Accounting policies are nothing but some very specific set of conversions, principles, and rules that are put forward by any entity in order to prepare and present the financial statements in a correct manner. Here we will be looking at the reasons for and effects of changes in accounting policies.
Changes in Accounting Policies
When there are different accounting periods, it’s important to maintain a comparison between the policies and to maintain them every time. However, one thing to note here is, if there are any sort of changes in accounting policies, the financial statements must hold true. Such changes can be anything and do not require an option in specific.
As per the general guidelines, there is a need to put forward in consideration the past facts in the statements while there are changes in accounting policies.
Accounting policies are more than just a set of standards. Apart from taking care of the financial statement that a company prepares, it also sets specific principles for them.
The accounting policies are specifically for those areas where the practices related to accounting are pretty much complicated. Some of which includes: Depreciation Methods, Goodwill Recognition, Cost for preparation of Research and Development, inventory value, etc.
Accounting Policies play a very major role in changing the earnings and manipulating them as well. For instance, most of the companies, there is a simple policy. Under this, they need to send a report to the inventory. The reporting in the inventory takes place by two processes: Last-In-First Out and First-In-First-Out. These two methods take the responsibility of maintaining reports in the inventory. Both the process is completely different from one another.
- F-I-F-O: Under this cost method, whenever there is selling of the product, the inventory producing it first is considered as sold.
- L-I-F-O: Under this cost method, whenever there is selling of the product, the inventory responsible for selling it last is the one that is sold.
Reasons for Changing Accounting Policies
Changes in Accounting Policies is not an easy thing to opt for. An entity can go for making changes in accounting policies if and only if:
- there is a requirement of change in the whole organization and its standards.
- it shows the correct statements that contain more reliable and relevant information. They are all related to every transaction ever made in the company so far.
The point to take into consideration here is the changes in accounting policies hold no responsibility for any sort of transaction that has not taken place in the past.
Disclosures Related to Changes in Accounting Policies
The disclosures relating to the coming up changes in accounting policies are as follows:
- the reason behind the change and the interpretation that is responsible for causing it.
- the type of nature and the changes occurring in the policies.
- a detailed description of provisions that will consist of all the necessary options for the changes in the coming time.
The disclosures relating to the coming up voluntary changes in accounting policies are as follows:
- change of nature in the policies.
- the probable reasons behind the relevant information that is easily accessible to gain more reliable details.
- adjustments that were made every time.
Solved Question for You
Q: What is meant by the retrospective application of changes in accounting policy?
Ans: In most cases, when we change the accounting policy of an entity we follow retrospective application. This means the accounting records will be adjusted to represent accounts as if the new policy has always been in place. So the new policy will be applied retrospectively.