Retrospective application of a change in accounting policy

[Yakub02]

Retrospective application of a change in accounting policy.

When a change in accounting policy is required, and there are no transitional provisions relating to the introduction of a new accounting standard, the change in policy should be applied retrospectively.

The entity should adjust the opening balance for each item of equity affected by the change, for the earliest prior period presented, and the other comparative amounts for each prior period presented, as if the new accounting policy had always been applied. IAS 1:

Presentation of Financial Statements requires a statement of financial position at the beginning of the earliest comparative period when a new accounting policy is applied retrospectively

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied.

Limitation on retrospective application It might be impracticable to retrospectively apply an accounting policy. This could be because the information necessary for the application of the policy to earlier periods is not available because it had not been collected then.

Period specific effect It might be impracticable to determine the effect of changing an accounting policy on comparative information for one or more prior periods presented. For example, it might be impracticable to determine the impact on profit for the prior year.

In this case a company must apply the new accounting policy to the carrying amounts of assets and liabilities (and therefore equity) as at the beginning of the earliest period for which retrospective application is practicable. This may be the current period.

 

[Yakub02]

The Periodic effect mentioned is very common in practice. So also there are cumulative effect

Cumulative effect It might be impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods,

In this case a company must adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.

When the cumulative effect of applying the policy to all prior periods cannot be determined, a company must apply the new policy prospectively from the start of the earliest period practicable.

This means that it would disregard the portion of the cumulative adjustment to assets, liabilities and equity arising before that date.

 

[Yakub02]

A change in accounting estimate may be needed if changes occur in the circumstances on which the estimate was based, or if new information becomes available.

A change in estimate is not the result of discovering an error in the way an item has been accounted for in the past and it is not a correction of an error. IAS 8 requires a change in an accounting policy to be accounted for retrospectively whereas a change in an accounting estimate is normally recognised from the current period.

The effect of a change in accounting estimate should be recognised prospectively, by including it:  in profit or loss for the period in which the change is made, if the change affects that period only; or

 in profit or loss for the period of change and future periods, if the change affects both.