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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.
10.4 Changes in accounting policies
10.4.1 Extracts from FRS 102 – Section 10.8 – 10.10A
10.8 An entity shall change an accounting policy only if the change:
(a) is required by an FRS or FRC Abstract; or
(b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows.
10.9 The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring;
(b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were not material; and
(c) a change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that an FRS or FRC Abstract would otherwise require or permit to be measured at fair value.
10.10 If an FRS or FRC Abstract allows a choice of accounting treatment (including the measurement basis) for a specified transaction or other event or condition and an entity changes its previous choice, that is a change in accounting policy.
10.10A The initial application of a policy to revalue assets in accordance with Section 17 Property, Plant and Equipment or Section 18 Intangible Assets other than Goodwill is a change in accounting policy to be dealt with as a revaluation in accordance with those sections, rather than in accordance with paragraphs 10.11 and 10.12.
10.4.2 OmniPro comment
10.4.2.1 Definition of change in accounting policy
A change in accounting policy encompasses changes in the recognition and measurement principals for assets, liabilities, income and expenses. It also includes ways in which items are classified even where there is no impact on the net results.
10.4.2.2 Changes in accounting policies and one exception to retrospective adjustment
Section 10.8 of FRS 102 provides accounting policy choices for the below straight forward matters. An entity must select the accounting choice on transition and then apply them consistently. An entity can choose to voluntarily change, but where this is done it must result in more relevant and reliable information for the readers of the financial statements as stated in Section 10.8 (b) of FRS 102. See below the simple accounting policy choices that can be made:
- A choice to either capitalise or expense qualifying borrowing costs (Section 25);
- A choice to adopt a policy of revaluation for property, plant or equipment (PPE- Section 17).
- A choice to adopt a policy of revaluation for intangible assets where possible (Section 18)
- A choice to adopt the performance model or the accruals model for accounting for government grants (Section 24);
- to either carry investments in subsidiaries, associates and joint ventures at fair value or cost less impairment (Section 9).
An entity should decide on its policy choice on transition to FRS 102 and include an accounting policy note in the financial statements detailing how the entity has treated such costs. If an entity wishes to change going forward a prior year adjustment will be required i.e. it must be adjusted retrospectively as stated in Section 10.10 of FRS 102 with one exception as detailed in Section 10.10a of FRS 102. See 10.6.2 for the rule on retrospective adjustment. The only exception to this is for points 2 and 3 above where the revaluation is adjusted prospectively as is stated in Section 10.10A of FRS 102 above.
10.4.2.3 Examples of changes in accounting policy
Other examples which would be considered to be a change in accounting policy are:
- A change in the methods used in points 1, 4 and 5 above;
- A change in classification of expenses within the profit and loss (e.g. in the prior year certain costs were posted to cost of sales whereas in the current year these are shown in administrative expenses and vice versa)
- A change in classification on the balance sheet this year versus the prior year
- Change from a single statement of comprehensive income to a two statement approach
10.4.2.4 Examples of items which are not changes in accounting policies
Section 10.9 of FRS 102 provides examples of items which are not changes to an accounting policy and therefore retrospective adjustment is not required. The examples are:
- The application of a policy for
- A transaction not entered into previously
- A transaction that differs in substance from that which previously occurred
- A change to a cost model where a reliable measure of fair value is no longer available
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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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