21.8 Chapter Summary

LO 1: Describe the different types of accounting changes.

There are three types of accounting changes: a change in accounting policy, which can be either voluntary if the change results in information that is reliable and more relevant, or required by the application of an IFRS; a change in accounting estimate, which presumes that the estimate was made with all the relevant information available at the time; and the correction of an accounting error, which means both omissions and misstatements and can include mathematical errors, mistakes in application of accounting policies, oversights, misinterpretations of facts, and fraud.

LO 2: Apply the appropriate method of accounting for an accounting policy change.

When applying an accounting policy change required by an IFRS, the IFRS will usually provide detailed transition provisions that outline the procedures. Voluntary accounting policy changes should be applied retrospectively, where all current and comparative information are restated as if the policy were always in effect. This means that opening balances will need to be restated, including the relevant equity accounts.

LO 3: Apply the appropriate method of accounting for an accounting estimate change.

Accounting estimate changes should be treated prospectively. This means that the new information is applied to the current year and any future years, if applicable. No attempt is made to restate prior periods, as it is assumed that the previous estimates were made with sound judgment based on all the information available at the time.

LO 4: Apply the appropriate method of accounting for an error correction.

When errors in prior period financial statements are discovered, the errors should be corrected retrospectively. This means that prior balances should be restated as if the error had never occurred. This will also require restatement of the relevant equity accounts.

LO 5: Identify the disclosure requirements for different types of accounting changes.

With retrospective restatement due to policy changes or error corrections, the reasons for the change must be identified and any transitional provisions disclosed. As well, the effects on each financial statement line item and earnings per share for current and prior periods should be identified. Comparative financial statements should be restated, and an opening balance sheet for the earliest comparative period should be presented. If retrospective application is impracticable, an explanation is required. The potential future effects of any IFRSes that are issued but not yet effective must also be disclosed. For estimate changes, the nature of the change and the effects on current and future periods should be disclosed. If the effects on future periods cannot be determined, this fact should be disclosed.

LO 6: Describe the key differences between IFRS and ASPE with respect to the treatment of accounting changes and error corrections.

IFRS only allows accounting policy changes if the new policy results in more relevant and reliable information. ASPE allows policy changes in the same circumstances, and also allows changes between acceptable alternatives identified for certain GAAP standards. ASPE requires errors to be corrected retrospectively, while IFRS requires retrospective restatement unless it is impracticable to do so. For a retrospective change, IFRS requires a restated balance sheet for the earliest comparative period, while ASPE only requires identification of the changes in the affected items. IFRS requires disclosure of the potential effects of accounting standards issued, but not yet effective, while ASPE does not require this disclosure.