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2 Changes in accounting policies
Changes in accounting policy are applied retrospectively.

1. 
   Accounting for changes of policy
   

The same accounting policies are usually adopted from period to period, to allow users to analyse trends overtime in profit, cash flows and financial position. Changes in accounting policy will therefore be rare and should be made only if:

1. 
   The change is required by an IFRS; or
   
2. 
   The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity, providing more reliable and relevant information. (IAS 8: para. 14)
   

The standard highlights two types of event which do not constitute changes in accounting policy:

1. 
   Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity
   
2. 
   Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material (this includes adopting a policy of revaluation for the first time for tangible non-current assets, which would be treated under IAS 16 (Chapter 3)
   

A change in accounting policy must be applied retrospectively. This means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, the policy is applied from the earliest date such transactions or events occurred. (IAS 8: para. 19)
Prospective application is not allowed under IAS 8 unless it is impracticable (see Key Terms) to determine the cumulative effect of the change. (IAS 8: para. 27)

2. 
   Worked example: change of accounting policy
   

Tabby Co has always valued inventory on a FIFO (first in, first out) basis. In 20X9 it decides to switch to the weighted average method of valuation. Gross profit in the 20X8 financial statements was calculated as follows.

		$'000
Revenue		869
Cost of sales:
Opening inventory	135
Purchases	246
Closing inventory	(174)	(207)
Gross profit		662

In order to prepare comparative figures for 20X8 showing the change of accounting policy, it is necessary to recalculate the amounts for 20X7, so that the opening inventory for 20X8 is valued on a weighted average basis.

It is established that opening inventory for 20X8 based on the weighted average method would be $122,000 and closing inventory would be $143,000. So the 20X8 gross profit now becomes:
$'000

Revenue		869
Cost of sales:
Opening inventory	122
Purchases	246
Closing inventory	(143)	1?25)

644

This shows $18,000 lower gross profit for 20X8 which will reduce net profit and retained earnings by the same amount. The opening inventory for 20X9 will be $143,000 rather than $174,000 and the statement of changes in equity for 20X9 will show an $18,000 adjustment to opening retained earnings.

3. 
   Adoption of an accounting standard
   

Where a new accounting standard is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new standard to be followed. If none are given in the standard then the general principles of IAS 8 should be followed.

4. 
   Disclosure
   

Certain disclosures are required when a change in accounting policy has a material effect on the current period, prior period presented, or in subsequent periods.

1. 
   Reasons for the change/nature of change
   
2. 
   Reasons why new policy provides more relevant/reliable information
   
3. 
   Amount of the adjustment for the current period and for each period presented
   
4. 
   Amount of the adjustment relating to periods prior to those included in the comparative information
   
5. 
   The fact that comparative information has been restated or that it is impracticable to do so
   

(IAS 8: para. 29)
An entity should also disclose information relevant to assessing the impact of new IFRS on the financial statements where these have not yet come into force. (IAS 8: para. 28)
Disclosure is important to maintain the principle of comparability. Users should be able to compare the financial statements of an entity over time and to compare the financial statements of entities in the same line of business. Changes of accounting policy affect comparability, so it is important that they are disclosed.

5.