BIM34050 - Change of basis of computing taxable profits: of accounting policy changes: has there been a change

A change of accounting policy happens when a business changes the way that it draws up its accounts in some respect. This has also often been described as a change of accounting basis. Since such changes are matters of accountancy the advice of the appropriate HMRC Accountant should always be sought in cases of doubt or difficulty.

Entities will change accounting policies either to a more appropriate policy or in order to comply with a new accounting standard, BIM34055.

Change in the way an existing policy is applied

A change of accounting policy as compared to a change in the way in which an existing policy is applied must be distinguished. The latter is not a change in accounting policy.

FRS3 at paragraph 61 says ‘Estimating future events and their effects requires the exercise of judgement and will require reappraisal as new events occur, as more experience is acquired or as additional information is obtained. Because a change in estimate arises from new information or developments, it should not be given retrospective effect by a restatement of prior periods. Sometimes a change in estimate may have the appearance of a change of accounting policy and care is necessary to avoid confusing the two.’

For example stock is valued at the lower of cost and net realisable value. A business may decide that its method of estimating cost is not accurate enough, without it necessarily being wrong. It may decide to adopt a different method. This is described as a change in estimation technique in FRS18. (This would not amount to a change of accounting policy unless it represents the correction of a fundamental error or is required by another accounting standard, Companies Act or European legislation.) The closing stock figure will be calculated using the new method without comment and the opening stock figure will be calculated using the old method. The consequences of such changes in methods and estimates will pass through the profit and loss account and no special treatment is required.

Modification of an accounting policy

There is a distinction between a change of accounting policy and a modification of a particular policy made because of a change in trading conditions. FRS3 recognises this in paragraph 62 ’It is a characteristic of a change in accounting policy that it is the result of a choice between two or more accounting methods. Therefore it does not arise from the adoption or modification of an accounting method necessitated by transactions or events that are clearly different in substance from those previously occurring.’ A change of policy has to involve a change between two different policies.

For example a modification to a method of computing a provision brought about by changes in the nature of the obligation in respect of which the provision was made, or in the probable future costs to be incurred, would not constitute a change of policy.

FRS18 gives some useful examples clarifying accounting policy.

Where an existing policy is modified no tax computation adjustment is necessary as the opening figures for the accounting period will be the same as the closing figures for the previous accounting period.