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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Change of basis of computing taxable profits: accounting policy changes: Section 10 of FRS102

The guidance in this section refers to section 10 of FRS102. Other accounting standards that deal with accounting policy changes are FRS18 and IAS8, neither of which is significantly different to section 10 of FRS102.

Section 10 of FRS102 distinguishes between accounting policies and accounting estimates.

It defines accounting policies as ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.’

A change in accounting estimate is defined as ‘an adjustment to the carrying amount of an asset or liability, or the amount of periodic consumption of an asset, that results from an assessment of the present status of, and expected future benefits or obligations associated with, assets and liabilities.’ Examples of changes in accounting estimates include changes to 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 recognition of stock at the lower of cost and net realisable value is an accounting policy. The method used to arrive at cost and net realisable value might be to carry out a physical stock take of items on hand and then estimate how many were damaged or unusable. A change to a more reliable method of estimating cost and net realisable value would be a change in accounting estimate but not a change in accounting policy. If, however, the stock were counted in the same way but then presented in the accounts at fair value, this would be 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.