21.5 Presentation and Disclosure

Accounting changes can be made either retrospectively or prospectively.

Retrospective application requires applying a new accounting policy in the accounts as if the new method had always been used.  The cumulative effect of the change on the financial statements at the beginning of the period is calculated and an adjustment is made to the financial statements.  In addition, all prior years’ financial statements that are affected are restated on a basis that is consistent with the newly adopted policy.

Prospective application requires that previously reported results remain; no change is made to past financial statements.  Opening balances are not adjusted, and no attempt is made to correct or change past periods.  The new policy or estimate is applied to balances existing at the date of the change, with effects of the change reported in current and future periods.

The following table summarizes and identifies the accounting standards for each type of accounting change:

Because changes in accounting policies and errors may fall outside of the normal expectations of financial statement readers, it is not surprising that additional disclosures are required. When an accounting policy is changed, the following disclosures are required:

• If the change results from the initial application of an IFRS then disclosure must be made of the title of the new IFRS being applied, the nature of the change, a description of any transitional provisions, and the potential effect of those transitional provisions on future periods.
• If the change is a voluntary policy change then disclosure must be made of the nature of the change and the reasons why the change results in reliable and more relevant information.
• For both types of change, disclosure must be made of the effects on each financial statement line item and earnings per share in the current and prior periods, and the amount of adjustment that relates to periods prior to the earliest period presented.
• If it was impracticable to apply the change retrospectively to all previous periods, an explanation of the reasons why should be provided along with a description of how the change was applied.
• If the entity has not yet applied a new IFRS (that is, issued but not yet effective), the entity should disclose, where possible, an estimate of the future effects of the new IFRS on financial statements.

When a change in an accounting estimate is applied, the following disclosures are required:

• The nature and the amount of the change, including the effect on the current period and the expected effects on future periods, should be disclosed.
• If the effect on future periods cannot be determined, this fact should be disclosed.

It should be noted that, as with all accounting applications, the principle of materiality applies. As a practical matter, companies may not disclose all changes in estimates if the effects are not deemed to be material. However, companies are sometimes criticized for using immaterial estimate changes as a way to engage in creative earnings management. Obviously, careful consideration needs to be given to the required level of disclosures in cases like these.

For corrections of accounting errors, the following disclosures are required:

• The nature of the prior period error should be disclosed.
• Disclosure must be made of the effects on each financial statement line item and earnings per share in the current and prior periods, and the amount of adjustment that relates to periods prior to the earliest period presented.
• If it was impracticable to retrospectively restate all previous periods, an explanation of the reasons why should be provided along with a description of how the correction was applied.