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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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The two methods of reporting an accounting change are (a) retrospective adjustment and (b) prospectively. Indicate which method is used for the following changes:

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

To determine

Mention the method of reporting accounting changes used for the given types of accounting changes.

Explanation

Accounting changes: When a company requires to sacrifice the consistent accounting methods and procedures, to enhance the usefulness and relevance of the accounting information, those changes are referred to as accounting changes. Such inevitable accounting changes decrease the comparability and consistency of accounting information. The reasons for accounting changes could be new methods introduced by FASB (Financial Accounting Standards Board), changes in accounting principles, and changes in accounting estimates. The following are the three types of accounting changes:

  • Change in an accounting principle
  • Change in an accounting estimate
  • Change in a reporting entity

Methods of reporting accounting changes:

  • Retrospective adjustment method: This method requires that the previously reported financial statements should be revised to reflect the current accounting change.
  • Prospective method: This method requires that the current financial statements should be accounted for the changes, and the previously reported financial statements need not be revised.

Method of reporting accounting changes (a) and (b) used for types of accounting changes (1), (2), and (3):

Types of Accounting ChangesMethod of Reporting Accounting ChangesDescription
1...

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