Chp. 22

Accounting changes

-accounting alternatives diminish the comparability of financial information between periods and between companies and alos obscure useful historical trend data -reporting framework helps preserve comparability when there is an accounting change

changes in accounting principle-report changes prospectivly (in the future)

-companies do not adjust opening balances to reflect the change in principle -the current-period cumulative adjustment is not appropriate b/c that approach includes amounts that have little or no relationship to the current year's income or economic events

changes in accounting principle- report changes currently

-companies report the cumulative effect of the change in the current year's income statement as an irregular item -the effect of the change on prior year;s income appears only in the current-year income statement and does not change prior-year financial statements

accounting changes-error in financial statements

-errors result from mathematical mistakes, mistakes in applying accounting priniples, or oversight or misuse of facts that existed when preparing the financial statements

Changes in accounting prinicple

-involves a change from one generally accepted accounting principle to another -adoption of new priniple in recognition of events that have occured for the first time or that were previously immaterial is not accounting change

changes in accounting principle-retrospective accounting change approach-reporting a change in principle

...

accounting changes- FASB has established a reporting framework, which involves three types of accounting changes

1. changes in accounting principle 2, changes in accounting estimate 3. change in reporting entity Fourth category necessitates changes in accounting, not classified as an accounting change 4. errors in financial statements

changes in accounting principle-retrospective accounting change approach-when a company changes an accounting principle, it should report the change using retrosepective application

1. it adjust its financial statements for each prior period presented. Financial statement information about prior periods is on the same basis as the new accounting principle 2. It adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented. By doing so, these accounts reflect the cumulative effect on periods prior to those presented of the change to the new accounting principle The company also makes an offsetting adjustment to the opening balance of retained earnings or other appropriate component of stockholder's equity or net assets as of te beginning of the first year presented.

changes in accounting principle-three possible approaches for reporting changes in accounting principles

1. report changes currently 2. report changes retrospectively 3. report changes prospectively (in the future)

changes in accounting principle-accounting profession prefer

FASB requires that companies use the restrospective approach -why b/c it provides financial statement users with more useful information than the cumulative-effect or prospective approaches. User can better compare results from one period to next

changes in accounting principle-report changes retrospectively

different accounting principle to recast previously issued financial statements--as if the new principle had always been use. Means the company goes back and adjust prior years' statements on a basis consistent with the newly adopted principle

changes in accounting principle-report changes currently-cumulative effect

the difference in prior years' income between the newly adopted and prior accounting method