Accounting policy changes – a bigger carrot

The IASB has issued Accounting Policy Changes, an exposure draft of proposed changes to IAS 8, with comments to be received by July 27, 2018.

The exposure draft proposes adding the following new definition to IAS 8:

  • An agenda decision is a decision published by the IFRS Interpretations Committee explaining its rationale for not adding a particular matter to its standard-setting agenda.
  • An agenda decision may result in a voluntary change in accounting policy, a change in accounting estimate or the correction of a prior period error. An entity shall apply the requirements of this Standard to determine the nature of, and the required accounting for, any change that results from an agenda decision.

It then proposes amending IAS 8.23 to allow that a change in accounting policy need not be applied retrospectively:

  • “if the change in accounting policy results from an agenda decision, to the extent that the cost to the entity of determining either the period-specific effects or the cumulative effect of the change exceeds the expected benefits to users.”

The exposure draft also contains guidance on making that determination, citing the following among the factors to consider:

  • the nature of the change—the more significant the effect of the change in accounting policy because of its nature, the greater the likelihood that a user’s decision-making could be affected by an entity not applying the change retrospectively. For example:
  • (i) users are likely to benefit more from retrospective application of a new accounting policy that would result in the initial recognition or derecognition of an asset or liability. Users are likely to benefit less from retrospective application of a new accounting policy that would affect only one aspect of a particular cost-based measurement of an asset or liability.
  • (ii) users are likely to benefit more from retrospective application of a new accounting policy that affects transactions reported in the financial statements over several periods.

Likewise, it notes that the more pervasive the effect of the change in accounting policy across an entity’s financial statements, or the more significant the effect of the change in accounting policy on information used for trend analysis, the greater the likelihood that a user’s decision-making could be affected by an entity not applying the change retrospectively. When an agenda decision-driven change isn’t applied retrospectively: “the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date for which the expected benefits to users of applying the change prospectively exceed the cost to the entity of determining the effects of the change.”

The background to all this is that IFRIC agenda decisions, as the Due Process Handbook puts it, “do not have the authority of IFRSs and they will therefore not provide mandatory requirements but they should be seen as helpful, informative and persuasive.” If an issuer decides to change an existing accounting policy because of the (say) persuasiveness of such a decision, the change constitutes (under IAS 8 in its current form) a voluntary change in accounting policy, to be applied retrospectively except to the extent that’s “impracticable” –  that is, “when the entity cannot apply it after making every reasonable effort to do so.” So the problem, in plain language terms, is that while issuers should presumably be encouraged to amend their existing policies to better reflect helpful and persuasive IFRIC material, IAS 8 doesn’t provide much of a carrot to do that. In contrast of course, accounting changes prompted by new standards typically come with all kinds of carefully-weighted transitional provisions, often allowing something less than full retrospective adoption, whether or not that would have been practicable. So the exposure draft, basically, is about providing a bigger carrot.

Perhaps the most obvious reaction to the exposure draft is to wonder why the carrot wouldn’t have been provided to all voluntary changes in accounting policy. The basis for conclusions explains that the board chose not to do that because, among other things: “applying the new threshold to a wider population might…result in a loss of comparability between entities and a loss of information for users of financial statements if voluntary changes in accounting policy (other than those that result from an agenda decision) were to occur frequently.” I don’t know if it’s entirely persuasive on that point though. It would have been useful in this regard to have more data about the volume of voluntary accounting changes across IFRS jurisdictions which might even potentially be affected by these amendments (in my experience there aren’t too many), but I couldn’t find anything on that in the supporting materials.

I assume the proposals are for the greater good for the reasons set out, although they do rather carry a sense of standard-setting turning in on itself, of IFRS getting longer and more unwieldy primarily just to avoid tripping over its own nuances and complexities. Does the issue I set out above really require adding multiple new paragraphs to IAS 8 and five pages of new application guidance? Good thing IFRS doesn’t take a rule-based approach…

The opinions expressed are solely those of the author

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