Acca

CHAPTER

Accounting for Changes and Errors

OBJECTIVES

After careful study of this chapter, you will be able to: 1. 2. 3. 4. 5. 6. 7. 8. Identify the types of accounting changes. Explain the methods of disclosing an accounting change. Account for a change in accounting principle using the retrospective adjustment method. Account for a change in estimate. Explain the conceptual issues regarding a change in accounting principle and a change in estimate. Identify a change in a reporting entity. Account for a correction of an error. Summarize the methods for making accounting changes and correcting errors.

23-1

SYNOPSIS Types of Accounting Changes 1. GAAP establishes the generally accepted accounting principles for the following changes: (a) (b) (c) Change in Accounting Principle - A change from one generally accepted accounting principle to another generally accepted accounting principle that is more preferable. Change in Accounting Estimate - A change in a prior estimate resulting from additional information, more experience, or a new event. Change in Reporting Entity - A change in the entity being reported, such as a change in the subsidiaries included in a company’s consolidated financial statements.

In addition to these changes, GAAP also establishes the accounting principles for the corrections of errors. Methods of Reporting an Accounting Change 2. The two possible methods for a company to disclose an accounting change (or error) in its financial statements include: (a) (b) Retrospective application of a new accounting principle (restate the financial statements of prior years, sometimes referred to as a retroactive adjustment or a restatement). Adjust for the change prospectively (prospective adjustment).

Exhibit 23-1 in the text summarizes the methods to be used and the impact on the financial statements. Accounting for a Change in Accounting Principle 3. A change in accounting principle may be a voluntary change from one generally accepted...