Changes in Accounting Policies

Accounting Policies

The term accounting policies refer to a particular set of rules, conversions and principles which a particular entity introduces in a manner that is rendered to be the correct one. This is done to prepare financial statements and present them to the relevant body. Changes in accounting policies are allowed only if the changes are an outcome of the financial statements which provide information (more reliable and relevant) about the transactions and their effects along with effects of other events on the financial status, financial performance, or cash flows or required by a standard or interpretation.


Reason for Change in Accounting

A comparison of the policies at hand is essential particularly in case of varying accounting periods. These comparisons must be maintained properly also. Whenever changes are bound to happen it must be taken care of that the financial statements comply with those changes. The changes can refer to anything and there is no need for any existing options to be adhered to. 


Change in Accounting Estimate

Often, the amount that an asset or liability carries, needs to be readjusted after much assessment. This is done to estimate the future benefits and obligations that the particular asset or liability is associated with. This modification is known as the change in accounting estimate.

Now, this change is dependent upon two main factors of profit or loss. These are:

  • Period of the change, when it affects only the period or duration

  • The present period of the change and the future periods, when both are affected simultaneously


Difference between Change in Accounting Policy and Change in Accounting Estimate

Difference between accounting policy  and  accounting estimate is important because modifications in the accounting policies are normally applied retrospectively while changes in accounting estimates are applied prospectively. Therefore it shows its effect on both the trends during the periods and reported outcomes.


Introduction of Errors

It is a must for any entity to take care of the errors occurred prior in the material at hand before a financial statement is authorized and issued. It is one of the general principles of managing errors in accounting policies. This is further impacted by the following:

It is dependent upon whether the error was identified in the early times of the prior period as that would restate the assets’ opening balances and liabilities. The equity presented in the earliest prior period is also of consideration.

Restating the comparative amounts for the prior period(s) presented, in which the error occurred

Now that we know that the accounting policies changes in accounting estimates and errors, let us try to distinguish them further:

Accounting Policy

  • Selection and Application of accounting policies

  • Consistency of the policies of accounting

  • Changes in Policies

Change in Estimate

  • Change in estimates

  • Disclosure of the above changes

Error 

  • Retrospective restatement limitations

  • Error disclosure


IFRS Change in Accounting Policy

For a change in accounting policies, there is a requirement of a change in the existing IFRS/IAS and provision of these standards needs prospective legal notices of a new accounting policy. And in such circumstances, one must take guidance from IFRS as they are the main concerned body. 

The application for the same should be different for different circumstances, transactions and other similar events which contributed to the present policy beforehand.


Difference between Accounting Policy and Accounting Estimate

  • Accounting policies consist of principles, bases, conventions, rules and practices and accounting estimates consist of amount or patterns.

  • Example of accounting policies changes from historical cost to realizable value and example of account estimate is a change in the useful life of the depreciable asset.

  • In accounting policies, accounting treatment is only considered when there is a retrospective change. On the other hand, in an accounting estimate, the accounting treatment is taken into consideration when there is a change in perspective.


Accounting Estimates IFRS

A component that helps in understanding the amount that has been credited or debited is known as Estimate or amount of estimate. There is non-discrete calculation available for the identical, that's why it is difficult to have a record of it. 


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FAQs (Frequently Asked Questions)

1. Describe Something about the Retrospective Application of Changes in Accounting Policy?

Ans. Commonly when we change the accounting policy of an entity we follow the retrospective application. This means if the new policies have always been placed then the accounting records will be adjusted to represent the accounts. This refers to the application of the policy retrospectively. 

2. What is the reason behind the Change in Accounting?

Ans. The organisations and the standards followed in accounting are in constant need of change. This ensures that correct statements are always available containing information that is relevant and reliable. The transactions that the organisation makes are recorded in these statements. So change is brought forth in accounting.

3. What is IFRS? And how many Aspects Come under it?

Ans. International Financial Reporting Standards is the full form of IFRS. The standards comprise of:

  1. International Financial Reporting Standards (IFRSs)

  2. International Accounting Standards (IASs)

  3. Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB.