Changes in Accounting Policies - Ind AS - Indian Accounting Standards - Companies Law

Changes in Accounting Policies An entity shall change an accounting policy only if the change: is required by an Ind AS; 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. Users of financial statements need to be able to compare the financial statements of an entity over time to identify trends in its financial position, financial performance and cash flows. Therefore, the same accounting policies are applied within each period and from one period to the next. It doesn t mean that an entity cannot change its policies. Change in accounting policies may relate to recognition, measurement or presentation of an item in financial statements. For Example An entity that previously applied the practical expedient may decide to no longer apply the practical expedient and instead segregate the finance component. This constitutes a change in accounting policy. A change in manner of presentation of grants related to assets is a change in accounting policy. Change its accounting policy of subsequent measurement of property, plant and equipment (PPE) from revaluation model to cost model. The following are NOT changes in accounting policies: the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring; and the application of a new accounting policy for transactions or events which were immaterial or non-existent in previous periods ; like introduction of formal retirement gratuity scheme in the place of an ad hoc policy. The initial application of a policy to revalue assets in accordance with Ind AS 16, Property, Plant and Equipment, or Ind AS 38, Intangible Assets, is a change in an accounting policy to be dealt with as a revaluation in accordance with Ind AS 16 or Ind AS 38, rather than in accordance with this Standard. Applying changes in accounting policies Change due to Transitional Provision an entity shall account for a change in accounting policy resulting from the initial application of an Ind AS in accordance with the specific transitional provisions, if any, in that Ind AS; and when an entity changes an accounting policy upon initial application of an Ind AS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively. Retrospective application Retrospective application means the entity should adjust (restate) the current year and previous year financial statements as if the new policy is followed from the beginning. When a change in accounting policy is applied retrospectively, the entity shall adjust 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. Limitations on retrospective application When retrospective application is required, a change in accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information 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. When 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. A restatement of the financial statement for prior years by means of prior year adjustment does not mean that the actual approved and issue financial statements have to be withdrawn and amended. Tax Effect due to retrospective application of change- As per Ind AS 8, retrospective application of accounting policy means accounting for as it is applied from the beginning. This includes event the tax effect i.e., both current and deferred tax. Tax effect related to previous period should be given in the previous year and if the tax effect is related to a period which is preceding to comparative year, it should be adjusted with opening reserve of previous year.