Accounting Policies
The term accounting policies refer to a particular set of rules, conversions and principles which a particular entity introduces in a manner that is rendered to be the correct one. This is done to prepare financial statements and present them to the relevant body. Changes in accounting policies are allowed only if the changes are an outcome of the financial statements which provide information (more reliable and relevant) about the transactions and their effects along with effects of other events on the financial status, financial performance, or cash flows or required by a standard or interpretation.
Reason for Change in Accounting
A comparison of the policies at hand is essential particularly in case of varying accounting periods. These comparisons must be maintained properly also. Whenever changes are bound to happen it must be taken care of that the financial statements comply with those changes. The changes can refer to anything and there is no need for any existing options to be adhered to.
Change in Accounting Estimate
Often, the amount that an asset or liability carries, needs to be readjusted after much assessment. This is done to estimate the future benefits and obligations that the particular asset or liability is associated with. This modification is known as the change in accounting estimate.
Now, this change is dependent upon two main factors of profit or loss. These are:
Period of the change, when it affects only the period or duration
The present period of the change and the future periods, when both are affected simultaneously
Difference between Change in Accounting Policy and Change in Accounting Estimate
Difference between accounting policy and accounting estimate is important because modifications in the accounting policies are normally applied retrospectively while changes in accounting estimates are applied prospectively. Therefore it shows its effect on both the trends during the periods and reported outcomes.
Introduction of Errors
It is a must for any entity to take care of the errors occurred prior in the material at hand before a financial statement is authorized and issued. It is one of the general principles of managing errors in accounting policies. This is further impacted by the following:
It is dependent upon whether the error was identified in the early times of the prior period as that would restate the assets’ opening balances and liabilities. The equity presented in the earliest prior period is also of consideration.
Restating the comparative amounts for the prior period(s) presented, in which the error occurred
Now that we know that the accounting policies changes in accounting estimates and errors, let us try to distinguish them further:
IFRS Change in Accounting Policy
For a change in accounting policies, there is a requirement of a change in the existing IFRS/IAS and provision of these standards needs prospective legal notices of a new accounting policy. And in such circumstances, one must take guidance from IFRS as they are the main concerned body.
The application for the same should be different for different circumstances, transactions and other similar events which contributed to the present policy beforehand.
Difference between Accounting Policy and Accounting Estimate
Accounting policies consist of principles, bases, conventions, rules and practices and accounting estimates consist of amount or patterns.
Example of accounting policies changes from historical cost to realizable value and example of account estimate is a change in the useful life of the depreciable asset.
In accounting policies, accounting treatment is only considered when there is a retrospective change. On the other hand, in an accounting estimate, the accounting treatment is taken into consideration when there is a change in perspective.
Accounting Estimates IFRS
A component that helps in understanding the amount that has been credited or debited is known as Estimate or amount of estimate. There is non-discrete calculation available for the identical, that's why it is difficult to have a record of it.
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FAQs on Changes in Accounting Policies: Key Insights
1. What is meant by a change in accounting policy according to the CBSE syllabus?
A change in accounting policy refers to switching from one acceptable accounting principle to another, or changing the method of applying a principle. For example, an enterprise might change its method for inventory valuation from First-In, First-Out (FIFO) to the Weighted Average Cost method. Such changes are only permitted if required by law, an accounting standard, or if it results in a more appropriate presentation of financial statements.
2. What are some common examples of changes in accounting policies in business?
Several scenarios can be considered a change in accounting policy. Some common examples include:
- Changing the method of inventory valuation (e.g., from FIFO to Weighted Average).
- Switching the depreciation method for fixed assets (e.g., from the Straight-Line Method to the Written-Down Value Method).
- Altering the policy for valuing investments (e.g., changing from the cost model to the fair value model).
- Modifying how borrowing costs are treated, such as changing from expensing them to capitalising them as part of an asset's cost.
3. How is a change in accounting policy different from a change in an accounting estimate?
A change in accounting policy involves altering a fundamental principle (like the depreciation method), whereas a change in an accounting estimate is a revision of a judgement based on new information (like changing the estimated useful life of an asset from 8 to 10 years). Policy changes are generally applied retrospectively to maintain comparability, while changes in estimates are applied prospectively, affecting only the current and future financial periods.
4. What does retrospective application of a change in accounting policy mean?
Retrospective application means applying a new accounting policy to past transactions and events as if that policy had always been in use. This involves adjusting the opening balances of equity and restating the comparative figures for prior periods shown in the financial statements. The primary goal is to enhance the comparability of financial data across different accounting periods.
5. Why is it crucial for a company to disclose any changes in its accounting policies?
Disclosing changes in accounting policies is crucial for transparency and comparability. When a change has a material effect on the financial statements, its disclosure helps users understand the impact on the company's profit or loss and financial position. As per Accounting Standard (AS) 5, this allows investors and other stakeholders to make informed decisions and fairly compare the company's performance over time.
6. Under what conditions is a change in accounting policy justified as per accounting standards?
A company can only change an accounting policy under specific circumstances. According to Accounting Standard (AS) 5, a change is permissible only if:
- The change is required by a statute or law.
- The change is necessary to comply with an official Accounting Standard.
- It is believed that the change will result in a more appropriate and reliable presentation of the enterprise's financial statements.
7. Which Accounting Standard (AS) governs the treatment of changes in accounting policies for the CBSE 2025-26 session?
For the CBSE 2025-26 session, the guidelines for Changes in Accounting Policies are primarily governed by Accounting Standard (AS) 5. This standard is titled 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies' and outlines the rules for applying, disclosing, and justifying such changes in financial reporting.
