Question

What happens when a change takes place in an accounting policy and estimate for a corporation? What are retrospective or prospective impacts of those changes on corporate financials if there are any.

Answer 1

As per IAS-8 Accounting Policies, Changes in Accounting Estimates and Errors :

Accounting policy :

"Change in accounting policy will be accepted if the change happend for any of following reason :

• Change is required by a standard or interpretation; or
• 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 cash flows."

Change in accounting policy should be given retrospective effect . Opening balance of the same should be given effect of changed accounting policy. For example Method of depreciation is changed it is treated as accouting policy change.

Accounting estimate :

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss of the period of the change.

"However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change."

Changes in accounting estimate should be given prospective effect to the financials. For example changes in useful life of asset will be treated as accounting estimate, Changes to the same should be given for the current period or for future.