Chapter 3: Changes in accounting policies

An entity should change its accounting policy only if:

• a standard or an interpretation requires the change; or
• the change will result in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.

Examples of changes in accounting policies Changes in accounting policies can be categorized according to the three basic processes applied in the preparation of financial statements: recognition; measurement bases; and presentation. Examples of each category include: Changes in recognition policies Changing revenue recognition regarding the sale of goods and services. Changing whether borrowing costs are included in the cost of acquisition for an asset that is to be subsequently measured at fair value. Changes in policies related to measurement bases Changing from measuring a class of property, plant and equipment at depreciated historical cost to a policy of regular revaluation. Changes in presentation policies Changing classification of an item within the balance sheet, income statement or cash flow statement, except where driven by a change in circumstances.

An entity might develop an accounting policy by analogy with other GAAPs If that standard or pronouncement is subsequently amended and the entity changes its policy to reflect the amendments, this is a voluntary change in accounting policy. The entity then has to justify that such a change will result in information that is reliable and more relevant.

An entity should apply the same accounting policy from one period to the next, unless a change in policy meets one of the two conditions specified in IAS 8. This is because users of the financial statements need to be able to compare the financial statements of an entity over time, in order to appreciate trends in its financial position, financial performance and cash flows.

It is not a change in accounting policy where an entity introduces an accounting policy to account for transactions or events that are different in substance from those previously occurring (that is, where circumstances have changed). Similarly, adopting an accounting policy for events or transactions that previously did not occur, or were immaterial, is not a change of accounting policy.

Situations not regarded as changes in accounting policies Change in functional currency A change in functional currency is not a change in accounting policy, because it arises as a result of a change to the entity’s underlying transactions, events and conditions. Therefore, an entity should account for this prospectively by translating all items into the new functional currency, using the exchange rate at the date of the change. Change in use of an existing asset Entity A owns an office building that it has previously used for its own administrative purposes. It classifies the building as property, plant and equipment and carries it at depreciated historical cost. During the current year, management moved the workforce to a new building and leased the old building to a third party. It then reclassified the old building as investment property and carried it at fair value. The change represents a change in use of the property, and so no restatement of the comparative amounts should be made. It is appropriate for entity A to apply different accounting treatments to the same property in the current and prior periods, because it used the building for different purposes in the two years.

General rules

A change in accounting policy that is made on the initial application of an IFRS standard or interpretation (including early adoption) should be accounted for in accordance with the specific transitional provisions of that standard or interpretation, if any.

New or revised IFRS standards often include specific transitional provisions, to allow prospective, rather than retrospective, application of the standard. This is sometimes because the Board has concluded that it would be impracticable or unduly onerous to obtain the information necessary to restate comparatives.

Early adoption of a new standard or interpretation is not treated as a voluntary change, and so any specific transitional provisions in that new standard or interpretation should be applied.

An entity should retrospectively apply voluntary changes to accounting policies or new accounting standards or interpretations where there are no specific transitional rules, including changes in presentation, except to the extent that it is impracticable. It should adjust all comparative amounts to show the results and financial position of prior periods as if the new accounting policy had always applied.

When should an entity change its accounting policy in response to an IFRS IC agenda decision? Question: The IFRS IC often addresses newly identified financial reporting issues, and may issue agenda decisions. ‘The process for publishing an agenda decision might often result in explanatory material that provides new information that was not otherwise available and could not otherwise reasonably have been expected to be obtained.’ When should an entity apply a change in accounting policy that arises from an IFRS IC agenda decision? Answer: Entities should determine whether a change in accounting policy is required as a result of an agenda decision that has been published and when that change should be made. The IFRS IC stated in the March 2019 IFRIC Update that: ‘… an entity might determine that it needs to change an accounting policy as a result of an agenda decision.The Board expects that an entity would be entitled to sufficient time to make that determination and implement any change (For example, an entity may need to obtain new information or adapt its systems to implement a change).’ Entities will need to apply judgement to determine what sufficient time is in this context. In our view, it should be just long enough to be able to implement the change. The judgement is an entity-specific assessment, and would take into consideration, For example, whether additional information needs to be collected for the implementation of the new policy or to provide disclosures, or whether processes and systems need to be modified. We expect that, in many cases, sufficient time would be a matter of months, but it is unlikely that it would extend for more than a year. Entities should consider the views of any relevant securities regulator as part of the assessment. When management has concluded that a change in an accounting policy is required as a result of an agenda decision but that change has not been made yet, they should consider providing disclosures similar to those provided about forthcoming standards in accordance with IAS 8. Changes in accounting policies as a result of agenda decisions are generally voluntary changes in accounting policies, unless an entity determines it relates to a correction of an error. Voluntary changes in accounting policies are applied retrospectively, except to the extent that it is impracticable. We expect that it is only in limited circumstances that it will be impracticable to apply a voluntary change in accounting policy retrospectively. Determining whether retrospective application is impracticable or not requires judgement.

‘Retrospective application’ refers to “applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied”.

An entity should report the adjustment to all periods prior to those presented as an adjustment to the opening balance of each affected component of equity (For example, retained earnings) for the earliest period presented.

For example, if a policy change is made in 20X7, and an entity presents financial statements for the year ended 31 December 20X7, with comparatives for the year ended 31 December 20X6, it should adjust the comparatives for the year ended 31 December 20X6. It should then include the cumulative adjustment for years preceding 20X6 in the retained earnings balance and any affected other equity components, at 1 January 20X6.

Does restatement have any implications on the date of financial statements authorized for issue? Question: Does restatement have any implications on the date of financial statements authorized for issue? Answer: A restatement of the financial statements for prior periods, by means of a prior period adjustment, does not necessarily mean that the financial statements that were approved and issued for those prior financial years have to be withdrawn and amended. However, management also needs to be aware of any specific regulatory requirements.

An entity also restates any other information in respect of prior periods presented with the financial statements (For example, historical summaries) as far back as is practicable.

Exception to general rules

IAS 8 makes a specific exception for a change in policy to measure property, plant and equipment or intangible assets at a revalued amount for the first time. The initial adoption of a policy to carry assets at revalued amounts in accordance with IAS 16 or IAS 38 is a change in accounting policy.

However, an entity should treat such a change as a revaluation in accordance with IAS 16 or IAS 38. The change in policy is accounted for as a revaluation in the year, rather than by means of a prior period adjustment.

Does the exception in IAS 8 for a change in accounting policy for property, plant and equipment and intangible assets also apply to investment property? No. IAS 8 provides specific guidance that permits an entity to account for a change in policy to measure property, plant and equipment and intangible assets as a revaluation in accordance with IAS 16 or IAS 38 (that is, prospectively). This is an exception to the general principle and should not be applied, by analogy, to investment property accounted for in accordance with IAS 40. An entity that changes from the cost to fair value model for the measurement of investment property should apply the general guidance in IAS 8 that requires such a change to be accounted for retrospectively, except to the extent that it is impracticable. It is expected to be rare that retrospective application would be impracticable. This is because an entity that applies the cost model to measuring investment property is required by IAS 40 to disclose the fair value of investment property unless, exceptionally, the entity cannot measure the fair value of the investment property reliably. If the fair value of the investment property cannot be measured reliably, it would not be appropriate to change to a policy of measuring investment property at fair value. IAS 8 requires a voluntary change in accounting policy to result in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.