302211 Retrospective Approach 3A

Question 1

Which of the following accounting changes should be given retrospective treatment when preparing the financial statements?

A change in the useful life of a finite life intangible asset

A change in the amount of expected warranty repairs

A change from the weighted-average method to the FIFO method of inventory costing

A change in the settlement rate used in computing pension expense

Question #302211

Answer 1

A change from the weighted-average method to the FIFO method of inventory costing

A change in accounting principle is given retrospective treatment when reported in the financial statements. This means that all periods presented need to reflect the new accounting principle. A change in accounting estimate is given prospective treatment, meaning that all changes are reported in current and future periods, but no prior periods are restated.

Of the four answer choices, only the change from weighted average to FIFO (first in, first out) for inventory costing qualifies as a change in accounting principle.

Question 2

Change in Accounting Principle

Answer 2

A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. It is expected that accounting pronouncements normally will provide specific transition requirements. However, in the unusual instance that there are no transition requirements specific to a particular accounting pronouncement, a change in accounting principle effected to adopt the requirements of that accounting pronouncement must be reported as a retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so. Retrospective application requires the following:

• The cumulative effect of the change to the new accounting principle on periods prior to those presented must be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
• An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.
• Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.

A change in the method of applying an accounting principle also is considered a change in accounting principle.

FASB ASC 250-10-20

Question 3

Retrospective Application (Retrospective Approach)

Answer 3

Retrospective application (retrospective approach) is the application of a different accounting principle to one or more previously issued financial statements, or to the statement of financial position at the beginning of the current period, as if that principle had always been used, or a change to financial statements of prior accounting periods to present the financial statements of a new reporting entity as if it had existed in those prior years.

FASB ASC 250-10-20

Question 4

2311.01

Answer 4

Retrospective Approach

The FASB requires that in the absence of a specific statement by the FASB to the contrary, accounting changes should be accounted for using the retrospective approach. Under this approach, all prior years’ financial statements presented should be restated and the cumulative effect of the change should be reported in the retained earnings statement (or in the statement of changes in stockholders’ equity) as an adjustment of the beginning-of-period balance of retained earnings of the earliest year presented.

Question 5

2311.02

Answer 5

The retrospective application should include only the “direct effects” of a change in accounting principle. “Indirect effects” should not be included in the retrospective application. For example, if a portion of compensation expense is based on a percentage of profits, a change in the method of accounting for long-term construction could change the amount of compensation expense reported in each of the years affected. If indirect effects are actually incurred and recognized, they should be reported in the accounting period in which the accounting change is made.