Accounting Policies, Estimates and Fair Value Measurement

Three standards, one shared purpose: getting the number right when judgement is required

Ind AS 8, Ind AS 10 and Ind AS 113 each address a different moment where judgement, not a mechanical rule, determines a number: choosing between policies where a choice exists, deciding whether new information after the reporting date changes this year's figures or next year's, and determining what "fair value" actually means when a specific standard requires it. None of the three tells you what to recognise — that is the job of the specific asset, liability or revenue standard. All three tell you how to exercise judgement correctly once you are already inside that specific standard's territory.

Ind AS 8: policies, changes in estimates, and errors

Selecting an accounting policy. Where an Ind AS specifically applies to a transaction, that standard's requirements are followed without alternative. Where no Ind AS specifically addresses a transaction, management uses judgement to develop a policy that is relevant to users' decision-making and reliable, and in doing so refers first to the requirements of other Ind AS dealing with similar and related issues, and then to the definitions, recognition criteria and measurement concepts in the Conceptual Framework — this is precisely the gap-filling role the framework chapter described, now stated as Ind AS 8's own explicit hierarchy.

Consistency and change of policy. An accounting policy, once selected, is applied consistently for similar transactions, and can be changed only if the change is required by an Ind AS, or if the change results in the financial statements providing reliable and more relevant information. A change in accounting policy is applied retrospectively — adjusting the opening balance of each affected component of equity for the earliest period presented, and the comparative amounts disclosed, as if the new policy had always been applied — unless a specific standard's own transitional provisions state otherwise, or retrospective application is impracticable.

Change in accounting estimate. An estimate — the useful life of an asset, the amount of a provision, the allowance for doubtful debts — is, by its nature, based on the most recent available and reliable information, and a change in estimate occurs when new information or new developments mean a previously reasonable estimate needs revision. This is applied prospectively — recognised in the period of the change and, if it affects future periods too, in those future periods as well — never restating prior years, because a prior estimate that was reasonable given the information available at the time was not wrong; it has simply been superseded by new information that did not exist when the original estimate was made.

The most heavily tested distinction in this chapter is telling a change in policy apart from a change in estimate apart from a correction of an error, because each is treated completely differently — retrospective, prospective, and retrospective-with-a-different-purpose (correcting a past mistake), respectively. A change from the straight-line method to the written-down-value method of depreciation, for instance, looks superficially like a policy change, but Ind AS 8 explicitly treats a change in depreciation method as a change in accounting estimate, because the change reflects a revised assessment of the pattern in which the asset's economic benefits are expected to be consumed, not a change in the recognition or measurement principle itself — the asset is still being depreciated, only the estimate of its consumption pattern has changed.

Correction of a prior period error. A material prior period error — arising from a failure to use, or misuse of, reliable information that was available when the prior financial statements were authorised for issue — is corrected retrospectively, restating the comparative amounts for the prior period presented, and, if the error occurred before the earliest period presented, restating the opening balances of assets, liabilities and equity for that earliest period, precisely the third-balance-sheet scenario the previous chapter introduced. The distinguishing feature of an error, as against an estimate later revised by new information, is that the error's correction relies only on information that was already available at the time the original financial statements were prepared — using later information to conclude a past estimate was "wrong" is not error correction, it is a change in estimate, applied prospectively instead.

Ind AS 10: events after the reporting period

Ind AS 10 governs events occurring between the end of the reporting period and the date the financial statements are approved for issue, splitting them into two categories that receive completely different treatment.

Adjusting events provide evidence of conditions that existed at the end of the reporting period, and the financial statements are adjusted to reflect them — the settlement of a court case after the reporting date that confirms the entity already had a present obligation at the reporting date, the bankruptcy of a customer after the reporting date that confirms a receivable was already impaired at the reporting date, or the discovery, after the reporting date, that inventory was overvalued because of a pricing or costing error that existed at year end.

Non-adjusting events are indicative of conditions that arose after the end of the reporting period, and the financial statements are not adjusted, though a material non-adjusting event must be disclosed — a decline in market value of investments occurring after the reporting date (since the decline reflects circumstances that arose after year end, not conditions existing at year end), a major business combination entered into after the reporting date, or a major natural disaster after the reporting date.

The single question that resolves nearly every Ind AS 10 scenario is: did the condition already exist at the reporting date, and has this later event merely provided evidence of it, or did the condition itself only come into existence after the reporting date? A customer's bankruptcy after year end is adjusting if the customer was already in financial difficulty at year end and the bankruptcy confirms that pre-existing weakness; it would be non-adjusting only if the customer was financially sound at year end and the bankruptcy was triggered by a genuinely new, post-year-end event with no connection to conditions existing at the reporting date.

Going concern. If management determines, after the reporting date but before the financial statements are approved for issue, that it intends to liquidate the entity or cease trading, or that it has no realistic alternative but to do so, the financial statements are not prepared on a going concern basis at all, regardless of whether this determination is treated as an adjusting or non-adjusting event in the ordinary sense — this is a fundamental change to the basis of preparation itself, not merely an adjustment to specific line items, and Ind AS 1's disclosure requirements around material uncertainty related to going concern interact directly with this Ind AS 10 provision.

Ind AS 113: fair value measurement

Before Ind AS 113, different standards defined and measured "fair value" slightly differently, creating inconsistency wherever fair value was required. Ind AS 113 does not tell you when to use fair value — that is decided by the specific standard requiring or permitting it — it tells you, once fair value is required, how to measure it consistently, everywhere across Ind AS.

The definition. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date — an exit price, not an entry price, and specifically a hypothetical transaction in the asset's or liability's principal market (the market with the greatest volume and level of activity), or, absent a principal market, the most advantageous market (the market that maximises the amount received for an asset or minimises the amount paid to transfer a liability, after transaction and transport costs).

Market participant assumptions. Fair value is measured using the assumptions market participants would use, including their assumptions about risk, not the entity's own specific intentions — an entity that intends to use an asset defensively, to prevent a competitor acquiring it, still measures its fair value based on what a market participant, who may have entirely different intentions, would pay, because fair value is deliberately entity-independent by design.

Highest and best use, for non-financial assets. Fair value of a non-financial asset is measured assuming its highest and best use by market participants — the use that maximises its value, whether or not the entity itself currently uses the asset that way — provided that use is physically possible, legally permissible and financially feasible. A parcel of land currently used for a low-value warehouse, but capable of legal and financially feasible redevelopment into a much higher-value commercial complex, is measured at the value reflecting that higher, alternative use, if a market participant would in fact pay for that potential.

The fair value hierarchy. Ind AS 113 establishes a three-level hierarchy prioritising the inputs used to measure fair value, and this hierarchy is examined constantly because it directly determines both measurement reliability and disclosure requirements. Level 1 inputs are quoted prices in active markets for identical assets or liabilities, the most reliable and least judgement-dependent input available. Level 2 inputs are observable inputs other than quoted prices included in Level 1, either directly (prices for similar assets) or indirectly (inputs derived from or corroborated by observable market data). Level 3 inputs are unobservable inputs, used only when relevant observable inputs are not available, requiring the entity to develop its own assumptions about what market participants would use, and correspondingly requiring the most extensive disclosure, since Level 3 measurements carry the most estimation uncertainty and the least external verifiability.

Why these three standards keep appearing together in Final questions

A single Final-level scenario often requires all three at once: a business combination completed after the reporting date but before approval for issue (Ind AS 10 — almost always non-adjusting, since the combination itself only came into existence after year end) is measured using Ind AS 113's fair value framework for the assets and liabilities acquired, and a subsequent change in the estimated useful life of an acquired asset, discovered a year later, is treated under Ind AS 8 as a change in accounting estimate, applied prospectively. Recognising which of the three standards a given fact actually engages, before applying any of their individual rules, is the disciplined first step every strong answer in this cluster takes.