Changes in Accounting Policies under Ind AS 8 (CA Final)

Understand Changes in Accounting Policies

Key rules to remember

Conditions for a voluntary change

Change allowed if: (a) required by an Ind AS, or (b) gives reliable and more relevant information

Write both limbs in theory answers. Convenience or a profit target is not a valid reason.

Default rule: retrospective application

Opening equity adjustment = Cumulative effect (new policy − old policy) on periods before the earliest period presented

Adjust the opening balance of the affected equity component. Restate comparatives as if the new policy had always applied.

Effect on profit of each presented year

Profit effect = Change in closing item − Change in opening item (for inventory: higher closing stock raises profit, higher opening stock lowers it)

Compute it year by year for a restated comparative.

Transitional provisions of a new Ind AS

Specific transition in the Ind AS applies; if none, retrospective

Applies when the change comes from initial application of an Ind AS.

Impracticability: period-specific effects

If period-specific effects cannot be determined: apply the new policy to carrying amounts at the start of the earliest period for which retrospective application is practicable (may be the current period) and adjust opening equity of that period

Comparatives before that date are not restated.

Impracticability: cumulative effect

If the cumulative effect at the start of the current period cannot be determined: apply prospectively from the earliest date practicable

No restatement of earlier periods at all.

How to solve Changes in Accounting Policies questions

1. 1Decide whether it is a change in policy. Check if it is a change in estimate, a prior period error, or a policy for new or substantively different transactions. These are treated differently.
2. 2Test whether the change is allowed: required by an Ind AS, or gives reliable and more relevant information. If neither, it is not permitted.
3. 3Identify the transition rule. If the change arises from a new Ind AS with transitional provisions, follow them. Otherwise apply retrospectively.
4. 4Check practicability. If you lack data to compute period-specific or cumulative effects, apply the impracticability limits: earliest practicable date, or prospective.
5. 5Compute the cumulative effect on opening equity at the start of the earliest period presented, then the effect on each presented year's profit.
6. 6Restate the comparatives and adjust opening retained earnings. Include the tax effect where the facts give a tax rate.
7. 7Disclose: nature of the change, reason it gives reliable and more relevant information, amount of adjustment for each line item and for EPS, and the amount relating to periods before those presented. Mention a third balance sheet when Ind AS 1 requires it.

Quickest way: Table of old versus new, year by year

Common mistakes in Changes in Accounting Policies

• Treating a change in depreciation method or useful life as a change in policy.

  Depreciation sounds like a policy choice.

  Fix: Ind AS 8 treats a change in depreciation method as a change in estimate, applied prospectively. Policy changes cover recognition, measurement basis and presentation choices.

• Adjusting the current year profit instead of opening retained earnings for the earlier periods.

  Students forget the 'as if always applied' idea.

  Fix: Put the cumulative effect up to the start of the earliest period presented into opening retained earnings. Only the presented years' effects go through their own profit.

• Applying the change prospectively because it is easier.

  Confusion with change in estimate.

  Fix: Prospective application is allowed only when retrospective is impracticable, or when a standard's transition says so.

• Giving 'higher profit' or 'convenience' as the reason for a voluntary change.

  Students do not memorise the allowed conditions.

  Fix: State the condition: the change gives reliable and more relevant information. Say why with the facts.

• Calling impracticability a matter of cost or effort.

  Ordinary meaning of the word.

  Fix: It means the entity cannot apply the requirement after making every reasonable effort, for example needed data was not collected or the effects need hindsight.

• Forgetting disclosures such as the line-item adjustment and EPS effect, and the third balance sheet.

  Students stop after the numbers.

  Fix: Close every answer with a short disclosure list. Refer to Ind AS 1 for the balance sheet at the start of the preceding period when the retrospective effect is material.

Worked examples