Accounting Policies

Accounting policies are the principles, bases, conventions, rules and practices applied by an entity which specify how the effects of transactions and other events are reflected in the financial statements.

International Accounting Standards (IAS 8) requires an entity to select and apply appropriate accounting policies complying with International Financial Reporting Standards (IFRSs) and interpretations to ensure that the financial statements provide information that is:

  • relevant to the decision-making needs of users.
  • reliable.

Changing Accounting Policies

The general rule is that accounting policies are normally kept that same from period to period to ensure comparability of financial statements over time.

IAS 8 requires accounting policies to be changed only if the change:

  • is required by IFRSs or
  • will result in a reliable and more relevant presentation of evens or transaction.

A change in accounting policy occurs if there has been a change in:

  • recognition, e.g. an expense in now recognized rather than an asset.
  • presentation, e.g depreciation is now included in cost of sales rather that administrativ expenses, or
  • measurement basis, e.g stating assets at replacement cost rather than historical cost

Accounting for Change in Accounting Policy

The required accounting treatment is that:

  • the change should be applied retrospectively, with an adjustment to the opening balance of retained earnings in the statement of changes in equity.
  • comparative information should be restated unless it is impracticable to do so.
  • there will be a prior adjustment to the balance of retained earnings brought forward in the statement of changes in equity
  • if the adjustment to opening retained earnings cannot be reasonably determined, the change should be adjusted prospectively, i.e. included in the current period's income statement.

Disclosure

When a change in accounting policy has material effect on the current period or any period presented, or may have a material effect in the subsequent periods, the following disclosures should be made:

  • the reasons for the change
  • the amounts of the adjustments recognized in the current period and the previous period presented (i.e. the comparative figures)
  • the amount of the adjustment relating to periods prior to those included in the financial statement.