When can a company change its accounting policy

Q: What looks like a policy change but is not one?

New or different transactions. Paragraph 10.9 says applying a policy to transactions that differ in substance from earlier ones, or to transactions that did not happen before or were immaterial, is not a change in policy. A first finance lease or a first grant simply needs a policy. Losing a reliable fair value. Moving to the cost model because a reliable fair value is no longer available is not a policy change either (paragraph 10.9(c)). First revaluation. Adopting the revaluation model for property, plant and equipment or intangible assets for the first time is a policy change, but paragraph 10.10A says it is dealt with as a revaluation under Sections 17 or 18, not by restating earlier years. Estimates. Changing an input or a measurement technique, such as a useful life or a bad debt method, is a change in estimate and applied prospectively (paragraph 10.15). Changing framework. Moving to FRS 102 from IFRS, FRS 101 or FRS 105 is a change of reporting framework, dealt with under Section 35 Transition to this FRS rather than Section 10. Company law also limits how often a company can move from IAS accounts back to Companies Act accounts: section 395 of the Companies Act 2006 allows a voluntary switch back only if the company has not made such a change in the previous five years.

Under FRS 102 a company may change an accounting policy voluntarily only if the new policy gives reliable and more relevant information about its financial position, performance or cash flows (paragraph 10.8). The change is applied retrospectively, restating the comparatives as if the new policy had always applied, and the notes must explain what changed, why it is better and the effect on each line item.

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When is a voluntary change allowed?

FRS 102 starts from consistency. Paragraph 10.7 requires policies to be applied consistently to similar transactions, and company law says the same thing: accounting policies and measurement bases must be applied consistently within the same accounts and from one financial year to the next (paragraph 12 of Schedule 1 to the Small Companies Regulations, with an identical rule for larger companies).

Paragraph 10.8 then allows a change in only two cases: where an FRS requires it, or where the change results in the financial statements providing reliable and more relevant information. The second limb is the voluntary change. It is a two part test. The new policy must be at least as reliable, and it must be more relevant to users. A wish to report a higher profit, match a competitor or make the bookkeeping easier is not a reason on its own, and paragraph 10.14(b) makes the company say in its notes why the new policy passes the test.

This page is about deciding on and carrying out a voluntary change. The underlying Section 10 rules, including how a policy change differs from a change in estimate and how errors are corrected, are covered in FRS 102 Section 10: policies, estimates and errors.

Which policy choices does FRS 102 actually offer?

Paragraph 10.10 says that where an FRS allows a choice of accounting treatment, including a measurement basis, changing the previous choice is a change in accounting policy. The main choices are:

Choice	Options	Paragraph
Borrowing costs on qualifying assets	Capitalise or expense	25.2
Development costs meeting the recognition criteria	Capitalise or expense, applied consistently	18.8H and 18.8K
Government grants	Performance model or accrual model, by class	24.4
Property, plant and equipment	Cost model or revaluation model, by class	17.15
Stock cost formula	First in, first out or weighted average	13.18
Investments in subsidiaries in separate accounts	Cost less impairment, or fair value	9.26
Investment property rented to another group entity	Fair value, or transfer to the cost model	16.4A
Financial instruments	Sections 11 and 12, or recognition and measurement under IAS 39 or IFRS 9	11.2
Comprehensive income	One statement or two	5.2

Outside these choices, a voluntary change is rare, because where FRS 102 specifically deals with a transaction the company must follow it.

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What looks like a policy change but is not one?

New or different transactions. Paragraph 10.9 says applying a policy to transactions that differ in substance from earlier ones, or to transactions that did not happen before or were immaterial, is not a change in policy. A first finance lease or a first grant simply needs a policy.
Losing a reliable fair value. Moving to the cost model because a reliable fair value is no longer available is not a policy change either (paragraph 10.9(c)).
First revaluation. Adopting the revaluation model for property, plant and equipment or intangible assets for the first time is a policy change, but paragraph 10.10A says it is dealt with as a revaluation under Sections 17 or 18, not by restating earlier years.
Estimates. Changing an input or a measurement technique, such as a useful life or a bad debt method, is a change in estimate and applied prospectively (paragraph 10.15).
Changing framework. Moving to FRS 102 from IFRS, FRS 101 or FRS 105 is a change of reporting framework, dealt with under Section 35 Transition to this FRS rather than Section 10. Company law also limits how often a company can move from IAS accounts back to Companies Act accounts: section 395 of the Companies Act 2006 allows a voluntary switch back only if the company has not made such a change in the previous five years.

How is the change carried out step by step?

Document the reason. The directors should record why the new policy is more relevant and no less reliable. That reasoning becomes the 10.14(b) disclosure and is what an auditor or reviewer will test.
Work out the effect on earlier years. Under paragraph 10.12 the new policy is applied to comparative information as if it had always been applied, back to the earliest date practicable. The opening balances of the comparative year, and the comparative profit, are restated.
Consider impracticability. If the effect on individual earlier periods cannot be determined, the policy is applied from the start of the earliest period for which it is practicable, which may be the current period, with an adjustment to opening equity. The glossary defines impracticable as being unable to apply a requirement after making every reasonable effort to do so; inconvenience is not enough.
Update the primary statements. Paragraph 6.3(b) requires the statement of changes in equity to show, for each component of equity, the effect of retrospective application.
Write the disclosure. Paragraph 10.14 requires the nature of the change, the reasons, the adjustment for each line item affected for the current period, each prior period presented and earlier periods in total, and an explanation if any amount is impracticable to determine. Later accounts need not repeat it.
Revise the policies note. The accounting policies note should describe the new policy, not the old one with a footnote.

Small companies using Section 1A are not exempt from explaining the change. Paragraph 1AC.8 repeats the company law rule that where a comparative figure is not comparable and is adjusted, particulars of the non comparability and the adjustment must be disclosed, and notes that this is likely to apply to a change in accounting policy. Company law also requires particulars, reasons and effect to be given where directors depart from any of the statutory accounting principles for special reasons (paragraph 10(2) of Schedule 1).

What does a voluntary change look like in practice?

Illustration only. A software company has always expensed development costs. In 2026 it decides to capitalise development costs that meet the paragraph 18.8H criteria, because investors and lenders want the balance sheet to reflect the platform it is building. Its records show that £60,000 of last year’s spending met every criterion at the time, and the product has not yet been brought into use, so no amortisation has started.

Comparative year	As originally reported	Restated
Development costs expensed	£60,000	Nil
Intangible asset at year end	Nil	£60,000
Profit before tax	£20,000	£80,000

Tax effects are ignored here. The current year’s opening retained earnings rise by £60,000 and the notes explain the change. Had the company not kept records showing which earlier costs met the criteria when they were incurred, restating those years could be impracticable and the policy would start from the earliest practicable date instead. Paragraph 18.8K then requires the policy to be applied consistently to all qualifying expenditure: the company cannot capitalise only the projects it likes.

How do groups deal with policy changes?

Paragraph 9.17 requires consolidated accounts to use uniform accounting policies for like transactions, adjusting a subsidiary’s figures on consolidation where it uses different policies. A group may also want a newly acquired subsidiary to change its own policies to match. That is still a voluntary change in the subsidiary’s individual accounts, so it still needs the 10.8 justification, retrospective application and 10.14 disclosure. Separately, section 407 of the Companies Act 2006 requires a parent preparing group accounts to secure that its own and its subsidiaries’ individual accounts use the same financial reporting framework, unless there are good reasons not to.

What are the tax and dividend consequences?

For corporation tax, a change of accounting policy is a change of basis under section 180 of the Corporation Tax Act 2009. HMRC’s Business Income Manual at BIM34040 explains that an adjustment is needed so that receipts are taxed once and deductions given once over the life of the business. Under section 181 a positive adjustment is a trading receipt, and a negative one a deduction, arising on the first day of the first period of account on the new basis. The adjustment is therefore taxed in that first period rather than by amending earlier returns.

Distributions are tested against the company’s last annual accounts (section 836 of the Companies Act 2006). A change that reduces opening reserves will reduce the profits available in the next accounts used for that test, so the effect on distributable reserves should be checked before any dividend is declared.

What mistakes come up most often?

Changing policy to improve results with no genuine relevance argument.
Applying the new policy from the current year only and calling earlier years impracticable without a real attempt.
Treating an estimate change, such as a new depreciation rate, as a policy change and restating.
Restating the comparatives but forgetting the statement of changes in equity or the line by line disclosure.
Overlooking the corporation tax change of basis adjustment.
Changing back and forth between options, which undermines the claim that either policy is more relevant.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.