Accounting Changes
Accounting standards distinguish among four types of accounting changes: (1) a change in accounting principle, (2) a change in accounting estimate, (3) a change in reporting entity, and (4) correction of an error. We discuss reporting requirements pertaining to each type and examine analysis implications.
Reporting of Accounting Changes
Change in Accounting Principle. A change in accounting principle occurs when a company switches from one generally accepted accounting principle to another generally accepted accounting principle. The phrase accounting principle refers to both the accounting standards and practices used and the methods of applying them. An example of a change in accounting principle is a change in depreciation method from straight line to accelerated.
Under current accounting standards, when a change occurs, current period income is computed using the new principle. The cumulative effect of this change in principle (net of tax) on retained earnings as of the beginning of the period when the change occurs is computed. This cumulative effect is reported in the income statement after extraordinary items, but before net income. This computation is a “catch-up” adjustment, because previously published financial statements are not revised.
Change in Accounting Estimate. Accrual accounting requires estimates of items such as useful lives of assets, warranty costs, inventory obsolescence, pension assumptions, and uncollectible receivables. These are known as accounting estimates. Accounting estimates are approximations based on unknown future conditions. As such, accounting estimates can change. There exist certain accounting and disclosure requirements when changes occur in accounting estimates. These are» Tin mới nhất:
» Các tin khác: