Download Chapter 22: Accounting for Changes and Error Analysis

Accounting Changes and
Error Corrections
Sid Glandon, DBA, CPA
Associate Professor of Accounting
The University of Texas at El Paso
Types of Accounting Change




Change in Accounting Principle
Change in Accounting Estimates
Change in Reporting Entity
Correction of errors
Changes in Accounting Principle

Change from one generally accepted
principle to another




Adopt a new FASB standard
Change methods of inventory costing
Change to, or from, cost method to equity
method
Change to, or from, completed contract to
percentage-of-completion
Change in Accounting Estimate

Revision of an estimate because of new
information or experience

Change in accounting principle





Depreciation, amortization, depletion methods
Change estimate of useful life
Change estimate of residual value
Change estimate of bad debt percentage
Change actuarial estimates regarding
pension plan liability
Change in Reporting Entity

Change from reporting as one type of
entity to another type of entity


Consolidate a subsidiary for the first time
Replace individual financial statements with
consolidated financial statements
Correction of an Error

Correction of error in prior period






Math errors
Inaccurate physical count of inventory
Chance from cash basis to accrual basis
Failure to record an AJE
Incorrectly classifying and recording assets
or expenses
Fraud or gross negligence
Approaches to Reporting
Accounting Changes

Retrospective approach






Improves consistency and comparability
Revise comparative financial statements
Report cumulative effect on prior years’ income
AJE to adjust general ledger accounts
Disclose in notes to financial statements
Prospective approach


Implementation in current year
Effects reflected in current and future years
Change in Accounting Principle

Retrospective approach




Revise comparative financial statements
Adjust general ledger accounts
Disclose in notes to financial statements
Prospective approach

When retrospective approach is impracticable



Mandated by FASB
Change to LIFO inventory method
Change depreciation, amortization or depletion methods
Change in Accounting Estimate

Prospective Approach



A consequence of having to use estimates
Change is reflected in current and future
periods
Disclose in notes to financial statements
Change in Reporting Entity

Retrospective approach



Restatement of all prior periods reported
Consolidation of financial statements
Disclose in notes to financial statements
Correction of an Error

Retrospective approach




Revise prior years’ statements
Report cumulative effect on prior years’
income
AJE to adjust general ledger accounts
Disclose in notes to financial statements
Prior Period Adjustment

Adjustment to beginning retained
earnings of the earliest period reported

Cumulative effect of correction of error