Accounting for change

We all know that things can change, hopefully for the better, and as a result of this our accounting policies may need to change as well.

FRS 102 section 10 sets out the rules and regulations for setting accounting policies and also encompasses the way in which we deal with changes.

Generally, we are expected to apply accounting policies consistently year on year and to similar classes of transaction. We are however able to make a change if this will result in increased reliability and relevance of information in the financial statements. In most years we would not expect to see many changes in accounting policy however given the circumstances we have all been operating under recently, this is likely to be more common.

Changes in accounting policy

We are required to apply changes in accounting policy retrospectively to all previous accounting periods as if the new accounting policy had always been in place.

We must include within the accounting policies section of the financial statements the new accounting policy and also disclose the following within the relevant note to the financial statements:

• the nature of the change in accounting policy;
• the amount of the adjustment for each financial statement line item affected for the current and prior year;
• the amount of the adjustment relating to periods before those presented, (where practical!)
• that we apply the change retrospectively to all previous years and we explain what we have done and why.

An example of a change in accounting policy would be a move to holding buildings at cost within the financial statements as opposed to holding them at their market value.

When considering a change we need also to make sure that what we are dealing with is a change of an accounting policy as opposed to an estimate as both are accounted for differently.

Changes in estimates

A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the period of its consumption and arises from the changes in the expected future benefits or obligation arising from the associated assets or liability. They will arise from something new such as information or developments and should not be confused with errors.

Changes in accounting estimates should be accounted for prospectively in future periods only and will not impact on previously reported information.

They will still require disclosure of the below within the relevant notes to the financial statements as well as ensuring that any references to the estimates within the accounting policies are changed to the new treatment:

• The nature of the change
• The effect on the assets, liabilities, income or expense for the current year
• The expected impact in one or more future periods as well, (if possible)

An example of a change in estimate would be a change in the useful life of an asset or the method used to depreciate an asset which may change from a straight line method to a model based on usage given that some industries were not able to be operational for all of the last year.

Uncertainty

I am sure that there will be times when what we are changing will be a little ambiguous. It may be hard to decipher whether what we are dealing with is a change of an accounting policy or a change in an accounting estimate. In these situations we should account for the change on a forward looking basis as if it was a change to an accounting estimate.

What to do when the FRS 102 accounting policies do not meet your needs

The accounting policies within FRS 102 have been written to cover the majority of situations for most entities. This does mean that there will be times when the options within FRS 102 do not quite cover what an entity actually does. In these instances we are able to use our judgement to develop and apply an accounting policy to meet our needs, provided the policy:

• gives relevant information to the users of the financial statements;
• provides reliable figures in the financial statements, which:
  • represent faithfully the financial position, financial performance and cash flows;
  • reflect the economic substance and not merely the legal form;
  • are free from bias;
  • are prudent; and
  • are materially complete.

In arriving at an accounting policy which satisfies the above, management are asked to also follow these principles:

(a) look for an FRS approach to dealing with similar and related issues;

(b) where an entity is within the scope of a Statement of Recommended Practice (SORP) consider the SORP requirements and guidance for similar and related issues; and

(c) follow the definitions, recognition criteria and measurement concepts for assets,

liabilities, income and expenses which are covered in Section 2 of FRS 102.

Contributing to your success

If you would like to discuss your accounting policies in more detail please get in touch with your usual Albert Goodman contact or Sophie Parkhouse.