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ACCA Strategic Professional · Strategic Business Reporting (International) · Discussion of issues in financial reporting

Nadir Co has always measured its inventory using the weighted average cost formula. In the current year the finance director proposes switching to FIFO because the change would increase reported profit and help meet a bank covenant. Under IAS 8, when may Nadir Co change an accounting policy?

An entity may change an accounting policy only if an IFRS Standard requires it or if the change produces reliable and more relevant information. Wanting higher profit or meeting a covenant is not sufficient justification, and voluntary changes are applied retrospectively under IAS 8.

  1. AWhenever management believes the new policy gives a higher profit figure
  2. BOnly if the change is required by an IFRS Accounting Standard or results in reliable and more relevant informationCorrect
  3. COnly if the change is approved by the external auditor in writing
  4. DOnly at the start of a new financial year, whatever the reason, and without restatement

Explanation

IAS 8 permits a voluntary change in accounting policy only when it is required by a Standard or results in financial statements providing reliable and more relevant information. Boosting profit to meet a covenant is not a valid reason. Auditor approval is not the test, and changes are normally applied retrospectively, not without restatement.

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