimate — this default resolves the common grey area where a company revises both a method and an underlying judgement at the same time (e.g. switching to a new depreciation method that also happens to better reflect a revised view of the asset's consumption pattern).
| Change | Classification | Application |
|---|---|---|
| Switching inventory cost formula from weighted average to FIFO | Change in accounting policy | Retrospective |
| Revising an asset's useful life from 10 to 7 years based on updated usage patterns | Change in accounting estimate | Prospective |
| Changing the depreciation method from straight-line to written-down value to better reflect the pattern of benefit consumption | Change in accounting estimate (per IND AS 16) | Prospective |
| Revising the percentage used to estimate a warranty provision, based on updated claims experience | Change in accounting estimate | Prospective |
6. Prior Period Errors
Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when those financial statements were authorised for issue. Errors can arise from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
Material prior period errors are corrected retrospectively in the first financial statements authorised for issue after discovery — by restating the comparative amounts for the prior period(s) presented in which the error occurred, or, if the error occurred before the earliest prior period presented, by restating the opening balances of assets, liabilities and equity for that earliest period. An error is never corrected by dumping a catch-up adjustment into the current period's profit or loss.
7. The Impracticability Exception
Retrospective application of a policy change, or retrospective restatement to correct an error, is required unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change or error. Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so — genuinely lacking the information needed, not merely finding the exercise time-consuming or costly. Where impracticable, the entity applies the new policy, or corrects the error, prospectively from the earliest date practicable.
8. Worked Example — A Policy Change, an Estimate Change and an Error
A — Voluntary Change in Accounting Policy (Retrospective)
Scenario: Bhandari Textiles Ltd changes its inventory cost formula from weighted average to FIFO, concluding FIFO better reflects the actual physical flow of goods and provides more relevant information. Under the old policy, opening retained earnings at the start of the earliest comparative period would have been ₹40,00,000; under the new policy (FIFO), the equivalent figure is ₹43,50,000.
All comparative periods presented are also restated to reflect FIFO, as if it had always been the company's policy.
B — Change in Accounting Estimate (Prospective)
A machine with an original cost of ₹60,00,000 and estimated useful life of 10 years (no residual value) has been depreciated for 4 years at ₹6,00,000/year, leaving a carrying amount of ₹36,00,000. Based on updated technical assessment, the remaining useful life is revised from 6 years to 4 years.
| Item | Amount (₹) |
|---|---|
| Carrying amount at start of Year 5 | 36,00,000 |
| Revised remaining useful life | 4 years |
| Revised annual depreciation (36,00,000 ÷ 4) | 9,00,000 |
The revised ₹9,00,000/year depreciation applies from Year 5 onward — Years 1-4's depreciation of ₹6,00,000/year is not restated, since this is a change in estimate, applied prospectively.
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Explore IND AS Tools →C — Correction of a Prior Period Error (Retrospective)
During the current year, Bhandari discovers that a ₹8,00,000 repair expense was incorrectly capitalised as PP&E in the prior year (with ₹80,000 of related depreciation also incorrectly charged that year), rather than expensed as incurred.
The comparative prior-year figures are restated to show the ₹8,00,000 as an expense (not an asset) and to remove the ₹80,000 of related depreciation — the current year's profit or loss is not used to absorb this correction.
9. IND AS 8 vs Old IGAAP (AS 5) — Key Differences
| Aspect | Old IGAAP (AS 5) | IND AS 8 |
|---|---|---|
| Prior period items | Shown as a separate line item in the current period's statement of profit and loss, so their impact is visible but doesn't restate the past | Corrected by retrospective restatement of the comparative period(s) or opening balances — the current period's P&L is not used to absorb them |
| Change in accounting policy | Disclosed with the impact quantified, if material, but no formal "retrospective restatement of comparatives" mechanic in the same structured way | Explicit retrospective application with restated comparatives, subject to the impracticability exception |
| Change in accounting estimate | Similar prospective treatment | Same prospective treatment, more clearly distinguished from a policy change |
| Impracticability | Not a formally defined concept | Explicit, narrowly defined exception requiring genuine inability, not mere inconvenience |
| Disclosures | Less extensive | Detailed disclosure of the nature and amount of each policy change/error correction by financial statement line item |
10. Disclosures Required
For a change in accounting policy, an entity discloses the nature of the change, the reasons why applying the new policy provides more reliable and relevant information, the amount of the adjustment for the current and each prior period presented (and, if practicable, for periods before those presented), and the amount of the adjustment relating to periods before those presented. For a change in accounting estimate, the nature and amount of the change is disclosed, including its effect on the current period and, if practicable, future periods. For a prior period error, the nature of the error, the amount of correction for each prior period presented, and the amount of correction at the beginning of the earliest period presented are disclosed.
11. Common Mistakes CAs Make
Error 1 — Correcting a prior period error through the current year's profit or loss. Material prior period errors must be corrected by restating comparatives (or opening balances) retrospectively — not by recognising a one-off catch-up gain or loss in the current period's P&L.
Error 2 — Restating comparatives for a change in accounting estimate. Changes in estimate (useful life, provision assumptions, bad debt rates) are always prospective — the past is never restated, only current and future periods are affected.
Error 3 — Treating a first-time application of a new standard's requirement as a voluntary policy change. Applying a newly effective IND AS, or a policy for a transaction that didn't occur before, is not a "change" requiring the IND AS 8 change-of-policy mechanics — it's simply the correct first application.
Error 4 — Changing an accounting policy simply because it's easier to apply going forward. A voluntary policy change is only justified if it produces more reliable and relevant information — administrative convenience alone doesn't meet the bar.
Error 5 — Overusing the impracticability exception. Impracticability requires the entity to have made every reasonable effort and genuinely be unable to determine the effect — it isn't available just because gathering the historical data would take significant time or cost.
12. FAQs
What is the difference between a change in accounting policy and a change in accounting estimate?
A change in accounting policy is a change in the specific principles, bases, conventions, rules and practices applied in preparing financial statements (e.g. switching cost formulas for inventory) and is applied retrospectively. A change in accounting estimate is an adjustment to the carrying amount of an asset or liability resulting from reassessing its expected future benefits or obligations (e.g. revising an asset's useful life or a provision's expected outcome), based on new information or developments, and is applied prospectively, never retrospectively.
When can an entity change its accounting policy?
Only in two circumstances: if the change is required by an Ind AS or an interpretation, or if the change results in the financial statements providing reliable and more relevant information about the effects of transactions on the entity's financial position, performance or cash flows. A change made purely because a different policy is simpler or more convenient does not qualify.
How is a voluntary change in accounting policy applied?
Retrospectively — as if the new policy had always been applied. The opening balance of each affected component of equity for the earliest prior period presented is adjusted, along with other comparative amounts for each prior period presented, as if the new policy had always applied, unless it is impracticable to determine either the period-specific or cumulative effects of the change.
How are prior period errors corrected under IND AS 8?
Material prior period errors are corrected retrospectively in the first financial statements authorised for issue after discovery, by restating the comparative amounts for the prior period(s) presented in which the error occurred, or, if the error occurred before the earliest prior period presented, by restating the opening balances of assets, liabilities and equity for that earliest period. Errors are never corrected by adjusting the current period's profit or loss for a prior year's mistake.
Is impracticability a valid reason to avoid retrospective application?
Yes, in genuinely limited circumstances. If it is impracticable to determine either the period-specific effects or the cumulative effect of a change in accounting policy or a correction of an error, the entity applies the new policy, or corrects the error, prospectively from the earliest date practicable — impracticability requires the entity to have made every reasonable effort to apply the requirement but genuinely be unable to do so, not merely find it inconvenient or costly.
Is IND AS 8 the same as IAS 8?
IND AS 8 is India's converged version of IAS 8 and follows the same distinction between accounting policies, changes in estimates, and errors, along with the same retrospective/prospective application rules. It replaces the older Indian AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies), which used a narrower "prior period items" concept shown as a separate line in the current period's profit or loss, rather than IND AS 8's retrospective restatement of comparative figures.