Accounting for changes in accounting policies, estimates & errors- FRS 102

Welcome to the Institute’s Financial Reporting Q&A pages. We have prepared these pages to address some of the commonly asked questions relating to financial reporting matters.

Whilst we hope that the below questions are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Users of these pages should be aware that different facts and circumstances may exist in relation to similar accounting matters which may significantly change the financial reporting implications, and as a result, these Q&As do not represent a "one size fits all" solution to financial reporting issues.

In these Q&As, we look at accounting for changes in accounting policies, estimates and errors under FRS 102 and some of the commonly asked questions.

1. Under what circumstances can an entity change an accounting policy?
2. How is a change in accounting policy accounted for?
3. How is a change in accounting policy applied retrospectively?
4. What disclosures are required when there is a change in accounting policy?
5. What is a change in accounting estimates and how does this differ from a change in accounting policy?
6. How should a change in accounting estimate be accounted for?
7. What disclosures are required when a change in accounting estimates arises?
8. What is a prior period error?
9. If I identify a prior period error how must this be accounted for under FRS 102?
10. What must be disclosed when a prior period error is identified?

1. Under what circumstances can an entity change an accounting policy?

   An entity can only change an accounting policy if:

   • The change in policy is required by an FRS; or
   • The change 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 cashflows.

   Entities should be mindful of accounting policy requirements within the standard and where requirements change, this may result in the need for a change in accounting policy.

   In circumstances where the standards offer an accounting policy choice (for example, the choice of using the performance or accruals model for accounting for government grants) an entity must initially choose an appropriate policy. Where an entity then voluntarily changes an accounting policy this should only be done when it provides more relevant and reliable information.

    

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2. How is a change in accounting policy accounted for?

   Section 10.11 of FRS 102 sets out the requirements as follows:

   • If the change results from a change in the specific requirements of an FRS, then the change should be accounted for in accordance with the transitional provisions, if any, specified in that amendment.
   • Where an entity has elected to follow IAS 39 and/or IFRS 9 instead of following Section 11 & 12 of FRS 102 (basic and other financial instruments) and the requirements of IAS 39 and/or IFRS 9 change then the entity must account for the change in accordance with the transitional provisions, if any, specified in the revised IAS 39 or IFRS 9.
   • When an entity is required or has elected to follow IAS 33, IFRS 8 or IFRS 6 and the requirements of those standards change, the entity shall account for that change in accounting policy in accordance with the transitional provisions, if any, specified in those standards as amended.
   • In all other circumstances, a change should be accounted for in accordance with the retrospective approach (see below).

    

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3. How is a change in accounting policy applied retrospectively?

   If a change in accounting policy is applied retrospectively then section 10.12 of FRS 102 sets out the requirements as follows:

   • The entity should apply the new accounting policy to comparative information for prior periods to the earliest date for which it is practicable, as if the new accounting policy had always been applied.
   • Where it is impracticable to determine the individual-period effects of a change in accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period.
   Therefore, retrospective application requires the entity to adjust the carrying amount of the assets and liabilities at the earliest period presented, with a corresponding adjustment to profit and loss reserves at that date. It also requires the entity to adjust the prior period to reflect the effect of the change.
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4. What disclosures are required when there is a change in accounting policy?

   The disclosure requirements are different depending on whether the change arises from:

   • An amendment to an FRS, or
   • A voluntary change

   Where a change arises as a result of an amendment to an FRS that has an effect on the current or prior period or may have an effect on future periods then the entity should disclose the following:

   1. The nature of the change in accounting policy;
   2. for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected;
   3. the amount of the adjustment relating to periods before those presented, to the extent practicable; and
   4. an explanation if it is impracticable to determine the amounts to be disclosed in (b) or (c) above.

   When a voluntary change in accounting policy has an effect on the current period or any prior period, an entity should disclose the following:

   1. the nature of the change in accounting policy;
   2. the reasons why applying the new accounting policy provides reliable and more relevant information;
   3. to the extent practicable, the amount of the adjustment for each financial statement line item affected, shown separately:
      • for the current period;
      • for each prior period presented; and
      • in the aggregate for periods before those presented; and
   4. an explanation if it is impracticable to determine the amounts to be disclosed in (c) above.

   In both of the above circumstances, the disclosures are only required in the year of the change and subsequent periods do not need to repeat the disclosure.

    

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5. What is a change in accounting estimates and how does this differ from a change in accounting policy?

   FRS 102 defines an accounting estimate as follows:

   “Monetary amounts in financial statements that are subject to measurement uncertainty.”

   FRS 102 recognises that entities may need to use accounting estimates and apply judgements or assumptions based on the latest available, reliable information. Some examples of accounting estimates include:

   • The fair value of an asset or liability
   • The estimated selling price less costs to sell of an item of inventory
   • The depreciation expense for an item of property, plant and equipment
   • A provision for warranty obligations

   FRS 102 notes that “an entity may need to change an accounting estimate if changes occur in the circumstances on which the accounting estimate was based or as a result of new information, new developments or more experience”.

   While an accounting policy change is typically driven by a change in accounting standard or a voluntary change in order to provide more reliable information, a change in accounting estimate is driven by a change in underlying assumptions, estimates or circumstances which necessitates the change.

   The standard identifies that when it is difficult to distinguish a change in accounting policy from a change in accounting estimate then the change is treated as a change in accounting estimate.

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6. How should a change in accounting estimate be accounted for?

   Where a change in accounting estimate occurs, a prior year adjustment is not required and the change is recognised in the period that the change occurs. Any resulting profit or loss effect from the change is recognised in the period that the change occurs.

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7. What disclosures are required when a change in accounting estimates arises?

   • The nature of the change in accounting estimate;
   • The effect of changes on assets, liabilities, income and expenses for the period; and
   • If it is practicable for the entity to estimate the effect of the change in one or more future periods, the entity should disclose those estimates.

    

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8. What is a prior period error?

   FRS 102 defines prior period errors as follows:

   “Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:

   (a) was available when financial statements for those periods were authorised for issue; and

   (b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

   Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.”

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9. If I identify a prior period error how must this be accounted for under FRS 102?

   An entity should correct a prior period error retrospectively in the first financial statements after its discovery. This is done by:

   • Restating the comparative amounts for the prior period(s) presented in which the error occurred, or
   • If the error occurred before the prior period presented then the opening balances of assets, liabilities and equity should be restated for the prior year.

   Note - If an entity identifies that its financial statements contain an error that render them defective then regard should be had for the voluntary option available to revise defective statutory financial statements under section 366 of the Companies Act 2014 in the Republic of Ireland.

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10. What must be disclosed when a prior period error is identified?

     

    1. The nature of the error;
    2. For each prior period presented, to the extent practicable, the amount of the correction for each financial statement line item affected;
    3. To the extent practicable, the amount of the correction at the beginning of the earliest period presented; and
    4. An explanation if it is impracticable to determine the amounts to be disclosed in b and c above.

     

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