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IFRS Changes in accounting policies-a retrospective approach

IFRS Changes in accounting policies a retrospective approach

IFRS Changes in accounting policies a retrospective approach: A change in accounting principle is where the company changes the basic rules, conventions, etc. it previously used to account for similar transactions.

changes in accounting principles:

  • Any change in method used to account for inventory valuation.
  • Any change in method used to account for bonds payable.
  • Any change in method used to value fixed assets.
  • Any change in revenue recognition method.
IFRS Changes in accounting policies a retrospective approach

IFRS Changes in accounting policies a retrospective approach

IFRS Changes in accounting policies-a retrospective approach: The following terms are used in this Standard with the meanings specified: Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. International Financial Reporting Standards (IFRSs) are Standards and Interpretations issued by the International Accounting Standards Board (IASB). They comprise:

(a) International Financial Reporting Standards.

(b) International Accounting Standards.

(c) IFRIC Interpretations.

(d) SIC Interpretations.1 Material Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.

IFRS Changes in accounting policies-a retrospective approach

The size or nature of the item, or a combination of both, could be the determining factor. Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

(a) was available when financial statements for those periods were authorised for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied. Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.

Impracticable Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if:

(a) the effects of the retrospective application or retrospective restatement are not determinable;

(b) the retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period; or

(c) the retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that:

(i) provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed.

(ii) would have been available when the financial statements for that prior period were authorised for issue from other information.

Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are:

(a) applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed.

(b) recognising the effect of the change in the accounting estimate in the current and future periods affected by the change.

IFRS Changes in accounting policies-a retrospective approach

Project Objective

The objective of the proposed amendment is to clarify the existing distinction between accounting policies and accounting estimates.

In September 2014 the IFRS Interpretations Committee informed the IASB about divergent practices regarding the assessment of whether an accounting change represents a change in accounting policy, or a change in accounting estimate, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

In its April 2016 meeting, the Board tentatively decided to amend the definitions of accounting policies and changes in accounting estimates in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in order to:

  1. clarify the definitions of accounting policies and of changes in accounting estimates with the objective of making them more concise and distinctive.
  2. clarify how accounting policies and estimates relate to each other.
  3. add guidance about whether changes in valuation techniques and in estimation techniques are changes in accounting estimates.
  4. update examples of estimates provided in IAS 8.

IFRS Changes in accounting policies-a retrospective approach

Retrospective Application

CAP, Inc. started operations on 1 January 2011. It originally applied weighted-average cost-flow assumption for inventory accounting. However, after studying the flow of its products, the company’s management concluded that FIFO is a better method and it started applied it beginning 1 January 2013. You are required to work out the necessary adjustments needed to balance sheet accounts as at the date of change in policy.

The company’s income statement (under weighted-average inventory accounting method) for financial year ended 31 December 2012 and 31 December 2011 is given below:

20122011
USD in million
Sales600500
Cost of sales350275
Gross profit250225
Selling and administrative expenses9080
Profit before tax160145
Taxes4844
Net income112102

Under the current method, the company’s inventories amounted to $25 million and $30 million at the end of 2011 and 2012 respectively. The company’s cost of goods sold under FIFO would have been $260 million and $330 million in 2011 and 2012 respectively.

Retained earnings amounted to $102 million and $214 million at the end of financial year 2011 and 2012 respectively. Corresponding taxes payable balances were $35 million and $50 million.

Sales, cost of goods sold (COGS) and selling and general expenditures for financial year 2013 are $700 million, $410 million and $120 million.

Tax rate is 30%.

IFRS Changes in accounting policies-a retrospective approach : Solution

Preparing the new income statement with comparative figure is quite straightforward. We just replace the historical COGS for 2011 and 2012 and recalculate taxes.

CAP, Inc.
Income Statements
USD in million
Year201320122011
Sales700600500
Cost of sales410330260
Gross profit290270240
Operating expenses1209080
Profit before tax170180160
Taxes515448
Net income119126112

The change in accounting policy will affect balances in inventory account, retained earnings account and taxes payable account.

IFRS Changes in accounting policies-a retrospective approach

The relevant calculations are given below.

Financial Year20122011
Cost of goods sold under FIFOA330.0260.0
Cost of goods sold under weighted-averageB350.0275.0
Decrease in cost of goods sold (~increase in inventories)A – B20.015.0
Cumulative effect (decrease in COGS, increase in inventories)C35.015.0
Inventories closing balance under weighted-averageD30.025.0
Cumulative effect of difference in COGSC35.015.0
Inventories closing balance under FIFOD + C65.040.0
Taxes for the year under FIFOE54.048.0
Taxes for the year under weighed averageF48.043.5
Increase in income tax expense for the yearE – F6.04.5
Cumulative increase in income taxesG10.54.5
Net income under FIFO methodH126.0112.0
Net income under weighted-averageI112.0101.5
Increase in net incomeH – I14.010.5
Cumulative increase in retained earningsJ24.510.5

Following adjustment is needed as at 1 January 2013 to restatement the retained earnings and other balance sheet account:

Inventories35 million
Taxes payable10.5 million
Retained earnings24.5 million

IFRS Changes in accounting policies-a retrospective approach

Relevant adjusted closing balances at the end of 2011 and 2012 are presented below:

Adjusted balance sheet balance as at 31 December20122011
Inventories under weighted-averageD30.025.0
Effect of decrease in COGSC35.015.0
InventoriesD + C65.040.0
Retained earnings under weighted-averageGiven214.0102.0
Cumulative increase in retained earningsJ24.510.5
Retained earnings under FIFO238.5112.5
Tax payable under weighted-averageGiven50.035.0
Cumulative increase in income taxesG10.54.5
Taxes payable under FIFO60.539.5

IFRS Changes in accounting policies-a retrospective approach

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IFRS Changes in accounting policies-a retrospective approach

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