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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://ie.frs102.com/members/premium-toolkit/section-10/” type=”big” color=”red”] Return to Section 10 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Changes in accounting policies
Extracts from FRS 102 – Section 10.8 – 10.10A
10.8 An entity shall change an accounting policy only if the change:
(a) is required by an FRS or FRC Abstract; or
(b) results 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.
10.9 The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring;
(b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were not material; and
(c) a change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that an FRS or FRC Abstract would otherwise require or permit to be measured at fair value.
10.10 If an FRS or FRC Abstract allows a choice of accounting treatment (including the measurement basis) for a specified transaction or other event or condition and an entity changes its previous choice, that is a change in accounting policy.
10.10A The initial application of a policy to revalue assets in accordance with Section 17 Property, Plant and Equipment or Section 18 Intangible Assets other than Goodwill is a change in accounting policy to be dealt with as a revaluation in accordance with those sections, rather than in accordance with paragraphs 10.11 and 10.12.
OmniPro comment
A change in accounting policy encompasses changes in the recognition and measurement principals for assets, liabilities, income and expenses. It also includes ways in which items are classified even where there is no impact on the net results.
FRS 102 provides accounting policy choices for the below straight forward matters. An entity must select the accounting choice on transition and then apply them consistently. An entity can choose to voluntarily change, but where this is done it must result in more relevant and reliable information for the readers of the financial statements. See below the simple accounting policy choices that can be made:
- A choice to either capitalise or expense qualifying borrowing costs (Section 25);
- A choice to adopt a policy of revaluation for property, plant or equipment (PPE- Section 17).
- A choice to adopt a policy of revaluation for intangible assets where possible (Section 18)
- A choice to adopt the performance model or the accruals model for accounting for government grants (Section 24);
- to either carry investments in subsidiaries, associates and joint ventures at fair value or cost less impairment (Section 9).
An entity should decide on its policy choice on transition to FRS 102 and include an accounting policy note in the financial statements detailing how the entity has treated such costs. If an entity wishes to change going forward a prior year adjustment will be required i.e. it must be adjusted retrospectively. The only exception to this is for points 2 and 3 above where the revaluation is adjusted prospectively as is stated in Section 10.10 and 10.10A above.
Other examples which would be considered to be a change in accounting policy are:
- A change in the methods used in points 1, 4 and 5 above;
- A change in classification of expenses within the profit and loss (e.g. in the prior year certain costs were posted to cost of sales whereas in the current year these are shown in administrative expenses and vice versa)
- A change in classification on the balance sheet this year versus the prior year
- Change from a single statement of comprehensive income to a two statement approach
Refer to Section 10.9 of FRS 102 above for examples of items which are not changes to an accounting policy and therefore retrospective adjustment is not required.
Applying changes in accounting policies
Extracts from FRS 102 – Section 10.11
10.11 An entity shall account for changes in accounting policy as follows:
(a) an entity shall account for a change in accounting policy resulting from a change in the requirements of an FRS or FRC Abstract in accordance with the transitional provisions, if any, specified in that amendment;
(b) when an entity has elected to follow IAS 39 Financial Instruments: Recognition and Measurement and/or IFRS 9 Financial Instruments instead of following Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues as permitted by paragraph 11.2, and the requirements of IAS 39 and/or IFRS 9 change, the entity shall account for that change in accounting policy in accordance with the transitional provisions, if any, specified in the revised IAS 39 and/or IFRS 9; and
(c) when an entity is required or has elected to follow IAS 33, IFRS 8 or IFRS 6 and the requirements of those standards change, the entity shall account for that change in accounting policy in accordance with the transitional provisions, if any, specified in those standards as amended; and
(d) an entity shall account for all other changes in accounting policy retrospectively (see paragraph 10.12).
OmniPro comment
Change in accounting policy due to a change to requirements issued by the FRC
Where a change in accounting policy arises as a result of a change in the requirements of the FRS then this accounting policy should be adjusted in accordance with the guidance issued with the change as to how this should be accounted for.
The new guidance contained in the FRS, will instruct how this should be treated.
Change in accounting policy due to adoption of IAS 39 or IAS 33
Where an entity elects to account under the above IFRS standards then the treatment of the change in policy should be accounted for in line with that standard and can use any transition exemptions included in that standard.
Change in accounting policy due to other reasons
Where a change of accounting policy arises for a reason other than the above two reasons, then the change should be accounted for retrospectively. The only exception is where an option of revaluating PPE or intangible assets is adopted as Section 17 makes it clear that this should be accounted for prospectively. This is discussed further below.
Retrospective application
Extracts from FRS 102 – Section 10.12
10.12 When a change in accounting policy is applied retrospectively in accordance with paragraph 10.11, the entity shall:
- apply the new accounting policy to comparative information for prior periods to the earliest date for which it is practicable, as if the new accounting policy had always been applied.
When it is impracticable to determine the individual-period effects of a change in accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period.
OmniPro comment
Retrospective application involves:
- adjusting the carrying amount of the assets and liabilities (as at the earliest prior period presented), with a corresponding adjustment to profit and loss reserves
- adjusting the prior periods to show the affect the change in policy had on the prior year results. There is only a need to show the comparative balance sheet restated, there is no need to disclose balance sheets after that date.
In the financial statements, the financial statements should show the adjustment in the statement of changes in equity together with a note so that a reader of the financial statements can see how the profit and loss reserves moved from the prior year reported numbers to the current year. Where a change in accounting policy is adopted it will affect tax, this can be current or deferred tax depending on the jurisdiction and it is likely the prior year tax return will have to be restated.
Example 1: Change in accounting policy
Company A previously adopted a policy of carrying investments in subsidiaries at cost less impairment. During the current year the company decided to adopt a policy of carrying investments at fair value through the profit and loss as it provides the reader with more relevant data. The carrying amount of the investment at cost less impairment in the prior years was CU100,000. The company has determined the fair value of the investment to be CU150,000 at the start of the prior year and CU190,000 at the end of the prior year. The fair value at the end of the current year is CU240,000. Assume the deferred tax sales rate is 20% and this rate is used as this is the tax rate in which the asset is likely to be realised. Note corporation tax is not effected here as the adjustment is not chargeable to corporation tax but instead to capital gains tax.
The accounting entries required in this case to restate the prior year accounts are:
Journals required to the prior year’s financial statements/comparatives
|
|
CU |
CU |
|
Dr Investments (CU150,000-CU100,000) |
50,000 |
|
|
Cr Profit and Loss Reserves (CU50,000-CU10,000) |
|
40,000 |
|
Cr Deferred Tax Liability (CU50,000*20%) |
|
10,000 |
Being journal to reflect uplift in value from cost at the start of prior year including current tax impact which is posted to opening reserves.
|
|
CU |
CU |
|
Dr Investments (CU190,000-CU150,000) |
40,000 |
|
|
Cr Change in Fair Value in Profit and Loss |
|
40,000 |
|
Dr Deferred Tax in P&L |
8,000 |
|
|
Cr Deferred Tax Liability (CU40,000*20%) |
|
8,000 |
Being journal to reflect movement in fair value during the prior year including the current tax impact.
Journals required in current year’s trial balance for the correction of opening reserves
|
|
CU |
CU |
|
Dr Investments (CU190,000-CU100,000) |
90,000 |
|
|
Cr Profit and Loss Reserves |
|
72,000 |
|
Cr Deferred Tax Liability (CU90,000*20%) |
|
18,000 |
Being journal to reflect adjustment for the restatement of the profit and loss reserves carried forward for the effect of the change of accounting policy applied retrospectively.
|
|
CU |
CU |
|
Dr Investments (CU240,000-CU190,000) |
50,000 |
|
|
Cr Change in Fair Value in Profit and Loss |
|
50,000 |
|
Dr Deferred Tax in P&L |
8,000 |
|
|
Cr Deferred Tax Liability (CU40,000*20%) |
|
8,000 |
Being journal to reflect movement in fair value during the current year including the current tax impact.
The disclosure requirements in Section 10.14 would have to be complied with in this instance. Note if the change in accounting policy had of affected current tax her, current tax would be replaced with deferred tax above.
Disclosure of a change in accounting policy
Extracts from FRS 102-Section 10.13 – 10.14
10.13 When an amendment to an FRS or FRC Abstract has an effect on the current period or any prior period, or might have an effect on future periods, an entity shall disclose the following:
(a) the nature of the change in accounting policy;
(b) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected;
(c) the amount of the adjustment relating to periods before those presented, to the extent practicable; and
(d) an explanation if it is impracticable to determine the amounts to be disclosed in (b) or (c) above.
Financial statements of subsequent periods need not repeat these disclosures
10.14 When a voluntary change in accounting policy has an effect on the current period or any prior period, an entity shall disclose the following:
(a) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy provides reliable and more
relevant information;
(c) to the extent practicable, the amount of the adjustment for each financial
statement line item affected, shown separately:
(i) for the current period;
(ii) for each prior period presented; and
(iii) in the aggregate for periods before those presented; and
(d) an explanation if it is impracticable to determine the amounts to be disclosed in
(c) above.
Financial statements of subsequent periods need not repeat these disclosures.
OmniPro comment
It is clear that FRS 102 requires disclosure as to why a change in policy occurred i.e. made voluntarily or as a result of an FRC requirement.
The procedure for a prior year error is similar to prior period adjustments. See the worked example 6 below in relation to this.
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