When may a policy change?

Learning objectives

• Determine whether a change in accounting policy is permitted (required by an IFRS, or resulting in reliable and more relevant information).L1, L2
• Distinguish a change in accounting policy from situations that are not one (transactions that differ in substance, new transactions) and from the initial application of a revaluation model.L2, L3
• Calculate, from the case data, the measurement difference between two inventory cost formulas on a voluntary change in accounting policy.L2, L3

Normative references

• IAS 8 §14An entity changes an accounting policy only if the change is required by an IFRS or results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on its financial position, financial performance or cash flows.
• IAS 8 §15Users need to be able to compare financial statements over time to identify trends; the same policies are therefore applied within each period and from one period to the next, unless a change meets the criteria in para. 14.
• IAS 8 §16The following are not changes in accounting policies: applying a policy to transactions, other events or conditions that differ in substance from those that previously occurred; applying a new policy to transactions, other events or conditions that did not occur previously or were immaterial.
• IAS 8 §17The initial application of a policy to revalue assets in accordance with IAS 16 or IAS 38 is a change in accounting policy that is dealt with as a revaluation in accordance with those standards, rather than in accordance with this standard.
• IAS 8 §18Paras. 19 to 31 do not apply to the change in accounting policy described in para. 17.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• A change in accounting policy is permitted as soon as it is documented and approved by the board of directors.L1
• Because users compare financial statements over time, the same policies are applied from one period to the next, unless a change meets the criteria of the standard.L1
• Applying a policy to transactions that differ in substance from those that occurred previously is not a change in accounting policy.L2
• In which cases may an entity change an accounting policy?L1
• Mundac adopts the revaluation model for its property, plant and equipment for the first time. How is this change treated?L2
• Which of the following situations is not a change in accounting policy?L2
• Which of the following situations are not dealt with as changes in policy under paragraphs 19 to 31 of IAS 8?L2
• Which statements about the conditions for a voluntary change in policy are correct?L2
• Girvac, with no opening inventory, bought {qty_1} units at {cost_1}, then {qty_2} units at {cost_2}, then {qty_3} units at {cost_3}, and sold {units_sold} units. It is considering a move from weighted average cost (computed over the period, teaching assumption) to FIFO. Compute closing inventory under each formula and the difference.L2
• To support a possible change of cost formula, Paimane's controller quantifies the measurement difference. Data for the year, with no opening inventory: purchase of {qty_1} items at a unit cost of {cost_1}, then of {qty_2} items at {cost_2}; {units_sold} items sold. Weighted average cost computed over the period (teaching assumption). What is closing inventory under each formula?L3
• Plirgois voluntarily moves to a cost formula that values its inventories higher: by {opening_difference} at the beginning of the comparative year and by {closing_difference} at its end. By how much does restated comparative profit before tax increase?L3
• Extract from Brorois's file: 'We are moving from weighted average cost to FIFO, because this choice increases this year's reported margin. The board approved it and the decision is documented.' What is the weakness of the file?L2
• Jeumac adopts the revaluation model for its land for the first time. Its accountant restates comparatives and opening equity of the earliest period presented 'as for any voluntary change'. What is the error?L3
• Nondot is considering changing the policy for presenting a line item. Three justifications are put forward. Which one can support a voluntary change?L2
• A new IFRS, effective from this year, changes the accounting for a class of Gelbenne's contracts. Must Gelbenne show that the change provides more relevant information?L2
• Kindouël, until now only an occupier of its premises, leases a building to a third party for the first time and adopts a policy for this type of property. The controller wants to restate comparatives 'for the change in policy'. What is the answer?L3
• The Vaulvot group used to sell standard equipment delivered within a few days. It now enters into multi-year design contracts, different in substance (case data), and applies a separate policy to them. Should this choice be treated as a change in policy?L3
• Vrédax's management wishes to move its inventories from weighted average cost to FIFO. It cites the fast turnover of products and alignment with how lenders analyse its margins (case data). Write the position paper for the audit committee.L2
• During the year, Taulouël: (1) adopts a policy for royalties it receives for the first time; (2) adopts the revaluation model for its land; (3) voluntarily changes the cost formula for unchanged inventories. Write an analysis classifying each situation and stating its treatment.L3