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