How to approach it
- Classify each change: depreciation method = estimate; cost formula = policy.
- Estimate: compute the current-year effect (new charge minus old charge) and state it is applied prospectively.
- Policy: compute the effect on each prior year's profit and on opening retained earnings of the earliest period presented.
- Write the notes in disclosure form: nature, reason, line items affected, amounts for current and prior periods, and the opening equity adjustment.
Key rules to apply
- IAS 8: a change in depreciation method is a change in accounting estimate, applied prospectively; disclose nature and amount of the effect on the current period (and future periods if practicable).
- A voluntary change in policy is applied retrospectively; disclose nature, reasons, the adjustment for each line item and for basic/diluted EPS for current and prior periods, and the amount relating to periods before those presented.
- Inventory: a lower opening inventory increases that year's profit; a lower closing inventory reduces it.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Answering with workings only and no disclosure note (examiners' point).
- Stating 'retrospective' or 'prospective' without amounts.
- Excluding land from the depreciable amount only in one of the two methods.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q5 without copying it.
Original practice question
Estimate change and policy change together
A building costing Rs 400m (land Rs 100m) bought on 1 January 2023 was depreciated straight-line over 25 years, nil residual. From 2025 management switches to 8% reducing balance.
The company also moves inventory from FIFO to weighted average. Closing inventory (Rs m): 2023 FIFO 200 / WA 190; 2024 FIFO 230 / WA 236; 2025 FIFO 250 / WA 245.
Required: Quantify the amounts the 2025 notes must disclose.
Worked solution
| Estimate change | Rs m |
|---|---|
| Building carrying amount 1 Jan 2025: 300 − 12 × 2 | 276.00 |
| Reducing balance charge 2025: 276 × 8% | 22.08 |
| Straight-line charge 2025 | 12.00 |
| Increase in 2025 depreciation | 10.08 |
| Policy change | 2024 (Rs m) | 2025 (Rs m) |
|---|---|---|
| Opening inventory lower / (higher) | +10 | −6 |
| Closing inventory higher / (lower) | +6 | −5 |
| Effect on profit | +16 | −11 |
Retained earnings at 1 January 2024 fall by Rs 10m (the 2023 closing difference).
Answer: Disclose: depreciation up Rs 10.08m in 2025 (prospective); 2024 profit restated up Rs 16m, 2025 profit Rs 11m lower than under FIFO, opening 2024 retained earnings down Rs 10m.