Quick answer
An accounting policy determines the principle or basis used to account for an item. An accounting estimate measures an amount subject to uncertainty using current information. An error results from failing to use, or misusing, reliable information that was available. Under IFRS and ASPE, qualifying policy changes and material prior-period errors are generally retrospective, while estimate changes are prospective.
New information can change a reasonable estimate without making the earlier accounts wrong. A change in accounting basis or discovery of a past mistake raises a different question: whether earlier reported figures must be revised.
Classification of accounting changes and errors
Policy
The principle, basis, convention, rule, or practice used to recognize, measure, present, or disclose an item.
Estimate
A monetary amount subject to measurement uncertainty that is updated when new information or developments change the best available measurement.
Error
An omission or misstatement caused by failing to use, or misusing, reliable information available when the statements were prepared.
Retrospective and prospective effects
Retrospective application changes comparative information and opening equity as though the new policy had always applied, to the extent required and practicable. Retrospective restatement similarly corrects material prior-period errors. Prospective recognition uses the revised estimate in the current and, where relevant, future periods without restating earlier estimates that were reasonable when made.
Retrospective
Prior comparative: restate it. Earliest opening equity presented: adjust the cumulative difference. Current period: report current activity under the revised basis, without a catch-up gain or loss for the past.
Prospective
Prior comparative: leave it as reported. Opening equity: do not restate earlier balances. Current period: use the revised estimate now and in later periods when relevant.
Selecting and changing policies
When an IFRS Standard specifically applies, the entity follows it. Without a directly applicable requirement, IAS 8 directs management first to requirements for similar issues and then to the Conceptual Framework’s definitions and recognition and measurement concepts. This provides a reasoned basis for a relevant and reliable policy. A voluntary change must meet the governing criteria; a preferred profit result is not enough.
ASPE Section 1506 similarly permits a policy change when a primary source of GAAP requires it, when the new policy provides reliable and more relevant information, or when a specific permitted choice applies. Primary sources include the applicable ASPE Sections and Accounting Guidelines. The entity follows any source-specific transition; otherwise a qualifying change is applied retrospectively to the extent practicable. Material prior-period errors are also corrected retrospectively, while estimate changes use current and future periods because they arise from new information rather than a defect in the old estimate.
Apply a policy change retrospectively
At the start of 2027, Alder Products changes its inventory cost formula. Assume the applicable IFRS requirements permit the change, the new policy provides more reliable and relevant information, and retrospective application is practicable. Under the new policy, 2026 ending inventory and profit would each have been $12,000 higher. There is no earlier cumulative difference, and tax is ignored.
Alder’s 2027 statements restate the 2026 comparative instead of reporting a $12,000 gain in 2027. The revised 2026 cost of goods sold is $12,000 lower, ending inventory is $12,000 higher, and closing retained earnings is $12,000 higher.
Retrospective policy-change effect
Scroll horizontally to see all columns.
| Statement | Account | Effect |
|---|---|---|
| 2026 comparative income statement | Cost of Goods Sold | Decreases by $12,000 under the new policy |
| 2026 comparative balance sheet | Inventory | Increases by $12,000 |
| 2026 comparative equity | Retained Earnings | Closing balance increases by $12,000 |
| 2027 income statement | Policy-change gain | No one-time gain is reported |
- 2026 comparative income statement
- AccountCost of Goods Sold
- EffectDecreases by $12,000 under the new policy
- 2026 comparative balance sheet
- AccountInventory
- EffectIncreases by $12,000
- 2026 comparative equity
- AccountRetained Earnings
- EffectClosing balance increases by $12,000
- 2027 income statement
- AccountPolicy-change gain
- EffectNo one-time gain is reported
Correct a material prior-period error
In a separate case, Birch Services discovers in 2027 a $7,500 supplier invoice for services received in December 2026. The invoice was available before the 2026 statements were authorized but was omitted. Assume the error is material, the amount remains unpaid, and tax is ignored.
This is not new 2027 information about an estimate. Reliable evidence existed when the 2026 statements were prepared, so Birch corrects the 2026 comparative expense and payable. Its 2027 opening retained earnings is $7,500 lower.
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | 7,500 | |
| Accounts Payable | 7,500 |
Revise an asset’s useful life using new information
At the start of 2027, a company has equipment with a $48,000 carrying amount and four years of remaining useful life. New operating evidence supports a six-year remaining life, with no residual value. The original estimate was reasonable when made, and straight-line depreciation continues to reflect the benefit pattern.
Because the change comes from new information, it is an estimate change. Depreciation from 2027 onward is $48,000 ÷ 6 = $8,000 per year. Prior depreciation is not restated.
Financial-statement effect
Scroll horizontally to see all columns.
| Statement | Account | Effect |
|---|---|---|
| Income statement | Depreciation Expense | Uses $8,000 from 2027 onward |
| Balance sheet | Equipment, net | Declines using the revised prospective pattern |
| Comparative statements | Prior depreciation | No restatement because the earlier estimate was not an error |
- Income statement
- AccountDepreciation Expense
- EffectUses $8,000 from 2027 onward
- Balance sheet
- AccountEquipment, net
- EffectDeclines using the revised prospective pattern
- Comparative statements
- AccountPrior depreciation
- EffectNo restatement because the earlier estimate was not an error
Distinguishing errors from new information
A later outcome that differs from an estimate does not prove the estimate was wrong. Ask what information was reasonably available when the amount was prepared. Ignoring an invoice already received may be an error; revising an allowance because later customer information changes expected collection is normally an estimate update.