48
3: Accounting conventions Part B The qualitative characteristics of financial information and the fundamental bases of accounting
(a)
Retrospective application
The new accounting policy is applied to transactions and events as if it had always been in use. In
other words, at the earliest date such transactions or events occurred, the policy is applied from
that date.
(b)
Prospective application
The new policy will be applied only to transactions or events occurring after the date of the change
in policy. Existing balances are not recalculated so no change is made to the opening balance on
retained reserves or to net profit or loss for the current period relating to prior periods. Only
changes caused by the new accounting policy in the existing period are necessary.
Where retrospective application is impracticable, the standard allows prospective application.
6.2.1 Adoption of an IFRS
Where a new IFRS is adopted, IAS 8 requires any transitional provisions in the new IFRS itself to be
followed. If none are given in the IFRS which is being adopted, then retrospective application is required.
6.2.2 Other changes in accounting policy:
IAS 8 requires
retrospective application, unless the amount of any resulting adjustment that relates to
prior periods is
not reasonably determinable. Any resulting adjustment should be reported as an
adjustment to the opening balance of retained earnings. Comparative information should be restated
unless it is impracticable to do so.
This means that all comparative information must be restated
as if the new policy had always been in
force, with amounts relating to earlier periods reflected in an adjustment
to opening reserves of the
earliest period presented.
Prospective application is allowed in certain circumstances, when the amount of the adjustment to the
opening balance of retained earnings required by the benchmark treatment cannot be reasonably
determined.
Certain
disclosures are required when a change in accounting policy has a material effect on the current
period or any prior period presented, or when it may have a material effecting subsequent periods.
(a)
Reasons for the change
(b)
Amount of the adjustment for the current period and for each period presented
(c)
Amount of the adjustment relating to periods prior to those included in the comparative
information
(d)
The fact that comparative information has been restated or that it is impracticable to do so
Disclosures are required when a change in accounting policy has a material effect on the current period or
any prior period presented, or when it may have a material effect in subsequent periods.
(a)
Reasons for the change
(b)
Amount of the adjustment recognised in net profit/loss in the current period
(c)
The amount of the adjustment included in each period for which prior information is presented and
the amount of the adjustment relating to periods prior to those included in the financial statements
Question
Change of accounting policy
Wick Co was established on 1 January 20X0. In the first three years' accounts development expenditure
was carried forward as an asset in the statement of financial position. During 20X3 the managers decided
that for the current and future years, all development expenditure should be written off as it is incurred.
This decision has not resulted from any change in the expected outcome of development projects on hand,
but rather from a desire to favour the prudence concept. The following information is available.
Part B The qualitative characteristics of financial information and the fundamental bases of accounting
3: Accounting conventions
49
(a)
Movements on the development account.
Transfer
from capitalised
Development
expenditure
development
expenditure
Year
incurred and capitalised during year
account to income statement
$'000
$'000
20X0 525
–
20X1 780
215
20X2 995
360
(b)
The 20X2 accounts showed the following.
$'000
Retained earnings b/f
2,955
Retained earnings for the year
1,825
Retained earnings c/f
4,780
(c)
The retained profit for 20X3 after charging the actual development expenditure for the year was
$2,030,000.
Required
Show how the change in accounting policy should be reflected in the reserves in the company's 20X3
accounts per IAS 8.
Ignore taxation.
Answer
If the new accounting policy had been adopted since the company was incorporated, the additional income
statement charges for development expenditure would have been:
$'000
20X0
525
20X1 (780 – 215)
565
1,090
20X2 (995 – 360)
635
1,725
This means that the reserves brought forward at 1 January 20X3 would have been $1,725,000 less than
the reported figure of $4,780,000; while the reserves brought forward at 1 January 20X2 would have been
$1,090,000 less than the reported figure of $2,955,000.
The statement of reserves in Wick Co's 20X3 accounts should, therefore, appear as follows.
Comparative
(previous year)
figures
20X3
20X2
$'000
$'000
Retained earnings at the beginning of year
Previously reported
4,780
2,955
Retrospective change in accounting policy (note 1)
1,725
1,090
Restated
3,055
1,865
Retained earnings for the year
2,030
1,190 (note 2)
Retained earnings at the end of the year
5,085
3,055
Notes
1
The accounts should include a note explaining the reasons for and consequences of the changes in
accounting policy. (See above workings for 20X3 and 20X2.)
2
The retained profit shown for 20X2 is after charging the additional development expenditure of
$635,000.