Changes in Accounting, Retrospective Application & Prospective Application

Change in depreciation to units of production method

Units of Production for CY (CV of Asset/Total Units of Production left for its useful life) = Depreciation Expense for the year

Changes in Accounting Estimates

Because changes in accounting estimates are reported prospectively, the previous application of the previous change is applied to only the carrying amount of the asset but also to the years of useful life. This means that the new estimate of remaining years in the asset will have substracted from it the years that have already passed under the previous method.

Correction of an error vs change of estimate

Correction of an error is applied retrospectively while change in a estimate is only applied prospectively.

Cumulative Effect On Change Of Accounting Principle Using Restrospective Application

Take the ending balances under both methods, (E.G inventory valuation) in the most current period. The difference between those two balances reflects the cumulative adjustment to be made in the year of change. Cumulative Effect are to be reported net of tax however. If the change happens during the same year of operation the cumulative effect would be difference in valuations between the balances at the beginning of the year and not at the end. Ending year balances are only used when the change happens at the beginning of the new year of operation.

Changes in reporting entity

These type of changes are applied retrospectively

Changes in Accounting Principle that are Indistinguishable from Changes In Accounting Estimate

These type of changes are simply treated as a change in accounting estimate, that is, prospectively. No cumulative effect is recorded.

Changes in Accounting Principle

They are to be reported restrospectively and as an adjustment to retained earnings. In order other words, they are reported as an adjustement to retained earnings at the beginning of the year of change and the previous years are retrospectively adjusted.

Asset Carrying Amount

This amount is the amount of the asset net of depreciation expense but not net of salvage value.

Change from cash basis of accounting to accrual basis of accounting

This is treated as a restatement or correction of an error as cash basis of accounting is not acceptable under GAAP.

Change from Cash basis to Accrual basis

Treated as an error correction. It requires retrospective application, resulting in an after tax cumulative adjustment for prior years retained earnings, ( this is called prior period adjustment) in its beginning balance.

Accounting principle change that cannot be separated from a change in estimate

When an accounting principle change cannot be distinguished from a change in estimate, it is accounted for as a change in estimate. Changes in estimate are accounted for prospectively (current and future financial statements) & are reported in income from continuing operations.

Determining what kind of Accounting Change has occurred.

Whenever it is impossible to determine whether an accounting change is either a change of principle or a change of estimate, the change is treated as a change in estimate and be accounted for prospectively.