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