Under International Financial Reporting Standards (IFRS), IAS 8 sets out the criteria for selecting and changing accounting policies.

Companies change accounting policy either as a result of new requirements in IFRS standards or when the change would provide better information for users of financial statements. When a company changes an accounting policy, it is currently required to apply the new policy as if it had always applied this policy, other than in exceptional circumstances when this is not practicable.

This amendment, set out in exposure draft ED/2018/1, relates specifically to accounting policy changes driven by an agenda decision published by the IFRS Interpretations Committee. Agenda decisions explain why the Interpretations Committee concludes that there is no need to amend or add to requirements in IFRS after considering an application question. They are non-authoritative but often contain helpful explanatory information about how to apply IFRS standards.

To facilitate voluntary changes in accounting policy that result from an agenda decision, the IASB proposes amending IAS 8 to lower the impracticability threshold for retrospective application of such changes.

The proposed threshold would include consideration of the expected benefits to users of financial statements of applying the new accounting policy retrospectively and the cost to the entity of determining the effects of retrospective application.

The IASB is proposing that when companies are deciding how far back to go in applying a change in accounting policy resulting from an agenda decision, they would have to consider not only the practicality of any change, but also the benefits to users and costs to the company of making the change.

Following deliberation, the IASB has decided not to make changes to IAS 8 to address the timing of applying a change in accounting policy resulting from an agenda decision as it does not feel there is a satisfactory alternative, although it does ask for feedback from stakeholders on the issue.

On the timing of application of changes that result from an agenda decision, the IASB exposure draft states that ‘an entity could find it difficult in some circumstances to change its accounting to reflect this new information.

‘For example, assume the Committee publishes an agenda decision in June of a particular year and an entity with an annual reporting period ending on 31 December is expected to change its accounting policy as a result of the agenda decision.

‘Depending on the change, it could be difficult for the entity to apply that change to its interim financial report(s) of the same year.’

The IASB position is that an entity should be given sufficient time to prepare for a change in accounting policy that results from an agenda decision as it would generally be unreasonable to expect an entity to apply a change in accounting policy immediately. It added that ‘determining what “sufficient time” to implement a change is requires judgment, and will depend on the nature of the change’.

The proposed amendments to IAS 8 are designed to ensure greater consistency in the application of IFRS standards, and to reduce the cost and compliance burden on companies when an accounting policy is changed as a result of an agenda decision. It is hoped that this change will improve the overall quality of financial reporting.

The deadline for comment is 27 July 2018. 

IASB Exposure Draft ED/2018/1 - Accounting policy changes (Proposed amendments to IAS 8) issued 27 March 2018.

Report by Sara White