Accounting Policy Changes

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 prior-period error: retrospective restatement.

For a voluntary change in policy, ASPE 1506.06 permits the change only if it results 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.
• For voluntary changes, why the new policy provides more reliable and relevant information.
• The amount of the adjustment for the current and each prior period presented, for each line item affected.
• The amount of the adjustment relating to periods before those presented.

Example

A CCPC switches from the completed-contract method to the percentage-of-completion method for long-term fixed-fee consulting engagements. The change is voluntary and management believes percentage-of-completion better matches revenue with performance.

Application (simplified):

Opening retained earnings (as previously reported)   9,600
Cumulative effect on prior years of policy change:
  Additional revenue recognized, 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 percentage-of-completion. 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. Repeated voluntary changes invite auditor and CRA scrutiny.
• 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). All three trigger specific disclosure under ASPE 1506, and all three surface on the statement of retained earnings and in the comparative figures.