FRS3 - Reporting financial performance, gives the accountancy
rules for showing changes in accounting policy in the accounts. A
change in accounting policy made to adopt a new standard will
result in a prior period adjustment unless the new standard
contains transitional provisions which do not require this.
The following example illustrates how a change of accounting
policy from one valid policy to another is reported.
A business made a reorganisation provision of £1million in
its 1998 accounts under a valid accounting policy for that
accounting period. Under the same accounting policy it would have
provided a further £500,000 in its 1999 accounts.
By the time that the 1999 accounts were being prepared FRS12
had come into force. (FRS12 contains stringent requirements for
reorganisation provisions). Because the provision fails to satisfy
these requirements, the business cannot now make the further
provision of £500,000 in 1999. It must also remove the
£1million from its balance sheet.
The provision is removed by way of a 'prior period
adjustment' and the effect of this is to enhance shareholders or
owners equity by increasing retained profits by the amount of the
adjustment.
The profit and loss account for the previous year will be
restated so as to provide accurate comparative figures.
There is no reopening of the 1998 accounts because the
accounting policy was valid at the time that the accounts were
drawn up.
If the reorganisation provision of £1million had been
allowed for tax purposes the prior period adjustment is taxable,
BIM34070.
