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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: how are they reported in accounts

Section 10 of FRS102 requires changes in accounting policy resulting from a change in the requirements of an accounting standard, or from the adoption of a new accounting standard, to be accounted for in accordance with the transitional provisions of that standard. All other changes in accounting policy should be accounted for retrospectively.

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 Year 1 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 Year 2 accounts.

By the time that the Year 2 accounts were being prepared a new financial reporting standard had come into force. Because the provision fails to satisfy the requirements of the standard, the business cannot now make the further provision of £500,000 in Year 2. 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 Year 1 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, see BIM34070.