IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 6/ Accounting Policies, Changes in Accounting Estimates and Errors (lAS 8)

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6. FACTORS GOVERNING CHANGES IN ACCOUNTING POLI CIES 6.1 Once selected, an accounting policy may be changed only if the change • Is required by a Standard or an Interpretation; or • Result s in financial statements providin g reliable and more relevant information. Pr actical Insigh t In the year in which an entity changes its acco unting system from manual to computerized, it may be requi red to switch from the first-in, first-out (FIFO) method (which it used while valuing inventory manually) to the weighted-average method. This change may be essential because the computerized system, which is tailor-made for the industry to which the entity belongs, is capable of valuing inventories under the weighted- average method only and is not equipped to value inventories under the FIFO method, because industry best practice dictates that only FIFO is appropri ate for the industry to which the entity belongs. Under these circum– stances, this change in method of valuing inventories from the FIFO to the weighted-average method is probably ju stified because it results in financial statements prov iding reliable and more relevant information (and comparable to other entities within the industry to which the entity belongs ). 6.2 These items are not considered changes in accounting policies: • The application of an accounting policy for transac tions, other events, or conditions that dif– fers in substance from those previously occurring • The application of a new accountin g policy for transactions, other events, or conditions, that did not occur previously or were immaterial 7. APPLYING CHANGES IN ACCOUNTING POLICIES 7.1 A change in accounting policy requi red by a Standard or Interpretati on shall be applied in ac– cordance with the transitional provisions therein . If a Standard or Interpretation contains no transi– tional provisions or if an accounting policy is changed voluntarily, the change shall be appli ed ret rospectively. That is to say, the new policy is applied to transactions, other eve nts, and condi– tions as if the policy had always been applied. 7.2 The practical impact of this is that corresponding amounts (or "compara tives") presented in financial statements must be restated as if the new policy had always been applied. The impact of the new policy on the retained earnings prior to the earlie st period presented should be adju sted aga inst the opening balance of retained earnings . Facts (a) All Ch ange Co. Inc. changed its acco unting policy in 200Y with respect to the valu ation of invento– ries. Up to 200X , inventories were valued using a weigh ted-ave rage cost (WAC) me thod . In 200Y the method was chang ed to first-in, first-out (FIFO), as it was considered to more accurately reflect the usage and flow of inventories in the economic cycle. The impact on inventory valuation was determined to be At December 3 1, 200W : an increase of $ 10,000 At December 31, 200X: an increase of $ 15,000 At December 31, 200Y: an increase of $20.000 (b) The income statements prior to adj ustment are Case Study 1

200Y $250,000 100 000 150,000 60,000 25000 $65000

200K $200,000 80 000 120,000 50,000 .illlQQ $55 000

Revenue Cost of sales Gross profit Administration costs Selling and distribution costs Net profit