IAS 8 — Changes in accounting policies
Background
The Staff sought feedback from the IC on a paper that will be discussed by the Board in its upcoming June meeting. The paper deals with changes in accounting policies resulting from agenda decisions, and addresses two central issues:
- Whether the change is a correction of error or a voluntary change in accounting policy; and
- Lowering the impracticability threshold for exemption from retrospective adjustments to a cost/benefit threshold.
The IC’s comments were sought as the publication of agenda decisions falls within its ambit. When the IC receives a request and considers that the requirements in existing Standards provide an adequate basis on which to account for the issue, it issues an agenda decision which typically includes explanatory material outlining the IC’s view on how to apply the applicable requirements.
Agenda decisions are non-authoritative. Neither the Board nor the IC can specify transition requirements or an effective date for the information contained in an agenda decision. If an entity changes its accounting policy as a result of an agenda decision (be it as a correction of error or a voluntary change in policy), it is required to apply the new policy retrospectively unless it is impracticable to do so. ‘Impracticability’ is a high hurdle. It is often seen as deterring entities from voluntarily changing an accounting policy for the better because of the efforts involved in restating comparatives. This undermines the value of agenda decisions.
Accordingly, the paper explores a cost/benefit approach as an alternative to the impracticability approach for exemption from retrospective application of a voluntary change in accounting policy.
Staff analysis
Correction of error or voluntary change in accounting policy?
The Staff believe that it would not be appropriate to characterise all changes resulting from agenda decisions as corrections of errors or as changes in accounting policies.
Matters that are submitted for consideration by the IC are generally complex and require extensive analysis and discussion by the IC members. The resulting explanatory information that is published in an agenda decision is therefore, arguably, new information that was not available previously and could not reasonably have been expected to be obtained by an entity. Accordingly, the accounting policy applied by an entity prior to the publication of the agenda decision could not always be said to be an error.
On the other hand, an entity could simply have applied a Standard incorrectly. This would meet the definition of an error. The characterisation of a change in accounting practice resulting from an agenda decision depends on the specific facts and circumstances of each case.
Cost/benefit threshold
The Staff considered adding a cost/benefit threshold to the existing impracticability threshold for exemption from retrospective application to:
- all voluntary changes in accounting policies; or
- only voluntary changes in accounting policies resulting from agenda decisions.
The Staff analysed the pros and cons of each alternative and, on balance, recommend alternative 2 as its limited scope could help avoid unintended consequences arising from lowering the threshold for all voluntary changes in accounting policies.
The Staff also propose that the costs of retrospective application would outweigh the benefits if the incremental costs that an entity would incur or the additional effort that would be required to determine the effects of the change substantially exceeds the expected benefits for users from retrospective application. The paper includes elaboration on the factors that an entity should consider when assessing the cost/benefit threshold.
Staff recommendation to the Board
The Staff recommend that the Board:
- not characterise a change in policy resulting from agenda decisions as either a correction of error or a change in accounting policy;
- propose a narrow-scope amendment to IAS 8 to require an entity to apply a voluntary change in an accounting policy resulting from an agenda decision retrospectively, unless:
- a) determining the period-specific effects or the cumulative effect of the change would be impracticable; or
- b) the cost of determining those effects would outweigh the benefits that users would receive from a retrospective application of the new policy.
The Staff further recommend including application guidance in IAS 8 on how to determine whether the costs of retrospective application would outweigh the expected benefits.
Discussion
The IC was generally supportive of the Board lowering the threshold from an impracticability assessment to a cost/benefit assessment. However, some IC members were skeptical on how an entity should apply the actual cost/benefit assessment, in particular, how to assess the benefits arising from a voluntary change in accounting policy. They noted that in the past, it has always been the Board that assessed the costs and benefits when determining the transition provisions for an amendment or a new requirement. There were also questions as to how an entity can prove and provide sufficient documentary evidence that the costs would exceed the benefits of applying a new accounting policy retrospectively. In light of this, some IC members thought that an ‘undue costs and efforts’ assessment could be considered.
The IC members did not, however, support differentiating between a change in accounting policy arising from an agenda decision and other voluntary changes in accounting policies. Some members noted that it would be difficult and judgemental to make such a distinction, and others saw no reason in elevating the status of an agenda decision. The IC generally believed that any change made should apply equally to all voluntary changes in accounting policies. Having said that, the resulting difference in accounting for error corrections and changes in accounting policies will inevitably add pressure on the IC to distinguish between the two in future agenda decisions. Even though that is not a question that the IC can address because it depends on facts and circumstances, the IC can foresee mounting requests from the stakeholders.
A couple of IC members preferred the status quo and believed that lowering the threshold could lead to abuse and inconsistency between entities. They were also not convinced that the Staff’s proposed implementation guidance on costs and benefits is useful.
