Change in accounting policy.

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2015 Dear freinds.

Current year we change our accounting policy and valuing our debtors and creditors at closing exchange rates.Earlier we valuing our debtors and creditors at entry date rate.

Query:
Whether we have to give it retrospective effect or not and how, since our firm doing business for last 20 years...

Querist : Anonymous

Querist : Anonymous (Querist)

07 August 2015 Still unsolved

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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19 July 2024 When you change an accounting policy, such as how you value debtors and creditors (from entry date rate to closing exchange rates), it's important to consider whether the change should be applied retrospectively or prospectively. Here’s how you can approach this situation:

### Retrospective Application

**1. Restate Comparative Information:**
- Under a retrospective application, you would restate the financial statements for prior periods (usually up to two years) as if the new accounting policy had always been applied.
- This means you would adjust the opening balances of assets, liabilities, equity, and any related impacts on prior periods' profit or loss.

**2. Practicality and Feasibility:**
- Given that your firm has been in business for 20 years, restating all previous financial statements might be complex and resource-intensive.
- However, some accounting standards may require or strongly recommend retrospective application, particularly if it provides more accurate and comparable information.

**3. Adjustments:**
- Calculate the adjustments needed for each affected financial statement line item, such as debtors, creditors, and any related exchange rate differences.
- Disclose these adjustments in the notes to your financial statements, explaining the nature of the change and its impact on each affected line item.

### Prospective Application

**1. Start from Current Period:**
- Under prospective application, you would apply the new accounting policy only to transactions occurring after the date of change.
- There would be no adjustments to prior period financial statements; hence, comparative information would remain consistent with the previous policy.

**2. Disclosure Requirements:**
- Disclose the nature of the change in accounting policy, its reasons, and the financial statement items affected.
- Provide qualitative and quantitative information to help users understand the impact of the change on your financial statements.

### Considerations

- **Accounting Standards:** Review applicable accounting standards (such as IFRS or GAAP) to determine if there are specific requirements or options regarding the change in accounting policy.

- **Materiality:** Consider the materiality of the change. If the impact on prior periods is immaterial, prospective application might be more appropriate.

- **Stakeholder Communication:** Communicate the change clearly to stakeholders such as shareholders, creditors, and regulators, ensuring they understand how it affects financial statement comparability.

### Conclusion

Given your firm’s long operating history, the decision to apply the change retrospectively or prospectively depends on factors like accounting standards, materiality, and practicality. Consulting with an accounting professional or auditor familiar with your business can provide further guidance tailored to your specific circumstances. Ensure your financial statements accurately reflect the change and provide transparent disclosure to maintain credibility and transparency with stakeholders.

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