A company currently measures a class of property using the cost model permitted by IAS 16, and management wants to switch to the revaluation model purely as a matter of preference, with no new IFRS requirement compelling the change and no change in the entity's circumstances. Under IAS 8, is this voluntary change in accounting policy permitted, and if so, on what condition?
- It is never permitted, because voluntary changes in accounting policy are prohibited outright once a policy has first been applied
- It is permitted automatically, because management is always free to choose between any of the accounting policies allowed by an IFRS Standard at any time, without further justification
- It is permitted only if a majority of the entity's shareholders formally approve the change at a general meeting
- It is permitted only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows
Why D? And why not the others?
Correct answer: D. It is permitted only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows
IAS 8 permits an entity to change an accounting policy voluntarily only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows; management must be able to justify the switch on that basis, and the reasons must be disclosed. The option treating voluntary policy changes as prohibited outright is wrong because IAS 8 explicitly permits them under that condition; a policy is not frozen forever simply because it has been applied once. The option treating the change as automatically permitted with no further justification ignores that IAS 8 conditions voluntary changes on demonstrating improved reliability and relevance, not on management's unconstrained preference alone. The option requiring formal shareholder approval at a general meeting invents a governance mechanism that IAS 8 does not impose; the standard's test is about the quality of the resulting information and the required disclosures, not a shareholder vote.
Source: IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 14-16 (selection and application of accounting policies; voluntary changes)