Synopsis
In this article, the author has touched upon a case of prevailing inconsistencies in the Indian GAAP and the listing agreement. The question raised here is whether changes in accounting policies should be disclosed by way of restatement of results of the earlier periods, while presenting quarterly financial results prepared as per the listing agreement requirements. This question has been analysed by taking into account AS-5, AS-25 and Clause 41 of the Listing Agreement. Read on for the analysis made by the author and a brief comparison with IFRS.
Question
How are changes in accounting policies (other than those required on adoption of new accounting standards) presented in the quarterly financial results prepared as per the listing agreement requirements? Is the impact of change in accounting policy on earlier periods disclosed as a one line item in the current interim period or reflected by restating the financial results of the prior interim periods? Response Let us first consider the requirements of various standards.
AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Paragraph 32
Any change in an accounting policy which has a material effect should be disclosed. The impact of, and the adjustments resulting from, such change, if material, should be shown in the financial statements of the period in which such change is made, to reflect the effect of such change.
Paragraph 33
A change in accounting policy consequent upon the adoption of an Accounting Standard should be accounted for in accordance with the specific transitional provisions, if any, contained in that Accounting Standard.
AS 25 Interim Financial Reporting
Paragraph 2
A statute governing an enterprise or a regulator may require an enterprise to prepare and present certain information at an interim date which may be different in form and/or content as required by this Standard. In such a case, the recognition and measurement principles as laid down in this Standard are applied in respect of such information, unless otherwise specified in the statute or by the regulator.
Paragraph 16
An enterprise should include the following information, as a minimum, in the notes to its interim financial statements, if material and if not disclosed elsewhere in the interim financial report:
(a) a statement that the same accounting policies are followed in the interim financial statements as those followed in the most recent annual financial statements or, if those policies have been changed, a description of the nature and effect of the change……..
Paragraph 42
A change in accounting policy, other than one for which the transition is specified by an Accounting Standard, should be reflected by restating the financial statements of prior interim periods of the current financial year.
Paragraph 43
One objective of the preceding principle is to ensure that a single accounting policy is applied to a particular class of transactions throughout an entire financial year. The effect of the principle in paragraph 42 is to require that within the current financial year any change in accounting policy be applied retrospectively to the beginning of the financial year.
Stock Exchange Listing Agreement Clause 41
Clause 41 IV (i)
Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) issued by ICAI/Company (Accounting Standards) Rules, 2006, whichever is applicable.
Discussion Paper on “Revision of Clause – 41 of Equity Listing Agreement”
Paragraph 4.13
Disclosure of impact of change in accounting policy: If there are any changes in the accounting policies during the year, the impact of the same on the prior quarters of the year, included in the current quarter results, shall be disclosed separately by way of a note to the financial results of the current quarter, without restating the previously published figures.
IV h
Changes in accounting policies, if any, shall be disclosed in accordance with Accounting Standard 5 (AS 5 – Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) notified under the Company (Accounting Standards) Rules, 2006 (as amended) / issued by the Institute of Chartered Accountants of India (ICAI), as applicable. If there are any changes in the accounting policies during the year, the impact of the same on the prior quarters of the year, included in the current quarter results, should be disclosed separately by way of a note to the financial results of the current quarter without restating the previously published figures. Where the impact is not quantifiable a statement to that effect shall be made.
Executive Summary
1. AS-5 requires the cumulative effect of changes in accounting policies to be disclosed in the current period. The current period could be a financial year or an interim period.
2. AS-25 requires changes in accounting policies to be reflected by restating the financial statements of prior interim periods of the current financial year. Interestingly, AS-25 allows restatement of only prior interim periods of the current financial year. In other words, interim periods of previous financial year are not restated. Therefore under AS-25 results are comparable only with respect to current financial year but not with respect to previous financial years.
3. The appropriate standard for quarterly accounts is AS-25 and not AS-5. However, AS-25 clearly states that regulations will have an overriding effect.
4. The listing agreement and the discussion paper on clause 41 clearly articulate that changes in accounting policies in interim periods are reflected in the current interim period. Comparative interim periods are not restated.
5. In the author’s opinion, clause 41, which is the regulation, will have to be followed. In other words, the cumulative effect of changes in accounting policies is reflected in current interim periods. Comparative interim periods are not restated.
Author’s suggestion
The International Financial Reporting Standards (IFRS) require comparative interim periods to be restated when accounting policies are changed. However unlike AS-25, they require even previous financial year’s interim period to be restated. Even in annual financial statements, IFRS requires previous year results to be restated to give effect to change in accounting policy. This ensures complete comparability.
Restatement of previous period financial statements is a better presentation of changes in accounting policies as it provides comparable numbers based on the new accounting policy. In India, we need to align AS-5, AS-25 and the listing agreement to enforce this comparability in line with IFRS (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors & IAS 34 Interim Financial Reporting).
