Retrospective or prospective application
|Retrospective application – Applying a new accounting policy to transactions, other events, and conditions as if that policy had always been applied (change in accounting policy) (IAS 8 5).|
Correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.
The concepts are used when the financial statements for multiple periods are being presented. With the retrospective application of accounting principles, the information in multi-period financial statements is more comparable from period to period. Retrospective or prospective application
|Changes in accounting policies | Correction of errors||Changes in estimates|
Change in accounting estimate – An adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors. Retrospective or prospective application
Financial statements are prepared based on an entity’s accounting policy application and estimation of certain events/transactions. Every company has a different accounting policies and different estimation processes as well, depend on the nature of business, size of business, strategy, internal and external environment. Retrospective or prospective application
Application of accounting policies and the estimation of certain events/transactions are made to make financial statements relevant and reliable for the user and economic condition on the reporting date. In applying accounting policies and estimation, an entity is required to apply consistently from period to period the application of the accounting policies and the estimation of certain events/transactions, so that the financial statements can be compared with previous periods. Retrospective or prospective application
Example: if in 20X1, X Company used LIFO method for inventory valuation, then in 20X2, they should use the same inventory valuation that they used for 20X1 in preparing the financial statement 20X2. Because if, X company change the accounting policies on inventory valuation (from FIFO to average), the financial statements for 20X1 and 20X2 can’t be compared.
Consistency in applying accounting policies and estimates doesn’t mean that we can’t change the policies and estimates. Accounting policies can be changed if only:
- The changes are required by IFRS, or Retrospective or prospective application
- The changes can produce financial statements that give more reliable and relevant information on impact of transaction, event, or other circumstances. Retrospective or prospective application
How it is Treated? Retrospective or prospective application
In applying changes in accounting policies and estimates, IAS divided into two treatments, retrospective or prospective. Retrospective means implementation new accounting policies for transaction, event, or other circumstances as if it had been implemented. In other words, retrospective will effect presentation of financial statements for previous periods. While prospective means implementation new accounting policies for transaction, event, or other circumstances after new accounting policies or estimation has been implemented.
When prospective or retrospective implementation should be applied? Retrospective or prospective application
- Retrospective implementation should be applied if the new accounting standards or policies are required by mandatory accounting standards and the changes can produce financial statements that give more reliable and relevant information on impact of transaction, event, or other circumstances.In the example above, if X company in 20X2 changes the inventory valuation method from FIFO to average, so that new accounting policies should be applied retrospectively. Then, the financial statements of X company for 20X1 should be restated, and Errors may arise from mistakes and oversights or misinterpretation of information. Material prior-period errors are adjusted retrospectively (that is, by restating comparative figures) unless this is impracticable. Retrospective or prospective application
- Prospective implementation should be applied if there is changes in accounting estimation. Retrospective or prospective application
Transition to new IFRS Standards
New standards often provide simplified transition model from an old to a new IFRS Standard, also to keep cost for IFRS changes limited.
IFRS 15 Revenue from contracts with customers
The date of initial application is the start of the reporting period in which a vendor first applies IFRS 15. IFRS 15 is applied retrospectively either to:
- Each prior period presented in the financial statements in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (sometimes referred to as the full retrospective method); or Retrospective or prospective application
- The current period with a cumulative effect adjustment on the date of initial application (sometimes referred to as the cumulative catch-up method).
The four practical expedients are: Retrospective or prospective application
- An entity need not restate completed contracts, which are contracts that: Retrospective or prospective application
- Began and ended within the same annual reporting period; or Retrospective or prospective application
- Were completed at the beginning of the earliest period presented (i.e. completed by 31 December 2016 for an entity presenting one year of comparatives if adopting IFRS 15 for the first time for a year beginning 1 January 2018 or by 31 December 2015 if two years of comparatives are being presented).
- For completed contracts that have variable consideration, the transaction price at the date the contract was completed can be used instead of estimating variable consideration amounts in comparative reporting periods; Retrospective or prospective application
- For contracts that were modified before the beginning of the earliest period presented an entity can reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to performance obligations; Retrospective or prospective application
- For all reporting periods presented before the date of initial application, disclosure is not required of the amount of the transaction price allocated to remaining performance obligations, and an explanation of when that amount was expected to be recognised as revenue. Retrospective or prospective application
For entities transitioning to IFRS 15 using the cumulative catch-up method: Retrospective or prospective application
- Practical expedients 1 and 2 are not available; Retrospective or prospective application
- Practical expedient 3 is available and, as an alternative, entities can also consider the combined effect of all contract modifications that occur before the date of initial application rather than only those prior to the start of the earliest comparative period presented; and Retrospective or prospective application
- Practical expedient 4 is not applicable because disclosures for comparative periods presented would need to comply with the requirements of IAS 11 Construction Contracts, IAS 18 Revenue, and related Interpretations. However, IFRS 15 instead requires entities using the cumulative catch-up method to disclose in the year of adoption the amount by which each financial statement line item is affected as compared to IAS 11, IAS 18 and related Interpretations, as well as an explanation of the reasons for the changes.
Note that for the purposes of practical expedients 1 and 2, a ‘completed contract’ is one for which the entity has transferred all of the goods or services identified in accordance with IAS 11, IAS 18, and related Interpretations. This means that, for contracts where not all revenue had been recognised in accordance with previous standards (for example, because of uncertainty about the amount of revenue to be received), the remaining revenue will continue to be recognised in accordance with previous standards and not in accordance with IFRS 15.
IFRS 16 Leases
The effective date of IFRS 16 Leases is 1 January 2019. The new leases standard permits early application but it can’t be applied before an entity also adopts IFRS 15 Revenue from Contracts with Customers. Retrospective or prospective application Retrospective or prospective application
A lessee has to choose either a full retrospective approach or a modified retrospective approach to transition to the new standard. The selected approach has to be applied to the entire lease portfolio. Retrospective or prospective application Retrospective or prospective application
A lessor is not required to make any adjustments on transition for leases in which it is a lessor and shall account for those leases applying the new standard from the date of initial application (specific provisions apply for intermediate lessors). An entity shall not reassess sale and leaseback transactions entered into before the date of initial application to determine whether the transfer of the underlying asset satisfies the requirements in IFRS 15 to be accounted for as a sale.
Lessees and lessors are not required to reassess whether an existing contract contains a lease upon transition, i.e. if an entity concluded under IAS 17 Leases that the contract is not a lease, an entity does not have to reassess the contract in accordance with IFRS 16. Retrospective or prospective application
The full retrospective approach Retrospective or prospective application
The transition accounting under the full retrospective approach requires entities to retrospectively apply the new standard to each prior reporting period presented as required by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Under this transition approach, entities need to adjust equity at the beginning of the earliest comparative period presented.
The modified retrospective approach Retrospective or prospective application
Under this approach, a lessee does not restate comparative information. Consequently, the date of initial application is the first day of the annual reporting period in which a lessee first applies the requirements of the new leases standard. At the date of initial application of the new leases standard, lessees recognise the cumulative effect of initial application as an adjustment to the opening balance of equity as of 1 January 2019. Retrospective or prospective application
Lessees with leases previously classified as operating leases: Retrospective or prospective application
- Recognise a lease liability, measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at the date of initial application.
- There are two options for measuring the right-of-use asset on transition (on a lease-by-lease basis): by measuring the asset as if IFRS 16 had been applied since the commencement date of a lease using a discount rate based on the lessee’s incremental borrowing rate at the date of initial application; or by measuring the asset at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments recognised immediately before the date of initial application.
Under the modified retrospective approach lessees are permitted on a lease-by-lease basis to apply the following practical expedients:
- apply a single discount rate to a portfolio of leases with reasonably similar characteristics; Retrospective or prospective application
- adjust the asset on transition by the amount of any previously recognised onerous lease provision, as an alternative to performing an impairment review;
- apply an explicit recognition and measurement exemption for leases for which the term ends within 12 months or fewer of the date of initial application and account for those leases as short-term leases; Retrospective or prospective application
- use hindsight in applying the new leases standard, for example, in determining the lease term if the contract contains options to extend or terminate the lease; and
- exclude initial direct costs in the measurement of the right of use asset. Retrospective or prospective application
Lessees with leases previously classified as finance leases: Retrospective or prospective application
- The carrying amount of the right-of-use asset and the lease liability at the date of initial application shall be the carrying amount of the lease asset and lease liability immediately before that date measured applying IAS 17. Retrospective or prospective application
- Apply subsequent accounting in line with the requirements of IFRS 16.
IFRS 17 Insurance contracts
Where entities have applied the modified retrospective approach and/or the fair value approach on transition to IFRS 17, the Standard requires them to explain the effect of these methods on CSM and revenue in subsequent periods as illustrated below:
* Until balances transitioned under the above approaches are reported in the financial statements, there is a necessity to explain the nature and significance of methods, and judgments applied to measure the contracts at T-1 date
* When the entity chooses to disaggregate insurance finance income or expense between profit or loss and OCI for all periods in which amounts transitioned under the modified retrospective and/or fair value approach exist, reconcile the opening to the closing balance of the cumulative amounts included in OCI for related financial assets measured at fair value through OCI.
IFRS 17 transitional provisions refer to the beginning of the period immediately preceding the date of initial application (T-1 date). Reporting entities may also present adjusted comparative information for any earlier period but are not required to do so.
IFRS 17 disclosure requirements need not be applied for any period presented before the T-1 date.
If a reporting entity presents unadjusted comparative information for any earlier periods, it should clearly identify it as unadjusted and explain the different basis on which it has been prepared.
An entity need not disclose previously unpublished information about claims development that occurred earlier than five years before the end of the annual reporting period in which it first applies IFRS 17. If an entity has used this exemption, it should disclose that fact.
A road to transition
An efficient IFRS 17 transition project will require seamless collaboration between finance and actuarial teams. A much wider range of skills will be needed together with agile working involving IT specialist, data analysts and experienced project managers. To be successful in an environment of competing priorities and strain on resources, entities will have to:
See also: The IFRS Foundation