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Chapter
6/
Accounting Policies, Changes in Accounting Estimates and Errors (lAS
8)
53
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 .
Case Study 1
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
Revenue
Cost of sales
Gross profit
Administration costs
Selling and distribution costs
Net
profit
200Y
$250,000
100 000
150,000
60,000
25000
$65000
200K
$200,000
80 000
120,000
50,000
.illlQQ
$55 000