Applying a change in accounting policy

When you’ve opted for a change in an accounting policy, there are two ways it can be applied – retrospectively or prospectively. 

The easier of those two is obviously prospective option because with this you only have to apply the changes onwards from the decisions more or less (you can always say the change was applied in the beginning of the financial year when we’re talking about preparing the financial statements at the end of the year). Apart from disclosing the change and it’s future effects in the annual report there’s really not much else to be done aside the accounting obviously.

However, retrospective is always the trickier one. For one, you need to go back in time and adjust the opening balances of each equity component affected for the earliest prior period presented in the financial statements and to add to this, also adjust all other comparative figures affected on the balance sheet, income statement, cash flow statement and statement of changes in equity. Mind you that it’s not only those statements, but also all relevant related notes as well when it comes to the annual report.

Obviously one thing to keep in mind is that the change in a policy is only applied retrospectively to the extent it’s practicable. In such a case, the entity should adjust the comparative information to apply the accounting policy from the earliest date possible.