IPSAS 3
Active
Accounting Policies, Changes in Accounting Estimates and Errors
Prescribes criteria for selecting and changing accounting policies and the accounting treatment and disclosure of (a) changes in accounting policies, (b) changes in accounting estimates, and (c) corrections of errors – enhancing relevance, faithful representation, and comparability. Covers the policy hierarchy, retrospective application, the impracticability framework, and prior-period error correction.
Active Standard
IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors is the current, active standard issued by the IPSASB. It is effective for annual financial statements covering periods beginning on/after 1 January 2008 (earlier application encouraged). It superseded the 2000 IPSAS 3; the current Standard comprises paras. 1–61, all of equal authority (paras. 5–6 deleted).
1
Objective, Scope & Definitions (paras. 1–7)
Objective & scope
Prescribes criteria for selecting and changing accounting policies, plus the accounting treatment and disclosure of (a) changes in accounting policies, (b) changes in accounting estimates, and (c) corrections of errors – to enhance relevance, faithful representation, and comparability over time and across entities.
Applied in selecting/applying accounting policies, and accounting for policy changes, estimate changes, and prior period error corrections
Tax effects of error corrections and retrospective adjustments are OUT of scope – not relevant for many public sector entities
Disclosure requirements for accounting policies generally (other than CHANGES) sit in IPSAS 1, not here. Paras. 5–6 [Deleted].
Key definitions
Accounting policies
The specific principles, bases, conventions, rules, and practices applied in preparing and presenting financial statements.
Change in accounting estimate
An adjustment to the carrying amount of an asset/liability, or periodic consumption of an asset, from assessing its present status and expected future benefits/obligations. Results from NEW information – not error correction.
Prior period errors
Omissions/misstatements from failing to use, or misusing, faithfully representative information that was available and could reasonably have been obtained when prior statements were authorized for issue.
Retrospective application / restatement
Applying a new policy, or correcting an error, as if it had always been applied / the error had never occurred.
2
Selection & Application of Accounting Policies (paras. 9–15)
Step 1 – an IPSAS specifically applies
Where an IPSAS specifically applies to a transaction, other event, or condition, the policy applied SHALL be determined by applying that Standard. Immaterial departures are never acceptable, even to achieve a particular presentation.
Guidance stated as an INTEGRAL PART of an IPSAS is mandatory; guidance that is not does not itself impose requirements.
Step 2 – no IPSAS specifically applies: the hierarchy (para. 14–15)
Management uses judgment to develop a policy that is relevant to accountability/decision-making needs, faithfully represents financial position/performance/cash flows, and meets understandability, timeliness, comparability, and verifiability.
SOURCES, IN ORDER (PARA. 14)
(a) Requirements in IPSAS dealing with similar/related issues (b) Definitions, recognition & measurement criteria in the Conceptual Framework
MAY ALSO CONSIDER (PARA. 15) – ONLY IF CONSISTENT WITH THE ABOVE
Most recent pronouncements of other standard-setters (e.g. IASB/IFRS, IFRIC/SIC) Accepted public or private sector practices
3
Consistency & Changes in Accounting Policies (paras. 16–23)
Consistency requirement (para. 16)
Policies are selected and applied CONSISTENTLY for similar transactions, events, and conditions – unless an IPSAS specifically requires/permits categorization for which different policies may apply, in which case a consistent policy per category is used.
When a policy change is permitted (para. 17)
Required by an IPSAS; OR Results in faithfully representative and MORE RELEVANT information about the entity's position, performance, or cash flows
NOT POLICY CHANGES (PARA. 21)
Applying a policy to transactions that differ in substance from previous ones Applying a NEW policy to transactions that didn't previously occur or were immaterial
Initial application of a policy to revalue assets under IPSAS 31/45 is a policy change, but is dealt with as a REVALUATION under those Standards, not under IPSAS 3 (para. 22–23).
4
Applying Changes in Accounting Policy – Retrospective Application (paras. 24–32)
Which approach applies
Change from INITIAL APPLICATION of an IPSAS with transitional provisions → follow those specific provisions Change from initial application WITHOUT transitional provisions, or a VOLUNTARY change → apply RETROSPECTIVELY
Early application of a new Standard is NOT a voluntary policy change (para. 25).
Retrospective application mechanics (para. 27)
Adjust the opening balance of EACH affected net assets/equity component for the earliest period presented, and other comparative amounts, as if the new policy had always applied.
LIMITATIONS – WHEN IMPRACTICABLE (PARAS. 28–30)
Can't determine period-specific effects → apply prospectively from the earliest period practicable, adjusting that period's opening net assets/equity balance Can't determine the CUMULATIVE effect at all → apply the new policy PROSPECTIVELY from the earliest date practicable
5
Disclosure of Changes in Accounting Policy (paras. 33–36)
Initial application of an IPSAS (para. 33)
Title of the Standard Whether the change follows transitional provisions, and a description of them Nature of the change; transitional provisions that might affect future periods Amount of adjustment per line item, current period & each prior period presented (to the extent practicable) Amount relating to periods before those presented If impracticable for a particular period, the circumstances and how/from when the change was applied
Voluntary changes (para. 34) & impending standards (para. 35–36)
Same disclosure set as above, PLUS the reasons why the new policy provides faithfully representative and more relevant information.
NOT YET APPLIED A NEW IPSAS (ISSUED BUT NOT EFFECTIVE)
Disclose that fact, plus known/reasonably estimable information on the expected impact Consider disclosing: title, nature of the change, required application date, planned initial-application date, and expected impact (or a statement that it isn't known/estimable)
Financial statements of SUBSEQUENT periods need not repeat these disclosures.
6
Changes in Accounting Estimates (paras. 37–45)
Why estimates are needed & the policy/estimate boundary
TYPICAL ESTIMATES (PARA. 37)
Tax revenue due to government; bad debts on uncollected taxes Inventory obsolescence; fair value of financial assets/liabilities Useful lives / consumption pattern of depreciable assets; percentage completion; warranty obligations
A change in MEASUREMENT BASIS is a change in accounting POLICY, not an estimate. Where the two are hard to distinguish, treat it as a change in ESTIMATE (para. 40).
Recognition – prospective only
Effect of an estimate change → recognized in surplus/deficit PROSPECTIVELY
Period of the change, if it affects that period only (e.g. a bad-debt estimate revision) The period of change AND future periods, if both are affected (e.g. a revised useful life affecting future depreciation) If it changes assets/liabilities or a net assets/equity item directly, adjust the CARRYING AMOUNT in the period of change (para. 42)
Disclosure: nature and amount of the change, current-period effect plus expected future-period effect (unless impracticable to estimate – then disclose that fact) (paras. 44–45).
7
Errors – Definition, Correction & Disclosure (paras. 46–54)
What counts as an error
Mathematical mistakes Mistakes in applying accounting policies Oversights or misinterpretations of facts Fraud
Financial statements do NOT comply with IPSAS if they contain material errors, OR immaterial errors made INTENTIONALLY to achieve a particular presentation.
Correction mechanics (para. 47) & disclosure (para. 54)
Material prior period errors are corrected RETROSPECTIVELY in the first financial statements authorized for issue after discovery – restating prior-period comparatives, or (if the error predates the earliest period presented) restating opening balances of assets, liabilities, and net assets/equity.
DISCLOSE (PARA. 54)
Nature of the prior period error Amount of the correction per line item, for each prior period presented (to the extent practicable) Amount of the correction at the beginning of the earliest period presented If retrospective restatement is impracticable for a period, the circumstances and how/from when the error was corrected
Corrections are EXCLUDED from surplus/deficit for the period the error is discovered – they hit the comparatives instead. Distinguished from a change in estimate: e.g. resolving a contingency's actual outcome is not an error correction (para. 53).
8
Impracticability Framework (paras. 55–58)
The impracticability test – same standard applies to policy changes AND error corrections
A requirement is IMPRACTICABLE when the entity cannot apply it after making every reasonable effort. For retrospective application/restatement specifically, this arises when:
The effects are not determinable It requires assumptions about what management's INTENT would have been in that period It requires significant estimates, and it's impossible to objectively distinguish information that (i) evidences circumstances existing at the relevant date(s), from (ii) information that would have been available when those prior statements were authorized for issue
No hindsight allowed: when applying a new policy or correcting an error for a prior period, an entity does NOT use hindsight – neither in assuming what management's intentions would have been, nor in estimating amounts. Example: correcting a prior-period misclassification of a government building does not get revised for a LATER management decision to use it differently; correcting a pollution-cleanup liability estimate disregards a large spill discovered in a LATER period.
9
Effective Date & Amendment Timeline (paras. 59–61)
Amendment history at a glance
Base Standard: periods beginning on/after 1 January 2008 (earlier application encouraged). Supersedes IPSAS 3 (2000), Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies (para. 61, "Withdrawal"). Appendix – Amendments to Other IPSAS – is [Deleted].
EffectiveChange
1 Jan 2011Paras. 9, 11, 14 – Improvements to IPSAS (Jan 2010)
1 Jan 2017Para. 60 (IPSAS 33); paras. 7, 10, 12, 14, 15, 17, 34 amended, para. 13 deleted (Improvements to IPSAS 2015)
1 Jan 2018Paras. 5, 6 deleted – The Applicability of IPSAS (Apr 2016)
1 Jan 2025Para. 22 – IPSAS 45, Property, Plant & Equipment (May 2023)
1 Jan 2025Para. 57 – IPSAS 46, Measurement (May 2023)
Para. 60: when an entity adopts accrual-basis IPSAS after the effective date (per IPSAS 33), this Standard applies from the date of adoption.
10
Relationship to IAS/IFRS – Comparison with IAS 8
Comparison – IPSAS 3 vs IAS 8
IPSAS 3 is drawn primarily from IAS 8 (2003), Accounting Policies, Changes in Accounting Estimates and Errors, including the IASB's May 2008 Improvements to IFRS.
TopicIPSAS 3IAS 8
Terminology"Statement of financial performance," "accumulated surplus/deficit," "net assets/equity""Income statement," "retained earnings," "equity"
Income vs revenueDoes not use "income" – narrower "revenue" onlyUses the broader "income"
Definitions (para. 7)Distinct set of technical-term definitionsDifferent definition set
Policy hierarchySimilar structure to IAS 8Similar structure
EPS adjustment disclosuresNOT requiredRequires disclosure of the adjustment to basic/diluted EPS
11
Worked Examples (Implementation Guidance IG1–IG17)
Example 1 – retrospective restatement of a prior period error
CU6,500 of 20X1 tax revenue was omitted and wrongly recognized in 20X2
20X1 reported revenue CU67,000, surplus CU7,000, closing accumulated surplus CU27,000. 20X2 accounting records show revenue of CU60,000 (including the misplaced CU6,500) and expenses of CU86,500.
20X1 is RESTATED: revenue from taxation rises to CU40,500 (from CU34,000), restated surplus CU13,500. 20X2 revenue is corrected down to exclude the CU6,500 already recognized in 20X1, giving 20X2 surplus of CU11,000. Note discloses: increase in 20X1 revenue/surplus/debtors/net assets-equity of CU6,500 each, with NO effect on 20X2.
This is a correction of an ERROR (para. 47) – restated via comparatives, not a current-period revenue/expense line.
Example 2 – voluntary policy change with retrospective application
Change from capitalizing to expensing borrowing costs on a power station under construction
Previously capitalized: CU2,600 in 20X1, CU5,200 in periods before 20X1. Management judges expensing is more transparent and consistent with industry practice.
Opening 20X1 accumulated surplus reduced by CU5,200 (pre-20X1 adjustment). 20X1 restated surplus: CU18,000 − CU2,600 interest = CU15,400. 20X2 surplus (before interest CU30,000, less CU3,000 interest) = CU27,000. Statement of Changes in NA/E shows the CU5,200 policy-change adjustment as a distinct line, separate from the surplus for the year.
This is a VOLUNTARY policy change (para. 17(b)) applied retrospectively (para. 27) – disclosed per para. 34.
Example 3 – prospective application when retrospective application is impracticable
Adopting a fuller components approach and a current value model for PP&E
Existing asset records weren't detailed enough to apply a component approach fully in prior years. An engineering survey at the END of 20X1 provided current operational values, useful lives, and residual values for components going forward – but not enough to reliably reconstruct historical COST data for those components.
Management concludes it's impracticable to apply the change retrospectively, or prospectively from any earlier date. Applied PROSPECTIVELY from the start of 20X2: carrying amount of PP&E increases by CU6,000 at the start of the year, a revaluation reserve of CU6,000 is created, and depreciation expense increases by CU500 for 20X2. No effect on any prior period.
12
Statement / Process Mapping
Decision tree – is it a policy change, an estimate change, or an error?
- Did the item arise from NEW information or new developments about the future? → CHANGE IN ESTIMATE (prospective)
- Did the entity switch measurement basis, recognition, or treatment WITHIN or BETWEEN accounting bases? → CHANGE IN POLICY (retrospective, subject to impracticability)
- Was information available and obtainable at the time, but omitted or misapplied? → PRIOR PERIOD ERROR (retrospective restatement, subject to impracticability)
- Hard to tell whether it's a policy change or an estimate change? → treat as a CHANGE IN ESTIMATE (para. 40)
All three categories are corrected/applied WITHOUT hindsight – the impracticability test in §8 governs how far back a policy change or error correction can practically reach.
Concept-to-statement mapping table
IPSAS 3 conceptStatement(s)Notes
Retrospective policy changeSOFP NA/EAdjusts opening net assets/equity for the earliest period
Prospective policy change (impracticable)SOFPerfNo prior-period effect; hits current and future periods
Change in accounting estimateSOFPerfAlways prospective – current period, or current + future
Prior period error correctionNA/ERestates comparatives; excluded from current-period surplus/deficit
Impending Standard not yet appliedNotesKnown/estimable impact disclosure
13
Related Standards – Cross-Reference Map
How IPSAS 3 connects across the IPSAS body of literature
StandardNature of the connection
IPSAS 1General accounting-policy disclosure sits here; IPSAS 3 governs disclosure of CHANGES specifically (§5)
IPSAS 5Borrowing Costs – Example 2 retrospective capitalisation→expensing of borrowing costs (§11)
IPSAS 19Contingency outcomes are estimate changes, not error corrections (§7)
IPSAS 31Investment property revaluation – Example 1 error scenario (§11); treatment of revaluation surplus
IPSAS 33First-time adoption of accrual-basis IPSAS – effective-date interaction (§9)
IPSAS 46Measurement estimation-uncertainty guidance feeding para. 57 (§9)
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Quick-Reference Glossary
Retrospective application / restatement
Applying a previously applied accounting policy to a prior period, or as if a prior period error had never occurred.
Impracticable
Cannot be applied after making every reasonable effort; includes cases requiring hindsight-free assumptions about management intent or period-specific effects that are not determinable.
Prior period error
A misstatement in prior-period financial statements from an omission, misapplication of an accounting policy, or fraud – corrected retrospectively.
Change in accounting estimate
An adjustment to the carrying amount of an asset/liability from reassessing present circumstances and future benefits/obligations – recognized prospectively.
Measurement basis
The different methods used to determine the amounts at which assets, liabilities, and equity are carried – e.g. historical cost, current cost, realizable value, exit value, current operating value, fair value.
Faithful representation
A qualitative characteristic that requires representations in financial statements to be complete, neutral, and free from error.
Financial statement key
SOFP Statement of financial position SOFPerf Statement of financial performance NA/E Net assets/equity (statement of changes)