Accounting Study Guide

U.S. GAAP
Financial Reporting Guide

Section 2500: Accounting Changes and Error Correction

[U.S. GAAP Codification Topic]
250 Accounting changes and error corrections
250-10 Overall

[U.S. GAAP before the Codification]
SFAS 154, May 2005, Accounting changes and error corrections, a replacement of APB opinion No. 20 and FASB Statement No. 3

1. Change in accounting principle
(1) "Retrospective" application
--> Apply new accounting principle
--> to all prior periods presented

(2) At the beginning of the first period presented
--> Cumulative effect will be reflected on the beginning balances
--> of assets, liabilities, and retained earnings

(3) Balances of all prior and current periods reflect
--> the effect of change in accounting principle

(4) If it is impracticable
--> apply at the beginning of the earliest period possible

2. Change in accounting estimate
(1) "Prospective" application
--> Apply to current and future periods only

(2) Do not apply retrospectively

(3) Change in depreciation method is
--> a change in accounting estimate

(4) If the effects of (A) and (B) are "inseparable"
--> Total amount is considered as (B)
(A) change in accounting principle
(B) change in accounting estimate

3. Change in reporting entity
Retrospective application
--> Apply to all prior periods presented
--> in the financial statements of new reporting entity

4. Correction of prior-period error
(1) Retrospective "restatement"
--> Prior-period financial statements are restated

(2) At the beginning of the first period presented
--> Cumulative effect will be reflected on the beginning balances
--> of assets, liabilities, and retained earnings

(3) Balances of all prior and current periods reflect
--> the effect of error corrections

(4) Materiality of errors is reviewed with reference to
--> the estimated "full fiscal year" income

(5) Items material for (C), but not for (D) are
--> disclosed separately in the interim period
(C) interim period
(D) full fiscal year