Accounting Changes - Overview 3.2 Retrospective

All periods presented must be individually adjusted for the ? of the new principle.

period-specific effects (PSE)

If financial information is to be comparable and consistent, entities must not make voluntary changes in account principles unless they can be justified as ??

preferable

What time period are indirect effects recognized and reported?

In the period of change.

The three types of accounting changes are:

1. A change in accounting principle 2. A change in accounting estimate 3. A change in the reporting entity

A change in accounting principle (retrospective application) occurs when an entity (3)

1. Adopts a generally accepted principle different from the one previously used. 2. Changes the method of applying a generally accepted principle. 3. Changes to a generally accepted principle when the principle previously used is no longer generally accepted.

Retrospective application requires the carrying amount of what three things at the beginning of the first period reported to be adjusted for the cumulative effect (CE) of the new principle on the prior periods?

1. Assets 2. Liabilities 3. Retained Earnings (or other components of equity or net assets)

It may be practicable to determine the CE of applying the new principle to all prior periods but NOT the PSE. In theses circumstances, CE adjustments must be made to the ? balances for the ? period to which the new principle can be applied.

1. beginning 2. first

Retrospective application is required for all ? effects and the related ??? effects of a change in principle.

1. direct 2. income tax

What is an example of an indirect effect?

A required profit-sharing payment based on a reported amount that was directly affected (e.g., revenue).

What is an example of a direct effect?

An adjustment of an inventory balance to implement a change in the method of measurement.

It may be impracticable to determine the CE of a new principle on any prior period. If so, the new principle them must be applied how?

As if the change had been made prospectively at the earliest date practicable.

The assumption is that an adopted principle must be applied ? in preparing financial statements.

Consistently

Does retrospective application include indirect effects? Yes or No

No

Does a change in principle include adoption of a principle to account for an event or transaction that clearly differs in substance from a previously occurring event or transaction? Yes or No

No, it does not.

Does a change in principle include the initial adoption of a principle because of an event or transaction occurring for the first time or that previously had an immaterial effect? Yes or No

No, it does not.

What are indirect effects?

These are changes in current or future cash flows from a change in principle applied retrospectively.