Occasionally, a company will find that it must alter its accounting to reflect a change in accounting principle or estimate - or it may locate an accounting error that must be corrected. These changes can have a substantial impact on the reported results of a business from period to period, which can make financial statements much less comparable over time. Accounting Changes and Error Corrections describes the situations in which it is necessary to make adjustments to prior period financial statements, and indicates situations when adjustments are only needed for the current period or in future periods. The differing treatments of changes in accounting principle, accounting estimate, and reporting entity are noted, as is the concept of materiality, which pertains to the correction of accounting errors.
Upon successful completion of this course, participants will be able to:
- Recognize the situations in which an accounting principle should be changed.
- Identify the situations in which retrospective application is required.
- Note the different types of accounting errors.
- Recognize the disadvantage of applying changes on a prospective basis.
Table of Contents
Changes in Accounting Principle
Disadvantages of Retrospective Application
Changes in Accounting Estimate
Disadvantages of Prospective Application
Changes in Reporting Entity
Correction of an Error in Previously Issued Financial Statements
Corrections Related to Prior Interim Periods
The Materiality of an Error
The Materiality Principle
The SEC’s View of Materiality
Accounting Changes and Error Corrections Disclosures
Change in Accounting Principle
Change in Accounting Estimate
Change in Reporting Entity
Prior Period Adjustments
Review Question Answers and Rationales
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