Acca f3 Financial Accounting (int) Study Text

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. 

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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.

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