ASC 250-10-20 defines a change in accounting principle.
Definition from ASC 250-10-20 A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle. A change in accounting principle can be required by newly issued guidance or as the result of a decision by the reporting entity to adopt a different accounting principle on the basis that it is preferable. New accounting guidance generally provides specific transition requirements (e.g., prospective application, full retrospective application, modified retrospective application, etc.). Accordingly, the provisions of ASC 250 do not apply when a reporting entity is adopting a new accounting pronouncement that specifies the manner of adopting the change. However, if transition requirements are not provided by the new accounting guidance, a change in accounting principle should be reported in accordance with ASC 250. In certain situations, a reporting entity may elect to change its financial statement presentation from one acceptable alternative to another (e.g., a change from presenting accumulated depreciation and amortization on the face of the financial statements to the footnotes or changing from a “one-step” income statement to a “two-step” income statement). We believe a change in financial statement presentation does not constitute a change in accounting principle and thus would not require a preferability assessment. However, a reporting entity should have consistent presentation for all periods presented within the financial statements. The adoption of accounting principles in certain situations are outside the scope of ASC 250.
Excerpt from ASC 250-10-45-1 Neither of the following is considered to be a change in accounting principle:
Some examples of scenarios that would not constitute a change in accounting principle under ASC 250-10-45-1a may include the selection of a date for the annual goodwill impairment test after completing a business combination that resulted in recording goodwill for the first time or conforming the accounting policies of an acquired business to those of the acquirer. An example of a scenario that may not be deemed a change in accounting principle under ASC 250-10-45-1b is when changes in the contractual relationship between the reporting entity and other parties result in a conclusion that the reporting entity is no longer the principal in a revenue transaction and should present that revenue on a net basis. Generally, accounting principles that are not material are not disclosed in the footnotes. Therefore, it would be unusual for an accounting principle that is disclosed in previously-issued financial statements to be deemed immaterial for the purpose of considering ASC 250-10-45-1a. However, in certain instances, reporting entities may have historically disclosed immaterial accounting principles for comparability with peers or for consistency with prior years. In these situations, reporting entities should perform an assessment of the materiality of the accounting principle that they are changing, the materiality of the change, and the preferability of the change to determine what level of disclosure, if any, is warranted. Even if a reporting entity concludes that a change is immaterial and retrospective application is not required (refer to FSP 30.4.2 and discussion of SAB Topic 5.F), if the change is disclosed, an SEC registrant may still be required to file a preferability letter from their independent registered public accountants. See FSP 30.4.1 and FSP 30.4.2. Once an accounting principle is adopted, it should be applied consistently when accounting for similar events and transactions because the consistent use of accounting principles is critical to the utility of financial statements. A reporting entity that wants to voluntarily change an accounting principle must justify that the alternative accounting principle is preferable. For example, a change in a reporting unit’s annual goodwill impairment test date is a change in the method of applying an accounting principle requiring a preferability assessment (see BCG 9.5.1.2). Preferability may vary depending upon the circumstances of the reporting entity. For example, one reporting entity may consider the LIFO inventory method to be preferable due to the nature of its inventory costs, while for others, FIFO may be preferable. The disclosure should include an explanation of why the newly adopted change is preferable. SAB Topic 6.G.2.b, Reporting Requirements for Accounting Changes (codified in ASC 250-10-S99-4), provides guidance on assessing the justification for a change in accounting principle. It includes considerations such as whether an authoritative body has deemed an accounting principle preferable, how the change impacts business judgment and planning, and whether the change results in improved financial reporting. Question FSP 30-1 discusses whether a preferability assessment is required when a private company changes accounting principles upon filing an IPO registration statement. Question FSP 30-1 PwC response No. When a private company is required to change accounting principles to conform with public company accounting requirements (e.g., discontinuing the application of the Private Company Council (PCC) goodwill alternative), a preferability assessment is not necessary. This is because such a change in accounting principle is not “voluntary” and is required by a regulator to conform to GAAP. Question FSP 30-2 discusses whether a private company is required to perform a preferability assessment when adopting a PCC accounting alternative for the first time. Question FSP 30-2 PwC response No. Although the adoption of a PCC accounting alternative is a voluntary change in accounting principle, ASU 2016-03, Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815), allows private companies to forgo a preferability assessment the first time they elect any of the PCC accounting alternatives within the scope of the ASU. However, after the initial election of a PCC accounting alternative, any future accounting changes require a preferability assessment, except when a private company changes accounting principles to conform with public company accounting principles in connection with filing an IPO registration statement (see Question FSP 30-1).
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors. The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information. Changes in accounting policies and corrections of errors are generally retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on a prospective basis. IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January 2005.
* Clarified by Definition of Material (Amendments to IAS 1 and IAS 8), effective 1 January 2020. When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7] In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:
Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12] An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13] An entity is permitted to change an accounting policy only if the change:
Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16] If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19] Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]
Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]
Financial statements of subsequent periods need not repeat these disclosures. Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
Financial statements of subsequent periods need not repeat these disclosures. If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30] The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]
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. [IAS 8.37] Disclose:
The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8.42]
However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44] Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45] Disclosures relating to prior period errors include: [IAS 8.49]
Financial statements of subsequent periods need not repeat these disclosures. |
When there has been change in accounting principle that materially affects the comparability of comparative financial statements?
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