Question

In: Accounting

"Changes in Accounting Principles and Changes in Accounting Estimates" Use the Internet or Strayer Library to...

"Changes in Accounting Principles and Changes in Accounting Estimates"

Use the Internet or Strayer Library to research a company that had a change in accounting principles within the past five (5) years. Discuss the accounting principles that the identified company changed and explain the major reasons why the company changed accounting principles. Give your opinion on whether you believe the change in accounting principles was motivated by an attempt to provide more useful information or to make financial results look better to investors and creditors. Provide a rationale for your response.

Solutions

Expert Solution

Here in the solution provided policy represents principle

Changes in accounting policies•

An entity shall change an accounting policy only if the change: (a) is required by an particular IFRS or(b) 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.•Users of financial statements need to be able to compare the financial statements of an entity over time to identify trends in its financial position, financial performance and cash flows. Therefore, the same accounting policies are applied within each period and from one period to the next unless a change in accounting policy meets one of the above criteria.

Analysis

Continuing with the same rationale, the frequent changes in accounting policies are not permitted by particular IFRS. Frequent changes in accounting policies will make it impossible for a stakeholder to make the economic decisions properly. For example, suppose an entity has been following the FIFO method of determination of cost for inventories. In the current year, it shifts from FIFO to weighted average method. Assuming that cost is less than NRV, it means the opening stock is valued at FIFO method whereas closing stock is valued at Weighted Average Method, if retrospective application of the change is impracticable. This will directly impact the gross profit measurement of the entity. Additionally, the opening inventories and closing inventories will not be comparable. Moreover, if the investment companies and banks are using the information for calculation of liquidity, then, the liquidity ratios based on opening inventory and closing inventory may show major discrepancies. Thus, changing the base will not only affect the true and fair position of the financial statements but it will also affect the decision making of the stakeholders. In view of the above, particular IFRS allows the entity to change the accounting policy only in following circumstances: (a) when the change is required by an Ind AS; or(b) when 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 cash flows.

•The following are not changes in accounting policies: (a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring; and (b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were immaterial. Analysis

Ind AS 8 clearly states that if the entity applies an accounting policy which is different fromthe previous one to a transaction, other event or condition that differs in substance from a previously occurring transaction, other event or condition, the application of the new policy will not be considered as a change in accounting policy.

Example

A company owns several hotels and provides significant ancillary services to occupants of rooms. These hotels are, therefore, treated as owner-occupied properties and classified as property, plant and equipment in accordance with particular IFRS The company acquires a new hotel but outsources entire management of the same to an outside agency and remains as a passive investor. The selection and application of an accounting policy for this new hotel in line with particular IFRS is not a change in accounting policy simply because the new hotel rooms are also let out for rent. This is because the way in which the new hotel is managed differs in substance from the way other existing hotels have been managed so far.

Similarly, if an entity is not applying the accounting policy currently and starts applying the accounting policy newly, that will also not be treated as change in accounting policy.

Example

An entity has classified as investment property, an owner occupied property previously classified as part of property, plant and equipment where it was measured after initial recognition applying the revaluation model. particular IFRS on investment property permits only cost model. The entity now measures this investment property using the cost model. This is not a change in accounting policy.

How to apply the changes in accounting policies?

While discussing the process for application of changes of accounting policies, particular IFRS, deals with two situations:

1.an entity shall account for a change in accounting policy resulting from the initial application of an particular IFRS in accordance with the specific transitional provisions, if any, in that particular IFRS. If a change in accounting policy is due to a new particular IFRS, then, generally the standard itself will provide the transitional provisions i.e., provisions applicable on initial application of the standard, such as method of application (retrospective or prospective or modified retrospective), availability of any transitional relief etc. In such cases, the entity needs to follow the transitional provisions accordingly.

2.when an entity changes an accounting policy upon initial application of an particular IFRS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively. If the change in accounting policy is made voluntarily or where the particular IFRS is not containing transitional provisions, then the accounting policy needs to be applied retrospectively


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