BIM34055 - Change of basis of computing taxable profits: accounting policy changes: FRS18

UK GAAP on accounting policies is provided by FRS18, which is mandatory for accounting periods ending on or after 22 June 2001. FRS18 distinguishes between accounting policies, estimation techniques and measurement bases. It defines accounting policies as:

‘Those principles, bases, conventions, rules and practices applied by an entity that specify how the effects of transactions and other events are to be reflected in its financial statements through:

assets, liabilities, gains, losses and changes to shareholders funds.’

The terms accounting bases and accounting policies have previously been used interchangeably to describe the way in which the fundamental concepts of accounting are applied to the financial transactions of a business for the purpose of drawing up financial accounts. FRS18 uses the term accounting policy for this and does not use the term 'accounting basis'.

Examples of measurement bases are historic cost and current value bases. If an entity moves from measuring and presenting an asset or liability on one measurement basis to another this is a change in accounting policy.

Examples of estimation techniques are rates of depreciation and methods of computing bad debt reserves or warranty provisions. It is not a change in accounting policy if an estimation technique is changed to a more accurate technique.

For example the historic cost basis for stock is the lower of cost and net realisable value. The estimation technique used might be to carry out a physical stock take of items on hand and then estimate how many were damaged or unusable, to work out the cost of the saleable items in stock. A better method of estimating the unsaleable stock would be a change in estimation technique but not a change in measurement basis, which is still historic cost, or accounting policy. If the stock were counted in the same way but then presented in the accounts at mark to market (fair value) this would be a change in measurement basis from historic cost to current value and a change in accounting policy.

If an entity moves from using a realisation basis for trading assets to a mark to market basis this is a change in accounting policy.