1. Accounting Policies:

• Definition: Accounting policies refer to the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. These policies govern how transactions, other events, and conditions are recognized, measured, and presented in financial reports.
• Application: Accounting policies are chosen based on their appropriateness to the entity’s operations and the nature of its business. Once selected, these policies should be applied consistently unless a change is justified.
• Example: The method of depreciation used for fixed assets (e.g., straight-line or reducing balance), the inventory valuation method (e.g., FIFO or weighted average), and the recognition criteria for revenue.

2. Accounting Estimates:

• Definition: Accounting estimates are adjustments made to the carrying amounts of assets or liabilities, or the amounts of periodic consumption of assets, that are not precisely determinable. Estimates are used when exact data is not available, and they rely on management’s judgment and assumptions about future events.
• Application: Estimates are necessary when there is uncertainty regarding the future outcomes of events affecting the financial position and performance of an entity. They are revised if new information becomes available or circumstances change.
• Example: Estimating the useful life of a tangible asset, the provision for doubtful debts, or the expected future cash flows for calculating impairment of assets.

Distinction According to IAS 8:

• Nature of Change:
  • A change in accounting policy involves altering the method or principle used to report transactions. Changes in accounting policy are applied retrospectively and require restatement of prior period financial statements, unless impractical.
  • A change in accounting estimate is a revision due to new information or better insight and is applied prospectively, affecting only the current and future periods.
• Disclosure Requirements:
  • Changes in accounting policies must be disclosed with reasons, the nature of the change, and the financial impact on prior periods.
  • Changes in accounting estimates do not require restatement of prior periods but must be disclosed in the period they occur with explanations of the nature and impact on current and future periods.