ASPE 1506: Changes in Accounting Policy

Definition

An accounting policy is a specific principle, basis, convention, rule, or practice applied in preparing financial statements (ASPE 1506.05). A change in accounting policy is a switch from one acceptable policy to another. It can be required (by a new standard) or voluntary (by choice of management).

Key rules

ASPE 1506 distinguishes three types of accounting changes:

1. Change in accounting policy: retrospective application (restate comparatives).
2. Change in accounting estimate: prospective application.
3. Correction of a material prior-period error: retrospective restatement, subject to impracticability.

Subject to the explicit policy-choice exceptions in ASPE 1506.09, a voluntary change must result in financial statements that provide reliable and more relevant information about the effects of transactions on the entity's financial position, financial performance, or cash flows.

Required disclosures include:

• Nature of the change and reason for it.
• For required changes, the transitional provisions applied.
• Why the voluntary change meets the relevant criterion or permitted policy-choice exception.
• The adjustment for each affected prior-period line item, to the extent practicable.
• The amount of the adjustment relating to periods before those presented.

Example

A CCPC makes a justified change in inventory costing from weighted average to FIFO. Assume the change meets ASPE 1506, affects prior-period cost of sales, and can be applied retrospectively.

Application (simplified):

Opening retained earnings (as previously reported)   9,600
Cumulative effect on prior years of policy change:
  Decrease in cost of sales, net of tax            1,200
Opening retained earnings, as restated              10,800

The prior-year comparatives on the income statement and balance sheet are restated to reflect the revised inventory costing policy. The notes disclose the nature of the change, the reason, and the effect on each line.

Common mistakes

• Treating a change in how an amortization rate is calculated as a policy change. A rate change tied to useful life is an estimate, not a policy.
• Failing to restate comparatives under the retrospective model.
• Skipping the reconciliation of opening retained earnings on the statement of retained earnings.
• Changing policy every year to manage earnings. A policy cannot be changed merely to produce a preferred profit figure.
• Not updating the accounting policies note to describe the new policy going forward.

Related concepts

Policy changes contrast with estimate updates (see changes in estimates) and error corrections (see prior-period errors). Their accounting effects differ: estimates affect the current or future period, while retrospective corrections may change opening equity and comparatives.