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Cost/benefit test for changing accounting policy in IAS 8

Proposed changes to IAS 8 Accounting Policies on voluntary changes will encourage better reporting, says Julia Penny.

Julia Penny

July 2018

The IASB has issued ED/2018/1 to address the issue of voluntarily changing accounting policies. At the moment, a change in accounting policy is only permitted when required by an IFRS or when it improves the usefulness of information provided to users by the financial statements. 

This latter reason often applies because of an agenda decision by the IFRS interpretations committee, which effectively provides clarification of the required policy. Such a change in policy, as a result of an agenda decision, is regarded as a voluntary change.  

At present there is often a strong disincentive to change accounting policies voluntarily as retrospective adjustment is required, except to the extent that it is impracticable. This impracticability threshold is currently set at a very high threshold and so can deter entities from applying a better policy. 

The amendments are designed to specifically encourage changes in response to an agenda decision by lowering the threshold for such changes. 

The new threshold for changes in accounting policy arising from agenda decisions is a cost/benefit test. The expected benefits to users of applying a new policy retrospectively is compared to the cost to the entity of determining those retrospective adjustments. 

If the costs outweigh the benefits, then the new policy is applied as at the beginning of the earliest period for which benefits exceed the costs. So, for instance, if it was relatively easy to determine the cumulative retrospective figures as at the start of the current period, but costs would exceed benefits in prior periods, the adjustments are made from that point onwards. 

Note that there is no change in the threshold for voluntary changes in accounting policy which are not the result of agenda decisions. Retrospective adjustment is still required unless this is impracticable. 

This change seems a sensible adjustment in encouraging the development of better reporting. If you have comments on the ED the closing date for them is 27 July 2018 and they should be sent to commentletters@ifrs.org

Julia Penny FCA is London ICAEW Council Member and Technical Director at SWAT UK @JSPenny

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