Accounting Changes and Error Analysis

Accounting Changes and Error Analysis

Retrospective application refers to the application of a different accounting principle to recast previously issued financial statements-?as if the new principle had always been used. When a company changes an accounting principle, it should report the change by reporting the cumulative effect of the change in he current years income statement. One of the disclosure requirements for a change in accounting principle is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

An indirect effect of an accounting change is any change to current or future cash flows of a company that result from making a change in accounting principle that is applied retrospectively. Retrospective application is considered impracticable if a company cannot determine the prior period effects using every reasonable effort to do so. Companies report changes in accounting estimates retrospectively. When it is impossible to determine whether a change in principle or change in estimate has occurred, the change is considered a change in estimate.

Companies account for a change in depreciation methods as a change in accounting principle. When companies make changes that result in different reporting entities, the change is reported prospectively. Changing the cost or equity method of accounting for investments is an example of a change in reporting entity. Accounting errors include changes in estimates that occur because a company acquires more experience, or as it obtains additional information. Companies record corrections of errors from prior periods as an adjustment to the beginning balance of retained earnings in the current period.

Please follow and like us:
Haven’t found the essay you want?