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Section 10 – Accounting Policies, Estimates and Errors
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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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
10.2 Selection and application of accounting policies
10.2.1 Extract from FRS 102 – Section 10.2-10.6
10.2 Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
10.3 If an FRS or FRC Abstract specifically addresses a transaction, other event or condition, an entity shall apply that FRS or FRC Abstract. However, the entity need not follow a requirement in an FRS or FRC Abstract if the effect of doing so would not be material.
10.4 If an FRS or FRC Abstract does not specifically address a transaction, other event or condition, an entity’s management shall use its judgement in developing and applying an accounting policy that results in information that is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the entity;
(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
(iii) are neutral i.e. free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
10.5 In making the judgement described in paragraph 10.4, management shall refer to and consider the applicability of the following sources in descending order:
(a) the requirements and guidance in an FRS or FRC Abstract dealing with similar and related issues;
(b) where an entity’s financial statements are within the scope of a Statement of Recommended Practice (SORP) the requirements and guidance in that SORP dealing with similar and related issues; and
(c) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles.
10.6 In making the judgement described in paragraph 10.4, management may also consider the requirements and guidance in EU-adopted IFRS dealing with similar and related issues. Paragraphs 1.4 to 1.7 require certain entities to apply IAS 33 Earnings per Share (as adopted in the EU) IFRS 8 Operating Segments (as adopted in the EU) or IFRS 6 Exploration for and Evaluation of Mineral Resources.
10.2.2 OmniPro comment
10.2.2.1 Application of FRS 102 and materiality
It is clear from Section 10.3 of FRS 102 that it is not necessary to apply the policies required by FRS 102 if the effect of applying them is immaterial. That said an entity should not just dis-apply a policy requirement so as to show a desired result.
Appendix I of FRS 102 defines material as ‘Omissions or misstatements of items 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 omission or misstatement judged in the surrounding circumstances. The size and nature of the item, or a combination of both, could be the determining factor’.
When assessing materiality, it is based on the specific entity as an omission of a policy might be considered material for one entity because of the size of the entity and immaterial for another as the entity is larger.
10.2.2.2 Accounting policies
Section 8 of FRS 102 provides detailed examples of accounting policy notes to be included in the financial statements.
10.2.2.3 Hierarchy of guidance where transaction not covered by Standard
Section 10.4 of FRS 102 states where a transaction has not been dealt with by FRS 102 the user should develop an accounting policy that is relevant to the economic decision making of the users and represents fairly the financial statements, reflects the substance of the arrangement/transaction, is neutral, prudent, and complete.
Section 10.6 of FRS 102 provides a hierarchy of guidance for accounting for an item which is not dealt specifically within FRS 102. Section 10.6 of FRS 102 lists the sources of information that should be consulted by order of priority:
- Any guidance issued by the FRC on the issue
- Any guidance contained in statements of recommended practice issued
- The definition, recognition and measurement criteria contained in Section 2 detailing the fundamental concepts of FRS 102
- Any guidance in EU adopted IFRS. Note an entity does not have to follow IFRS guidance but it can choose to do so. However the exception to this rule applies to:
- Entities whose shares or debt instruments are publically traded
- Entities applying FRS 103 Insurance contracts to insurance contracts and any financial instruments with discretionary participation features that it issues.
In the above two cases these entities must apply EU adopted IFRS to:
- the application of IAS 33 Earnings per Share (as adopted in the EU); or
- IFRS 8 Operating Segments (as adopted in the EU); or
- IFRS 6 Exploration for and Evaluation of Mineral Resources.
Section 10 does not state that an entity may refer to any GAAP other than EU adopted IFRS, however it would not be unreasonable to refer to old GAAP for the accounting policy applied previously as long as the entity has went through the above hierarchy and it results in relevant information being provided.
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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 Example 6: Prior period error
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