In the preparation of financial statements there is an underlying presumption that an accounting principle, once adopted, should not be changed, but rather is to be uniformly applied in accounting for events and transactions of a similar type. This consistent application of accounting principles enhances the utility of the financial statements. The presumption that an entity should not change an accounting principle may be overcome only if the reporting entity justifies the use of an alternative acceptable accounting principle on the basis that it is preferable under the circumstances.
When IFRS are revised or new standards are developed, they often are promulgated a year or more prior to the date set for mandatory application. Disclosure of future changes in accounting policies must be made when the reporting entity has yet to implement a new standard that has been issued but that has not yet come into effect.
In addition, disclosure is now required of the planned date of adoption, along with an estimate of the effect of the change on the entity’s financial position, except if making such an estimate requires undue cost or effort.
Changes in Accounting Policy
A change in an accounting policy means that a reporting entity has exchanged one accounting principles for another.
According to IAS 8, the term accounting policy includes the accounting principles, bases, conventions, rules and practices used. For example, a change in inventory costing from weighted-average to first-in, first-out would be a change in accounting policy, as would a change in accounting for borrowing costs from capitalization to immediate expensing.
Changes in accounting policy are permitted if :
1. The change is required by a standard or an interpretation, or
2. The change in accounting principle will result in a more relevant and reliable presentation of events or transactions in the financial statements of the enterprise.
IAS 8 does not regard the following as changes in accounting policies :
1. The adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions; and
2. The adoption of a new accounting policy to account for events or transactions that did not occur previously or that were immaterial in prior periods.
The provisions of IAS 8 are not applicable to the initial adoption of a policy to carry assets at revalued amounts, although such adoption is indeed a change in accounting policy. Rather, this is to be dealt with as a revaluation in accordance with IAS 16 or IAS 38, as appropriate under the circumstances.
Changes in accounting policy pursuant to the adoption of a standard
When a change in an accounting policy is made consequent to the enactment of a new standard, it is to be accounted for in accordance with the transitional provisions set forth in that standard.
Generally, the transitional provisions will require the restatement of comparative period information. Nonetheless, comparative information presented for a particular prior period need not be restated if doing so is impracticable.
When the comparative information for a particular prior period is not restated, the new accounting policy is to be applied to the balances of assets and liabilities as at the beginning of the period following that one, with a corresponding adjustment made to the opening balance of retained earnings for the first period restated.
The cumulative effect as of the beginning of the earliest comparative period presented (for which restatement is applied), if any, is to be reported as an adjustment to beginning retained earnings of that period.
For example, assume that a change is adopted in 2008 and comparative 2007 financial statements are to be presented with the 2008 financial statements. The change in accounting policy also affects previously reported 2005-2006 financial position and results of operations, but these are not to be presented in the current financial report.
Therefore, the cumulative effect (i.e., the cumulative amount of expense or income which would have been recognized in years prior to 2007) as of the beginning of 2007 must be reported as an adjustment to beginning retained earnings in 2007.
In certain circumstances, a new standard may be promulgated with a delayed effective date. This is done, for example, when the new requirements are complex and IASB wishes to give adequate time for preparers and auditors to master the new materials.
If, as of a financial reporting date, the reporting entity has not elected early adoption of the standard, it must disclose (1) the nature of the future change or changes in accounting policy; (2) the date by which adoption of the standard is required; (3) the date as at which it plans to adopt the standard; and (4) either (a) an estimate of the effect that change(s) will have on its financial position, or (b) if such an estimate cannot be made without undue cost or effort, a statement to that effect.
A change in an accounting policy other than one made pursuant to the promulgation of a new standard or interpretation must, under revised IAS 8, be accounted for retrospectively.
With retrospective application, the results of operations for all prior periods presented must be restated, as if the newly adopted policy has always been used. If periods before the earliest period being presented were also affected, then the opening balance of retained earnings for the earliest period being presented must be restated to reflect the net impact on all earlier periods.
(Source of this article : Wiley IFRS 2008 : Interpretation and Application of International Accounting and Financial Reporting Standards 2008)
