F2-M2-Accounting Changes and Error Corrections

Question 1

Name the three types of accounting changes

Answer 1

1. Change in an accounting principle
2. Change in accounting estimate
3. Change in accounting entity

Question 2

How is a change in accounting principle reported

Answer 2

1. Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented
2. Prior period financial statement are restated, if presented.

Question 3

What are the special exceptions to the general rule for the reporting of changes in an accounting principle?

How are these exceptions reported?

Answer 3

Changes where it is impractical to estimate the cumulative effect adjustment, e.g. a change to LIFO from another method of inventory pricing under US GAAP or a change in depreciation methods

Such exceptions are accounted for prospectively, like a change in accounting estimate.

Question 4

How is a change in an accounting estimate reported?

Answer 4

Prospectively

Question 5

Under US GAAP, how is a change in the accounting entity reported?

Answer 5

All current and prior period financial statements presented are restated

Question 6

How are error corrections reported

Answer 6

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.