Chapter 20

Reporting Approaches

1. Retrospective Approach 2. Modified Retrospective Approach 3. Prospective Approach

Steps for Retrospective Approach

1. Revise Comparative Financial Statements 2. Adjust Accounting Records for the change 3. Disclosure Notes

prospective approach application

APPLICATION IS IMPRACTICAL: a lack of information makes it impracticable to report a change retrospectively so the new method is simply applied prospectively

Why might a company make a change?

Economic conditions - in the 70's companies changed from FIFO to LIFO due to inflations Industry changes - to be consistent with industry peers Mandated by the FASB - standards require the change

prospective approach mandated

MANDATED BY STANDARD: when authoritative literature requires prospective application for specific changes in accounting method

retrospective approach

adjust beginning Retained Earnings for the earliest year reported in the comparative financial statements

LIFO, FIFO

change from one generally accepted accounting principle to another ex: _________ to ________

retrospectively

most voluntary changes in principle are reported ___________ - all prior year financial statements prepared as if the new principle was used all along

prospective approach

non modification of prior years is necessary change is implemented in the period of the change and future periods

Modified retrospective approach

requires application of new standard only to the adoption period requires an adjustment to retained earnings in the current period to account for the cumulative effect of the change in prior periods

FALSE

true or false change in depreciation method is considered a change in principle and not a change in estimate.

modified retrospective approach

sometimes this approach is sometimes allowed by the FASB when a new standard has been implemented - apply the new standard in the period of adoption - adjust the balance of retained earnings at the beginning of the adoption period to capture the cumulative effects of prior periods

Retrospective Approach

when presenting multiple years of financial statements, financial statements issued prior to the change are adjusted to reflect the change advantage - all statements presented are on the same basis disadvantage - when previously reported numbers are superseded, public confidence in the integrity of the financial data suffers