Accounting Changes Flashcards
What are the two types of Accounting Changes that can take place ?
Change in accounting Principles
Change in accounting Estimates
Prior Period Adjustment
A change from an incorrect accounting method to one that is acceptable under GAAP or IFRS or the correction of an accounting error is reported as a prior period adjustment
How is Prior Period Adjustment made ?
Prior period adjustments are made by restating results for all prior period statements presented in the current financial statements
Disclosure of the nature if the adjustment and its affect on the net income is also required
What are the frequent Prior Period Adjustments ?
Prior period adjustments usually involve errors or new accounting standards and typically do not affect cash flow unless tax accounting is also affected.
Analyst should review adjustments carefully because errors may indicate weakness in the firms’s internal control system
What is Change in Accounting Principle ?
A change in accounting principle refers to the change from one GAAP or IFRS method to another method
and
requires RETROSPECTIVE APPLICATION so all of the prior period financial statements currently presented are restated to reflect the change
Important
Changes in asset lives and salvage value are accounting estimates and are not considered changes in accounting principle
What is Change in Accounting Estimates ?
Generally a change in accounting estimate is the result of a change in management’s judgement,usually due to new information
A change in estimate is applied PROSPECTIVELY and does not require the restatement of of prior financial statements.
Example of Change in Accounting Estimates ?
For example management may change the estimated useful life of an asset because new information indicates the asset has a longer life than originally expected
Accounting changes typically do not affect cash flow.
An analyst should review accounting principle changes and changes in accounting estimates to determine the impact on future cash operating results
