Accounting policy[1] should be amended within certain time limits[2], if such an obligation arises from the amendment of those accounting provisions or if the entity has lost the right to apply the simplifications provided for in the accounting rules. It may also be possible, in justified cases, to refrain from continuing to apply the accounting policy adopted and to amend it by retrospectively converting comparative data.
This is possible if the entity considers that this is necessary for a clearer presentation of its financial and financial situation and the financial result. According to point 3.7. National Accounting Standard No.
7 „Changes in accounting policies, estimates, correction of errors, events following the balance sheet day – take-up and presentation.” (Official Journal of the Minister of Finance, Warsaw, on 4 January 2019, item 2, hereinafter referred to as: CRS No 7) the new rule applies from first the date of the financial year; depending on the decision of the manager of the unit, this is the first the current or subsequent financial year.
Under point 3.9. CRS No 7 examples of situations that do not constitute a change in accounting policy are described. These include:
- 1) the adoption of accounting policies that differ from those previously applied to similar but not identical events and transactions,
- 2) the adoption of a new rule for events that have not previously occurred or occurred but have been irrelevant and have become relevant,
- 3) changes in estimates.
- 4) to decide to absorb newly acquired fixed assets by a method other than those used for similar facilities,
- 5) changes in the depreciation rates of fixed assets or intangible assets as a result of their verification,
- 6) the reclassification of fixed assets or vice versa of a long-term investment property arising solely from a change in the use of that property.
The change in accounting policy is included in the accounts for two methods i.e. through a full retrospective or transitional approach.
The full retrospective approach shall be applied when: (a) amendments to the accounting rules, resulting in a mandatory change in accounting policy, do not include transitional provisions setting out how to take them into account, (b) the entity on its own initiative changes the accounting policy adopted, (c) there is a loss of the right to apply the simplifications resulting from the accounting rules.
In turn, transitional provisions are applied when amendments to the accounting rules, which result in a mandatory change in accounting policy, determine how to take account of changes.
How is the retrospective approach applied? According to point 3.12. CRS No 7 unit:
- „(a) has the effect of modifying the accounting policies adopted into equity, demonstrating them under Article 8(2) [Accounting] as profit (loss) from previous years or other equity items (funds), if otherwise provided for in other accounting provisions,
- (b) transforms retrospectively the comparative data in the accounts;
(c) shows the effects of changes to the adopted accounting rules (policy) under the relevant heading of the statement of own capital changes (fund) if it is required to draw it up.’ [3]
In the event of a change in the adopted accounting policy, the nature of the changes, the reasons for their introduction and their numerical impact on the financial result or equity (fund) and the retrospective transformation of comparative data, respectively, should also be disclosed in additional information and explanations.
Chapter IV of CRS No 7 presents the issue of estimates. The determination of estimates shall be made on the basis of reliable information, using the appropriate methods of estimation under the conditions. point 4.1. CRS No 7 lists examples of subjects of respect, i.e. Among others:
- (a) claims whose recovery is doubtful,
- (b) periods of use subject to depreciation: fixed assets, intangible assets, real estate investments and rights,
- (c) deferred tax assets and reserves,
- (d) costs of producing long-term, unfinished services,
(e) provisions for liabilities and treated as ancillary costs, e.g. provisions for employee benefits, provisions for losses on commercial transactions in progress (including the effects of ongoing litigation, guarantees, guarantees).
According to point 4.2. CRS No 7, estimates shall be verified by the entity if:
- (a) the circumstances underlying the estimates made have changed,
- (b) the entity has obtained additional information which was previously unknown to the entity,
(c) the entity has acquired more economic experience.
Additionally, as Waldemar Gos writes:
„1. The change in the estimated values or the application of estimates to the valuation of assets previously shown at the purchase price or cost of production, possibly less the write-offs made against the loss of value, does not constitute a change in the accepted accounting policy.
Similarly, replacing a fair value with an adjusted purchase price or a purchase price, if a reliable fair value is not possible, does not constitute a change in accounting policy.
The change in valuation rules (e.g. materials in the purchase price instead of the purchase price) is a change in the accepted accounting policy.
In the event of difficulties in contrast to changes in the accepted accounting rules and changes in the estimated values, the estimated values shall be deemed to have changed.’[4]
Chapter V of CRS No 7 concerns error correction. All errors detected should be corrected whether they have been committed in the current or previous financial years.
‘Under the concept of errors made in previous financial years, omissions or irregularities in the entity’s financial statements for the previous year or previous financial years, causing a significant distortion of the reported data contained in the approved financial statements for the preceding years, those reports cannot be considered to be clearly and reliably presenting the entity’s financial, financial and financial situation.’[5]
point 5.2. CRS No 7 lists examples of situations that do not constitute error correction; i.e.:
- (a) the effects of a change in the accounting policy adopted due to a change in the accounting provisions or to an entity's initiative,
- (b) the effects of events which the entity could not have known, despite due diligence, and was therefore not able to take them into account in previous annual accounts,
(c) changes in estimates which, by nature, are some approximations and need to be updated after obtaining additional information.
[1] In the rest of the text, the terms ‘accounting principles’ and ‘accounting policies’ will be used interchangeably.
[2] According to Article 8(2) Accounting Act: ‘In order to be fair and clear, an entity may, with effect from first on the day of the financial year, irrespective of the date of the decision, change the existing arrangements to the other ones provided for by the Act. The revision of the existing arrangements also requires the additional information to specify the impact of these amendments on the accounts required by other legal provisions if they have been drawn up for the period during which the above arrangements have changed. In such a case, the financial statements of the entity for the financial year in which the changes occurred, the reasons for these changes, their impact on the financial result, and the comparability of the financial statements for the year preceding the financial year in which the changes took place, shall be quantified. The effects of the changes in the accounting policies adopted relate to equity (fund) and show as profit (loss) from previous years.’
[3] CRS No 7, point 3.12.
[4] Gos Waldemar, “National Accounting Standard No. 7 „Changes in accounting policies, estimates, error correction, events following the balance sheet day – take-up and presentation”, LEX.
[5] Ibid.
Author: Michał Zdanowski, tax consultant in Russell Bedford Poland. Graduate of the Faculty of Law and Administration of the University of Warsaw, Graduate of the Postgraduate Tax and Tax Law Studies of the University of Warsaw, Graduate of the Postgraduate Accounting and Finance Studies of the Warsaw School of Economics.
During his studies, he gained experience in law and tax law firms. Since September 2013 is associated with the law firm Russell Bedford Poland. It specialises in documenting transactions between related parties.