IAS 8 Changes in Accounting Policies
- Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. (IAS 8)
Events after Reporting Period are those that occur between the end of the reporting period and when the financial statements are authorized for issue.
Following are Examples of accounting policies:
- Valuation of inventory using FIFO, Average Cost or other suitable basis as per IAS 2
- Classification, presentation and measurement of financial assets and liabilities under categories specified under IAS 32 and IAS 39 such as held to maturity, available for sale or fair value through profit and loss
- Timing of recognition of assets, liabilities, expenses and income
- Basis of measurement of non-current assets such as historical cost and revaluation basis
- Accruals basis of preparation of financial statements
Management must consistently review its accounting policies to ensure they comply with the latest pronouncements by IASCF and that the adopted policies result in presentation of most relevant and reliable financial information for users.
Changes in Accounting Policies
Accounting Policies must be applied consistently to promote comparability between financial statements of different accounting periods. However, a change in accounting policy may be necessary to enhance the relevance and reliability of information contained in the financial statements. Such changes may be required as a result of changes in IFRS or may be applied voluntarily by the management.
As a general rule, changes in Accounting Policies must be applied retrospectively in the financial statements. Retrospective application means that entity implements the change in accounting policy as though it had always been applied.
Consequently, entity shall adjust all comparative amounts presented in the financial statements affected by the change in accounting policy for each prior period presented.
Exemption from Retrospective Application of Accounting Policies
Retrospective application of a change in accounting policy may be exempted in the following circumstances:
- A change in accounting policy is required by a new IFRS or a change to an existing IFRS / IAS and the transitional provisions of those standards allow or require prospective application of a new accounting policy. Specific transitional guidance of IFRS must be followed in such circumstances.
- The application of a new accounting policy is in respect of transactions, events and circumstances that are substantially different from those that transpired in the past.
- The effect of retrospective application of a change in accounting policy is immaterial.
- The retrospective application of a change in accounting policy is impracticable. This may for example be the case where entity has not collected sufficient data to enable objective assessment of the effect of a change in accounting estimate and it would be unfeasible or impractical reconstruct such data.
Where impracticability impairs an entity's ability to apply a change in accounting policy retrospectively from the earliest prior period presented, the new accounting policy must be applied prospectively from the beginning of the earliest period feasible which may be the current period.
Following must be disclosed in the financial statements of the accounting period in which a change in accounting policy is implemented:
- Title of IFRS
- Nature of change in accounting policy
- Reasons for change in accounting policy
- Amount of adjustments in current and prior period presented
- Where retrospective application is impracticable, the conditions that caused the impracticality