Summary of Accounting Change and Error

This posting try to summarize the accounting treatment and reporting for accounting change and error, including their illustration. We hope this summary would help us to understand the principle of accounting change and error.

Type:  Change in accounting principle

change in accounting

Example: Change its inventory valuation method from FIFO to average cost.
Definition: Change from the use of one generally accepted accounting principle to another generally accepted accounting principle. Notes: change of accounting principle to correct the error of applying accounting principles is treated “errors in financials statement”, not as “change in accounting principles”
Financial Treatment: Retrospective application:

• Report cummulative effect of change in the carrying amounts of the beginning of the first period presented, with an offsetting adjustment to the opening balance of retained earnings for that periode.
• Financial statements for each period are adjusted to reflect period-spesific effects of the change for direct effects.   

Financial Statement Disclosure: Disclose the nature and reason for the change; method of applying the change; description of prior period information that is retrospectively adjusted; effect of the change on income from continuing operations, net income, and any other financial statement line item; per share amounts for current period and adjusted periods; and a description of the indirect effect of the change and related amounts

Type: Change in Estimate.

Example: Change its estimate of the useful lives of machines from 10 years to 6 years.
Definition: Change of estimated financial statements amount based on new information or experience.
Financial Treatment: Prospective:

• Report in the period of the change and future periods.
• Do not adjust financial statements of previous periods.    

Financial Statement Disclosure: Disclose the effect on income from continuing operations, net income, and related per share amounts if the change affects severa future periods.

Type: Change in reporting entity

Example:Change the subsidiaries for which it prepares consolidated financial statements.
Definition: Change that results in the financial statements representing a different entity
Financial Treatment: Retrospective application:

• Report financial statement of all periods to show financial information for the new reporting entity for those periods    

Financial Statement Disclosure: Disclose the type of change and the reasons for the change; the related effects on income before extraordinary items. net income, other comprehensive income, and related per share effects on EPS for all periods presented.

Type: Errors in financial statements.

Example: Incorrectly apply the retail inventory method for determining its final inventory value.
Definition: Errors result from mathematical mistakes, mistakes in applying accounting principles, or oversight or misuse of facts that existed when preparing the financial statements.
Financial Treatment: Restatement approach (also apply for counterbalancing errors):

• Correcting all prior period statements presented.
• Restating the beginning balance of retained earnings for the fi rst period presented when the error effects occur in a period prior to the first period presented.    

Financial Statement Disclosure: Disclose that the previously issued financial statements were restated, along with a description of the error; the line item effects of the error and any per share amounts; the gross effects and net effects from applicable income taxes on the net income of the prior period; the effects on retained earnings and net income.

ILLUSTRATION

Illustrative Reporting a Change in Principle.

Lancer Company will prepare comparative financial statements for 2011 and 2012 using FIFO (the new inventory method). Illustration 22-10 indicates how Lancer might present this information.

Change in Accounting Principle

Illustrative Change in Estimate: Disclosures

Illustration below shows disclosure of a change in estimated useful lives, which appeared in the annual report of Ampco–Pittsburgh Corporation.

Change in Estimate: Disclosure

Illustrative Change in Reporting Entity

Using consolidated financial statements of Tallgrass Energy GP, LP., year 2014, 2013, 2012:
To learn more about the TEP financial statement please visit www.sec.gov.

Change in Reporting Entity