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Accounting Changes and Error Corrections (Changes in Accounting Estimate…
Accounting Changes and Error Corrections
Changes in Accounting Estimate (Prospective)
should not be restated
if previously used estimate is incorrect
Include
- change in
fixed asset life
, adjustment of year end
accrual of officer's salaries
, write-downs of
obsolete inventory
, material
IRS adjustments
,
litigation
, change in
accounting principles
, and
discontinued operations
Changes in Accounting Estimate (Retrospective)
accounting principle only changed if
required by GAAP
, or if
alternative is preferable
Direct Effects
- adjustments necessary to restate the financial statements of prior periods
Indirect Effects
- difference in bonuses that would've occurred if new principle used
Cumulative Effects (Net of Tax)
- adjust to beginning Retained Earnings
Noncomparative
- cumulative effect
Beg RE - (Delta) RE
of all affected periods
Comparative
- cumulative effect
Beg RE - RE
if change had been applied to all periods
Reporting Changes
- recognized by adjusting beginning RE in earliest period for cumulative effect
Exceptions to General Rule
-
impracticable to estimate
or
change in depreciation method
Application of General Rule
- cumulative effect to be reported net of tax on RE Statement
new accounting principle is used for all periods presented
(prior periods restated)
Changes in Accounting Entity (Retrospective)
entity being reported on has changed composition (consolidated)
all previous financial statements
that are presented in
comparative should be restated
Error Correction (Prior Period Adjustment)
not accounting changes (
non GAAP to GAAP
)
Comparative Financial Statements Presented
correct the info
(if year presented) or
adjusting Beg RE
of earliest year (if year not presented, net of tax)
Effect on Statement of RE - always net of tax