Accounting Changes and Estimates

Question 1

How to account for Changes in Accounting Estimate and when does it occur?

Answer 1

Prospectively
Occurs when it is determined that the estimate previously used by the company is incorrect

Question 2

How to account for Changes in Accounting Principle and when does it occur?

Answer 2

Retrospectively
Change from one accounting principle to another acceptable accounting principle (GAAP to GAAP)

Question 3

How is a prospective change accounted for?

Answer 3

Implement in the current period and continue in future periods

Question 4

How is a retrospective change accounted for?

Answer 4

By adjusting beginning retained earnings in the earliest period presented for the cumulative effect.
If prior period F/S are presented, they should be restated.

Question 5

What is a change in accounting principle that is inseparable from a change in estimate? And how to account for?

Answer 5

Prospectively
1. When it is considered impracticable to estimate: Change in inventory cost flow assumption to LIFO
2. Change in Depreciation Method: These should be accounted for as a change in estimate

Question 6

How to account for Changes in Accounting Entity and when does it occur?

Answer 6

Retrospectively
This occurs when an entity has changed composition (like consolidated or combined F/S)
Addition of a full disclosure of the cause and nature of the change

Question 7

How to account for an Error Correction and when does it occur?

Answer 7

Prior Period Adjustment
- when there is a change from non GAAP to GAAP
- mathematical mistakes
- oversight or misuse of facts that existed at the time