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Section 10 – Introduction
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Section 10 – Analysis
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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Section Downloads
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10.2 Selection and application of accounting policies
10.2.1 Extract from FRS 102 – Section 10.2-10.6
10.3 Consistency of accounting policies
10.3.1 Extract from FRS 102- Section 10.7
10.3.2 OmniPro comment – Consistency of accounting policies
10.4 Changes in accounting policies
10.4.1 Extracts from FRS 102 – Section 10.8 – 10.10A
10.4.2.1 Definition of change in accounting policy
10.4.2.2 Changes in accounting policies and one exception to retrospective adjustment
10.4.2.3 Examples of changes in accounting policy
10.4.2.4 Examples of items which are not changes in accounting policies
10.5 Applying changes in accounting policies
10.5.1 Extracts from FRS 102 – Section 10.11
10.5.2.1 Change in accounting policy due to a change to requirements issued by the FRC
10.5.2.2 Change in accounting policy due to adoption of IAS 39 or IAS 33
10.5.2.3 Change in accounting policy due to other reasons (Section 10.11 (c) of FRS 102)
10.6 Retrospective application
10.6.1 Extracts from FRS 102 – Section 10.12
10.6.2 OmniPro comment – Retrospective application – change in accounting policy
10.7 Disclosure of a change in accounting policy
10.7.1 Extracts from FRS 102-Section 10.13 – 10.14
10.8 Changes in accounting estimates
10.8.1 Extracts from FRS102 section 10.15 – 10.18
10.8.2 OmniPro comment – change in accounting estimates
10.8.2.2 Examples of change in accounting estimate
10.8.2.3: Revising residual value – worked example
10.8.2.4: Disclosure of accounting estimates
10.9 Corrections of prior period errors
10.9.1 Extracts from FRS102 section 10.19 – 10.23
10.9.2.1 Assessment and accounting for a prior period error
10.9.2.2 Disclosures of prior period errors
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Section 10 Accounting Policies, Estimates and Errors Quick Guide (PDF) (111 downloads )
Section 10: Accounting Policies, Estimates and Errors
Summary
Section 10 deals with the selection and application of accounting policies used in preparing financial statements. It also details how changes in accounting policies and prior period adjustments should be accounted for.
What is new?
Section 10 provides a hierarchy that describes how to account for a transaction that is not specifically addressed within FRS 102. In contrast old GAAP did not have such a hierarchy.
Prior year restatements due to a change in accounting policy or prior period error should be presented in the statement of changes in equity or statement of income and retained earnings (where applicable) together with a note for the reason for the change. This compares with old GAAP (FRS 3) which required the cumulative effect of the prior period restatement to be noted at the foot of the statement of total recognised gains and losses.
What is different?
Section 10 makes it clear that a prior period adjustment to restate the prior period should be made where a material error was made in the previous year, or an accounting policy change was made. This contrasts with old GAAP (FRS 3) where a prior year adjustment is only required if there was a fundamental error which destroyed the true and fair view of the financial statements. Therefore, under FRS 102, prior period adjustments are likely to be more frequent than was the case under old GAAP (FRS 18).
Section 10 requires disclosure of the effect of the change in accounting policies between those required by a change to an FRS or those made voluntarily (Section 10.13). It also requires the disclosure of the effect on each financial statement line item. Old GAAP (FRS 18), did not distinguish between the two nor did it require a disclosure on the effect on each financial statement line item, it only required the effect to be disclosed.
Section 10 provides more guidance where it is impracticable to apply a change of accounting policy fully retrospectively and states where this is the case the entity should restate the opening balances for the earliest period where it was practicable. This compares to old GAAP, where disclosure of prior period adjustments on results for the preceding years was only required if practicable.
Section 10 requires the disclosure of the nature and effect of a prior period adjustment for each financial line item affected whereas under old GAAP the effect only needed to be disclosed. There was no requirement to disclose it on a line item basis (however, in practice this was usually provided).
Section 10.18 requires disclosure of the effect of a change in an accounting estimate had on assets, liabilities, income, expenses for the current period and the future period where applicable. It also makes it clear a change is only required where new information or developments come to light. In contrast, old GAAP only required disclosure for the current period and change to accounting estimates were not limited to just new information coming to light.
Section 10 does not require a regular review of accounting policies, however, old GAAP did.
Section 10 does not require the effect of a prior year adjustment to be posted to other comprehensive income, under old GAAP this was required to be shown in the STRGL.
What are the key points?
Section 10.5 details the hierarchy for selecting accounting policies where the FRS does not deal with the issue specifically. The hierarchy to be applied is to obtain:
- guidance in the FRS dealing with similar and related issues;
- guidance in any relevant statement of recommended practice (SORP);
- the definitions, concepts and pervasive principles in Section 2,; and
- any guidance for similar issues in EU-adopted IFRS may also be considered but it is not required.
Accounting policies have to be applied consistently.
A change of accounting estimate is to be applied prospectively.
A change in accounting policy and material prior period adjustment requires a prior year restatement.
A move from fair value due to there no longer being a reliable estimate measure available does not constitute a change in accounting policy and vice versa.
Prior year restatement required where a prior year error was material.
Prior year restatements require disclosure of the nature and effect on a financial statement line item basis.
Disclosure required of the effect a change in accounting estimate has on the current and future period.
What do accountants need to do?
Be aware of the differences between old GAAP and Section 10 so that financial statements are prepared in compliance with FRS 102.
Review prior year financial statements to assess whether there were material errors which would not be required to be adjusted under old GAAP as they would not meet the definition of a fundamental error. Then, assess if a prior period adjustment is required and, where required and show these in line with Section 10 requirements.
Advise clients of the importance of selecting an appropriate accounting policy where choice is provided in FRS 102 and the implication of a change in accounting policy if a change is made in the future.
What do companies need to do?
Be aware of the differences between old GAAP and Section 10 so that financial statements are prepared in compliance with FRS 102.Review prior year financial statement to identify any errors and assess if they should be considered material under FRS 102.
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Example 1: Change in accounting policy
Example 2: Revising a residual value of an asset
Example 3: Revising a useful life of an asset
Example 4: Change in accounting estimate disclosure
Example 5: Change in functional currency – extract from notes to the financial statements
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Section 10 - Transition Adjustments (4 downloads )
Section 10 Accounting Policies, Estimates and Errors Detailed Guide (PDF) (241 downloads )
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FRS 102 35 Part Differences Quick Guide (859 downloads )
FRS 102 35 Part Differences Guide (581 downloads )
FRS 102 Differences on Transition Checklist (1119 downloads )
FRS 102 Differences on Transition Examples Appendix (1092 downloads )
Fillable Differences on Transition Checklist (866 downloads )
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Difference Guide – Accounting Policies, Estimates and Errors
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