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Are there any rules for changing the prevailing a…

Are there any rules for changing the prevailing accounting policies in a company?

Are there any rules for changing the prevailing accounting policies in a company?

Chiranjibi Mar. 12, 2018

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.

As a rule, same accounting policies are adopted for similar events or transactions in each period. This enables the user to compare the financial statements of an enterprise over a period of time.

However, it's not that accounting policies can not be changed. Accounting standard 5 (AS5) allows the change in accounting policies for the following reasons:

  • if the adoption of a different accounting policy is required by statute; or
  • the change is required to compy with an accounting standard; or
  • if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

A more appropriate presentation of events or transactions in the financial statements occurs when the new accounting policy results in more relevant or reliable information about the financial position, performance or cash flows of the enterprise.

Treatment of Changes in accounting estimates

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in.

  • the period of the change, if the change affects that period only, or
  • the period of the change and future periods, if the change affects both.

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.