Change in accounting policy?

Change in accounting policyChange in accounting policy – Oil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized over proved developed reserves. License acquisition, common facilities and future decommissioning costs are amortized over total proved reserves. The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.

This clearly shows all the estimates involved in setting up a depreciation policy. Not only in a complex environment as the oil and gas industry but also in a manufacturing business consisting of a complex logistical set-up of expensive machinery, and people processing raw materials into finished goods using the machinery, guarding inventories (raw materials, WIP and finished goods), selling the finished goods and registering for all transactions.

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Change in accounting policyHowever, this makes it all too clear that changing the depreciation method based on changes in one of the many estimates involved in making the estimate for the depreciation policy in the first place is a change in an estimate NOT a change in accounting policy.

This also shows from the IAS 8 definition of change in accounting policy. Change in accounting policy?

Depreciation is an adjustment of the carrying amount of a non-current asset over its useful life to correctly match the cost of usage of that asset with the revenue earned with that usage. And on receipt of information that the previous estimates were wrong regarding devaluation of the asset results in a revision of the depreciation policy. Change in accounting policy?

Additionally, a change in the scrap value of an asset as a result of new developments will also trigger an adjustment in accounting for depreciation and it is also a change of an accounting estimate and not a change in accounting policy (the estimate of the depreciable amount changes). Change in accounting policy?

Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. They are not estimates!!!, they are not about amounts, but provide the framework within which the financial statements are prepared.

An entity is permitted to change an accounting policy only if the change:

  • is required by a standard or interpretation; or
  • results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, or cash flows. [IAS 8.14]
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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]

  • However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]
  • Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]

Change in accounting policy

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Something else -   Accounting policies

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