Under FRS 102 Section 10, a change in accounting policy is applied retrospectively, restating the comparatives as if the new policy had always applied, while a change in an accounting estimate is applied prospectively, in the current and future periods only. The dividing line is that a change in measurement basis is a policy change, whereas a change in an input or measurement technique is an estimate change, and where the two cannot be told apart the change is treated as an estimate. Material prior period errors are corrected retrospectively, like policy changes.

What is an accounting policy and how is one chosen?

Paragraph 10.2 defines accounting policies as the specific principles, bases, conventions, rules and practices applied in preparing and presenting financial statements. Where FRS 102 specifically addresses a transaction, the entity applies it (paragraph 10.3). Where it does not, paragraph 10.4 requires management to develop a policy that gives relevant and reliable information, reflecting economic substance rather than legal form, free from bias, prudent and complete.

Paragraph 10.5 sets a hierarchy for that judgement: first, FRS requirements on similar and related issues; second, any applicable Statement of Recommended Practice (SORP); third, the concepts and pervasive principles in Section 2. Paragraph 10.6 allows management to look at full IFRS as well. Once chosen, paragraph 10.7 requires the policy to be applied consistently to similar transactions.

When can a company change an accounting policy?

Paragraph 10.8 allows a change only if it is required by an FRS, or if it gives reliable and more relevant information. Convenience or a better looking profit figure is not a reason. Paragraph 10.10 confirms that switching between options FRS 102 allows, including measurement bases, is a policy change. Common examples:

  • switching the stock cost formula between first in, first out and weighted average, both of which paragraph 13.18 permits;
  • switching between presenting one statement of comprehensive income and two statements (paragraph 5.3);
  • changing the policy for investments in subsidiaries in a parent’s separate accounts between cost and fair value.

Paragraph 10.9 lists things that are not policy changes: applying a policy to transactions that differ in substance from earlier ones, applying a new policy to transactions that did not occur before or were immaterial, and moving to the cost model because a reliable fair value is no longer available. Paragraph 10.10A adds a special case: first adopting the revaluation model for property, plant and equipment or intangible assets is a policy change but is dealt with as a revaluation under Sections 17 and 18, not by restating prior years.

What counts as a change in accounting estimate?

Paragraph 10.14A explains that a policy may require an item to be measured at an amount that cannot be observed directly, so an estimate is developed to meet the policy’s objective. The standard’s examples are fair values, the estimated selling price less costs to sell of stock, the depreciation charge, a warranty provision and the recoverable amount of an asset for impairment. Paragraph 10.14D recognises that estimates change as circumstances change, new information arrives or experience grows.

Depreciation is the area where people most often get this wrong. Paragraphs 17.19 and 17.23 say that a change in residual value, useful life or depreciation method is accounted for as a change in accounting estimate. Moving from straight line to reducing balance therefore does not require prior years to be restated.

How do you tell a policy change from an estimate change?

Paragraph 10.15 gives the test. The effect of a change in an input or a change in a measurement technique is a change in estimate, unless it corrects an error. A change in the measurement basis is a change in policy, except for the paragraph 10.9(c) case. If it is difficult to distinguish the two, the change is treated as a change in estimate.

Change Treatment Why
Useful life of vans cut from six years to four Estimate Input changed; paragraph 17.19
Depreciation moved from straight line to reducing balance Estimate Paragraph 17.23
Bad debt provision moved from a percentage of debtors to a review of each account Estimate Measurement technique changed, basis unchanged
Stock cost formula changed from weighted average to first in, first out Policy Choice between options in paragraph 13.18
Stock counted as before but measured at fair value instead of cost Policy Measurement basis changed

HMRC uses the same distinction. Its Business Income Manual at BIM34055 gives changes to depreciation rates and to methods of computing bad debt or warranty provisions as examples of estimate changes, and moving stock from cost to fair value as a policy change.

How is a change in accounting policy applied?

Paragraph 10.11 says a change required by an amendment to an FRS follows that amendment’s transitional provisions, if any. All other changes are applied retrospectively under paragraph 10.12: the new policy is applied to the comparative figures as if it had always applied, back to the earliest date practicable. If the effect on earlier periods cannot be determined after every reasonable effort, the new policy is applied from the start of the earliest practicable period, which may be the current one, with an adjustment to opening equity.

For a voluntary change, paragraph 10.14 requires disclosure of the nature of the change, why it gives reliable and more relevant information, the adjustment to each line item for the current year, each prior year presented and earlier years in total, and an explanation if any amount is impracticable to determine. The restatement also appears in the statement of changes in equity under paragraph 6.3(b).

How is a change in estimate applied?

Paragraph 10.16 requires the effect to be recognised prospectively in profit or loss: in the period of change if only that period is affected, or in the period of change and future periods if both are. Where the change affects an asset, liability or equity item, paragraph 10.17 adjusts its carrying amount in the period of change. Nothing is restated. Paragraph 10.18 requires disclosure of the nature of the change and its effect on the current period, and on future periods where practicable to estimate.

Illustration only. A van cost £30,000 with no residual value and a six year life, so depreciation is £5,000 a year. After two years its carrying amount is £20,000. The directors now expect to replace it after two more years. The remaining £20,000 is spread over two years at £10,000 a year. The first two years’ charges are not revisited.

How are prior period errors corrected?

Paragraph 10.19 defines prior period errors as omissions and misstatements arising from failing to use, or misusing, reliable information that was available when the earlier accounts were authorised and could reasonably have been obtained and taken into account. Paragraph 10.20 lists arithmetical mistakes, mistakes in applying policies, oversights, misinterpretation of facts and fraud.

A material error is corrected retrospectively in the first accounts authorised after its discovery, by restating the comparatives or, if it arose earlier, the opening balances of the earliest period presented (paragraph 10.21). Paragraph 10.23 requires disclosure of its nature, the correction to each line item for each prior period presented and the correction at the start of the earliest period.

The test is information available at the time. An estimate that proves wrong because events turned out differently is not an error; it is a change in estimate dealt with in the current year. Only where the information existed and was missed or misused is it an error.

Illustration only. This year a company finds that last year’s closing stock of £8,000 was counted twice. It restates last year’s comparatives: stock falls by £8,000, last year’s profit falls by £8,000 before tax effects, and this year’s opening retained earnings are restated. This year’s cost of sales is no longer distorted by the inflated opening stock.

What are the tax consequences?

HMRC treats the two kinds of prior period adjustment differently. Under BIM34040, a change from one valid basis to another, which includes a change of accounting policy, needs an adjustment so that receipts are taxed once and deductions given once over the life of the business. For corporation tax, BIM34095 says a positive adjustment is treated as a trade receipt, and a negative adjustment as a deduction, arising on the first day of the first period of account on the new basis, under section 181 of the Corporation Tax Act 2009.

An error correction is different. BIM34020 notes that where accounts have a prior period adjustment for a material error, the earlier accounts may have been prepared on an invalid basis, and the change of basis rules only apply from one valid basis to another. BIM34030 and BIM34035 explain that HMRC may then look at earlier years, subject to the discovery rules and time limits. The usual practical answer is to correct the earlier return where it is still open; see amending a tax return. For how these items are explained in the accounts, see FRS 102 notes to the accounts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.