Intermediate Accounting: Accounting Changes and Error Analysis

Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield
Chapter 22
Accounting Changes and Error Analysis
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Learning Objectives
After studying this chapter, you should be able to:
1. Discuss types of accounting changes and understand the accounting
for changes in accounting principles.
2. Describe the accounting for changes in estimates and changes in the
reporting entity.
3. Describe the accounting for correction of errors.
4. Analyze the effect of errors.
Copyright ©2019 John Wiley & Sons, Inc. 2

Preview of Chapter 22 (1 of 2)
Accounting Changes and Error Analysis
Accounting Changes
• Background
• Changes in accounting principle
• Impracticability
Other Changes
• Changes in accounting estimates
• Changes in reporting entity

Preview of Chapter 22 (2 of 2)
Accounting Errors
• Example
• Summary
Error Analysis
• Balance sheet errors
• Income statement errors
• Balance sheet and income statement errors
• Comprehensive example
• Preparation of statements with error corrections

Learning Objective 1
Discuss the Types of Accounting Changes and the
Accounting for Changes in Accounting Principles
LO 1 Copyright ©2019 John Wiley & Sons, Inc. 5

Accounting Changes
Accounting Alternatives:
• Diminish the comparability of financial information.
• Obscure useful historical trend data.
Types of Accounting Changes:
1. Change in Accounting Principal.
2. Change in Accounting Estimate.
3. Change in Reporting Entity.
Errors are not considered an accounting change.

Changes in Accounting Principle
Change from one accepted accounting policy to another.
Examples include:
• Average cost to LIFO.
• Completed-contract to percentage-of-completion
method.
Adoption of a new principle in recognition of events that

have occurred for the first time or that were previously
immaterial is not an accounting change.

Approaches
Three approaches for reporting changes:

1) Currently.
2) Retrospectively.
3) Prospectively (in the future).
FASB requires use of the retrospective approach.

Rationale - Users can then better compare results from
one period to the next.

What Do the Numbers Mean?: Quite a Change
The cumulative-effect approach results in a loss of comparability. Also, reporting

the cumulative adjustment in the period of the change can significantly affect
net income, resulting in a misleading income for example, at one time Chrysler
Corporation changed its inventory accounting from LIFO to FIFO. If Chrysler had
used the cumulative-effect approach, it would have reported a $53,500,000
adjustment to net income. That adjustment would have resulted in net income
of $45,900,000, instead of a net loss of $7,600,000.
A second case: In the early 1980s, the railroad industry switched from the
retirement-replacement method of depreciating railroad equipment to more
generally used methods such as straight-line depreciation. Using cumulative
treatment, railroad companies would have made substantial adjustments to
income in the period of change. Many in the industry argued that including such
large cumulative-effect adjustments in the current year would distort the
information and make it less useful. Such situations lend support to
retrospective application so that comparability is maintained.

Retrospective Accounting Change Approach
Company reporting the change

1) Adjusts its financial statements for each prior period
presented to the same basis as the new accounting
principle.
2) Adjusts the carrying amounts of assets and liabilities as
of the beginning of the first year presented, plus the
opening balance of retained earnings.

Retrospective Accounting Change: Long-Term Contracts
Illustration: Denson Company has accounted for its
income from long-term construction contracts using the
completed-contract method. In 2020, the company
changed to the percentage-of-completion method.
Management believes this approach provides a more
appropriate measure of the income earned. For tax
purposes, the company uses the completed-contract
method and plans to continue doing so in the future.
(Assume a 20 percent enacted tax rate.)

Changes in Accounting Principle Completed-Contract
Method vs. Percentage-of-completion Method

Retrospective Change
Data for Retrospective Change
Journal entry Construction in Process 220,000

beginning of Deferred Tax Liability 44,000
2020 Retained Earnings 176,000

What Do the Numbers Mean?: Change
Management (1 of 2)
Halliburton offers a case study in the importance of good reporting of an
accounting change. Note that Halliburton uses percentage-of-completion
accounting for its long-term construction-services contracts. The SEC questioned
the company about its change in accounting for disputed claims. Prior to the
year of the change, Halliburton took a very conservative approach to its
accounting for disputed claims. That is, the company waited until all disputes
were resolved before recognizing associated revenues. In contrast, in the year of
the change, the company recognized revenue for disputed claims before their
resolution, using estimates of amounts expected to be recovered. Such revenue
and its related profit are more tentative and subject to possible later adjustment.
The accounting method adopted is more aggressive than the company’s former
policy but is within the boundaries of GAAP. It appears that the problem with
Halliburton’s accounting stems more from how the company handled its
accounting change than from the new method itself. That is, Halliburton did not
provide in its annual report in the year of the change an explicit reference to its
change in accounting method.
What Do the Numbers Mean?: Change
Management (2 of 2)
In fact, rather than stating its new policy, the company simply deleted the
sentence that described how it accounted for disputed claims. Then later, in its
next year’s annual report, the company stated its new accounting policy. Similar
transparency concerns have been raised when companies, like Hawthorn
Bancshares, did not provide sufficient explanation about their changes to fair
value accounting for their mortgage servicing rights. When companies make
such changes in accounting, investors need to be informed about the change
and about its effects on the financial results. With such information, investors
and analysts can compare current results with those of prior periods and can
make a more informed assessment about the company’s future prospects.
Sources: Adapted from “Accounting Ace Charles Mulford Answers Accounting
Questions,” Wall Street Journal Online (June 7, 2002); and J. Arnold, B. Blisard,
and J. Duggan, “Dealing with the Implications of Accounting Change,” FEI
Magazine (November 2012).

Reporting a Change in Principle
Major disclosure requirements are as follows.
1. Nature of the change in accounting principle.
2. The method of applying the change, and:
a. A description of the prior period information that has been
retrospectively adjusted, if any.
b. The effect of the change on income from continuing operations, net
income (or other appropriate captions of changes in net assets or
performance indicators), any other affected line item.
c. The cumulative effect of the change on retained earnings or other
components of equity or net assets in the balance sheet as of the
beginning of the earliest period presented.

Note Disclosure

Retained Earnings Adjustment
Retained earnings balance is $1,360,000 at the beginning

of 2018.
Before Change

Retained Earnings Adjustment Continued
After Change

Inventory Methods
Illustration (Change in Principle—Inventory Methods):

Assume that Lancer Company has accounted for its inventory
using the LIFO method. In 2020, the company changes to the
FIFO method because management believes this approach
provides a more appropriate reporting of its inventory costs.

Lancer Company Information

Lancer Company Information Continued

Journal Entry – Change to FIFO
The entry to record the change to the FIFO method at the
beginning of 2020:

Changes in Accounting Principle Comparative Info

Retained Earnings Adjustment – Inventory Methods
Retained Earnings Statements (LIFO)
Retained Earnings balances FIFO vs. LIFO

Retained Earnings Adjustment – Inventory Methods Continued
Retained Earnings Statements After Retrospective

Application

Direct and Indirect Effects of Changes
• Direct Effects - FASB takes the position that companies

should retrospectively apply the direct effects of a
change in accounting principle.
• Indirect Effect is any change to current or future cash
flows of a company that result from making a change in
accounting principle that is applied retrospectively.

Impracticability
Companies should not use retrospective application if one of
the following conditions exists:
1. Company cannot determine the effects of the
retrospective application.
2. Retrospective application requires assumptions about
management’s intent in a prior period.
3. Retrospective application requires significant estimates
that the company cannot develop.
If any of the above conditions exists, the company prospectively
applies the new accounting principle.

Describe the Accounting for Changes in
Estimates and Changes in the Reporting Entity

Changes in Accounting Estimate
Examples
Examples of Estimates
1. Uncollectible receivables.
2. Inventory obsolescence.
3. Useful lives and salvage values of assets.
4. Periods benefited by deferred costs.
5. Liabilities for warranty costs and income taxes.
6. Recoverable mineral reserves.
7. Change in depreciation methods.

Prospective Reporting
Changes in accounting estimates are reported

prospectively. Account for changes in estimates in
1. the period of change if the change affects that period
only, or
2. the period of change and future periods if the change
affects both.
FASB views changes in estimates as normal recurring
corrections and adjustments and prohibits retrospective
treatment.

Illustration
Illustration: Underwriters Labs Inc. purchased for $300,000 a

building that it originally estimated to have a useful life of 15
years and no salvage value. It recorded depreciation for 5
years on a straight-line basis. On January 1, 2020,
Underwriters Labs revises the estimate of the useful life. It
now considers the asset to have a total life of 25 years.
(Assume that the useful life for financial reporting and tax
purposes and depreciation method are the same.

Illustration Continued
• Accounts at the beginning of the sixth year:
Underwriters Labs records depreciation for the year 2020 as follows.

Changes in Accounting Estimate Differentiating
between change in estimate or principle
Companies sometimes find it difficult to differentiate
between a change in estimate and a change in accounting
principle.
• If it is impossible to determine whether a change in
principle or a change in estimate has occurred, the
rule is this: Consider the change as a change in
estimate.
• Referred to as a change in estimate effected by a change
in accounting principle
• Companies should consider careful estimates that
later prove to be incorrect as changes in estimate.
Disclosures
Companies need not disclose changes in accounting

estimate made as part of normal operations, such as bad
debt allowances or inventory obsolescence, unless such
changes are material.
However, for a change in estimate that affects several
periods (such as a change in the service lives of
depreciable assets), companies should disclose the effect
on income from continuing operations and related per-
share amounts of the current period.

Change in Reporting Entity
Examples of a change in reporting entity are:
1. Presenting consolidated statements in place of statements of
individual companies.
2. Changing specific subsidiaries that constitute the group of
companies for which the entity presents consolidated financial
statements.
3. Changing the companies included in combined financial
statements.
4. Changing the cost, equity, or consolidation method of
accounting for subsidiaries and investments.
Reported by changing the financial statements of all prior periods
presented.
Describe the Accounting for Correction
of Errors

Accounting Errors
Types of Accounting Errors:
1. A change from an accounting principle that is not generally
accepted to an accounting policy that is acceptable.
2. Mathematical mistakes.
3. Changes in estimates that occur because a company did
not prepare the estimates in good faith.
4. An oversight, such as the failure to accrue or defer certain
expenses or revenues.
5. Misuse of facts.
6. Incorrect classification of a cost as an expense instead of
an asset, and vice versa.
Accounting Errors Category & Type of Restatement
Accounting Type of Restatement
Category
Expense Recording expenses in the incorrect period or for an incorrect amount.
recognition
Revenue Instances in which revenue was improperly recognized, questionable
recognition revenues were recognized, or any other number of related errors that led
to misreported revenue.
Misclassificati Include restatements due to misclassification of short- or long-term
on accounts or those that impact cash flows from operations.
Equity—other Improper accounting for EPS, restricted stock, warrants, and other equity
instruments.
Allowances/ Errors involving accounts receivables’ bad debts, inventory reserves,
contingencies income tax allowances, and loss contingencies.
Long-lived Asset impairments of property, plant, and equipment; goodwill; or other
assets related items.

Accounting Errors Category & Type of Restatement Continued
Accounting Type of Restatement
Category
Taxes Errors involving correction of tax provision, improper treatment of
tax liabilities, and other tax-related items.
Equity—other Improper accounting for comprehensive income equity transactions
comprehensive including foreign currency items, minimum pension liability
income adjustments, unrealized gains and losses on certain investments in
debt, equity securities, and derivatives.
Inventory Inventory costing valuations, quantity issues, and cost of sales
adjustments.
Equity—stock Improper accounting for employee stock options.
options
Other Any restatement not covered by the listed categories.
Source: T. Baldwin and D. Yoo, “Restatements—Traversing Shaky Ground,” Trend Alert,

Glass Lewis & Co. (June 2, 2005), p. 8.
Accounting Errors
Reporting
• All material errors must be corrected.
• Record corrections of errors from prior periods as an
adjustment to the beginning balance of retained
earnings in the current period.
• Such corrections are called prior period adjustments.
• For comparative statements, a company should restate
the prior statements affected, to correct for the error.

Example of Error Correction (1 of 8)
Illustration: In 2021 the bookkeeper for Selectro
Company discovered an error. In 2020 the company failed
to record $20,000 of depreciation expense on a newly
constructed building. This building is the only depreciable
asset Selectro owns. The company correctly included the
depreciation expense in its tax return and correctly
reported its income taxes payable.

Selectro’s income statement for 2020 with and without
the error.
What are the entries that Selectro should have made and
did make for recording depreciation expense and income
taxes?


Prepare the proper correcting entry in 2021, that should
be made by Selectro.

Single-Period Statements
Illustration: Selectro Company has a beginning retained
earnings balance at January 1, 2021, of $350,000. The
company reports net income of $400,000 in 2021.

Accounting Errors
Comparative Statements
Company should
1. make adjustments to correct the amounts for all
affected accounts reported in the statements for all
periods reported.
2. restate the data to the correct basis for each year
presented.
3. show any catch-up adjustment as a prior period
adjustment to retained earnings for the earliest period
it reported.

Accounting Errors Example – Woods, Inc
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2020
Balance, January 1 $ 1,050,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,110,000
Before issuing the report for the year ended December 31, 2020,
you discover a $62,500 error that caused the 2019 inventory to be
overstated (overstated inventory caused COGS to be lower and
thus net income to be higher in 2019). Would this discovery have
any impact on the reporting of the Statement of Retained Earnings
for 2020? Assume a 20% tax rate.
Accounting Errors
Example – Woods, Inc, continued
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2020
Balance, January 1 $ 1,050,000

Prior period adjustment, net of tax (50,000)
Balance, January 1, as restated 1,000,000
Net income 360,000
Dividends (300,000)
Balance, December 31 $ 1,060,000

Accounting Errors
Summary of Accounting Changes and Correction of Errors
Employ the retrospective approach by:
a. Changing the financial statements of all prior periods presented.
b. Disclosing in the year of the change the effect on net income and earnings per share for
all prior periods presented.
c. Reporting an adjustment to the beginning retained earnings balance in the retained
earnings statement in the earliest year presented.
If impracticable to determine the prior period effect (e.g., change to L IFO):
a. Do not change prior years’ income.
b. Use opening inventory in the year the method is adopted as the base-year inventory
for all subsequent LIFO computations.
c. Disclose the effect of the change on the current year, and the reasons for omitting the
computation of the cumulative effect and pro forma amounts for prior years.

Accounting Errors
Summary of Accounting Changes and Correction of Errors Continued
Employ the current and prospective approach by:
a. Reporting current and future financial statements on the new basis.
b. Presenting prior period financial statements as previously reported.
c. Making no adjustments to current-period opening balances for the effects in prior
periods.
Changes in Reporting Entity
Employ the retrospective approach by:
a. Restating the financial statements of all prior periods presented.
b. Disclosing in the year of change the effect on net income and earnings per share data
for all prior periods presented.
Changes Due to Error
Employ the restatement approach by:
a. Correcting all prior period statements presented.
b. Restating the beginning balance of retained earnings for the first period presented
when the error effects occur in a period prior to the first period presented.
Accounting Errors
Motivations for Changes of Accounting Method
Why companies may prefer certain accounting methods.

Some reasons are:
1. Political costs.
2. Capital Structure.
3. Bonus Payments.
4. Smooth Earnings.

Analyze the Effect of Errors

Error Analysis
Companies must answer three questions:
1. What type of error is involved?
2. What entries are needed to correct for the error?
3. After discovery of the error, how are financial
statements to be restated?
Companies treat errors as prior-period adjustments and
report them in the current year as adjustments to the
beginning balance of Retained Earnings.

Error Analysis
Balance Sheet Errors
Balance sheet errors affect only the presentation of an

asset, liability, or stockholders’ equity account.
• Current year error - reclassify item to its proper
position.
• Prior year error - restate the balance sheet of the prior
year for comparative purposes.

Error Analysis
Income Statement Errors
Improper classification of revenues or expenses.

• Current year error - reclassify item to its proper
position.
• Prior year error - restate the income statement of the
prior year if comparative statements are presented.

Error Analysis
Balance Sheet and Income Statement Errors 1 of 3
Counterbalancing Errors
Will be offset or corrected over two periods.
1. If company has closed the books:
(a) If the error is already counterbalanced, no entry is

necessary.
(b) If the error is not yet counterbalanced, make entry
to adjust the present balance of retained earnings.
For comparative purposes, restatement is necessary even
if a correcting journal entry is not required.
Error Analysis
Balance Sheet and Income Statement Errors

Counterbalancing Errors
Will be offset or corrected over two periods.
2. If company has not closed the books:
(a) If the error is already counterbalanced, no entry is
necessary.
(b) If the error is not yet counterbalanced, make entry
to adjust the present balance of retained earnings.

Error Analysis
Balance Sheet and Income Statement Errors

Noncounterbalancing Errors
Not offset in the next accounting period.
Companies must make correcting entries, even if they
have closed the books.

Error Analysis Example – E22-19; 1 of 8
E22-19 (Error Analysis; Correcting Entries): A partial trial balance of
Julie Hartsack Corporation is as follows on December 31, 2021.
Blank Dr. Cr.

Supplies $ 2,700 Blank
Salaries and wages
payable Blank $ 1,500
Interest receivable 5,100 Blank
Prepaid insurance 90,000 Blank
Unearned rent Blank 0
Interest payable Blank 15,000
Instructions: (a) Assuming that the books have not been closed,
what are the adjusting entries necessary at December 31, 2021?
(a) Assuming that the books have not been closed, what are the
adjusting entries necessary at December 31, 2021?
1. A physical count of supplies on hand on December 31, 2021,
totaled $1,100.
Supplies Expense ($2,700 – $1,100) 1,600
Supplies 1,600
2. Accrued salaries and wages on December 31, 2018, amounted
to $4,400.
Salary and Wages Expense 2,900
Salaries and Wages Payable 2,900

3. Accrued interest on investments amounts to $4,350 on
December 31, 2021.
Interest Revenue ($5,100 – $4,350) 750
Interest Receivable 750
4. The unexpired portions of the insurance policies totaled
$65,000 as of December 31, 2021.
Insurance Expense 25,000
Prepaid Insurance 25,000

5. $28,000 was received on January 1, 2021 for the rent of a
building for both 2021 and 2022. The entire amount was
credited to rental income.
Rental Income ($28,000 ÷ 2) 14,000
Unearned Rent Revenue 14,000
6. Depreciation for the year was erroneously recorded as $5,000
rather than the correct figure of $50,000.
Depreciation Expense 45,000
Accumulated Depreciation 45,000

E22-19 (Error Analysis; Correcting Entries) A partial trial balance of
Dickinson Corporation is as follows on December 31, 2021.
Blank Dr. Cr.
Supplies $ 2,700 Blank
Salaries and wages
payable Blank $ 1,500
Interest receivable 5,100 Blank
Prepaid insurance 90,000 Blank
Unearned rent Blank 0
Interest payable Blank 15,000
Instructions: (b) Assuming that the books have been closed, what
are the adjusting entries necessary at December 31, 2021?
(b) Assuming that the books have been closed, what are the
1. A physical count of supplies on hand on December 31, 2021,
totaled $1,100.
Retained Earnings 1,600
Supplies 1,600
2. Accrued salaries and wages on December 31, 2018, amounted
to $4,400.
Salaries and Wages Payable 2,900

3. Accrued interest on investments amounts to $4,350 on
December 31, 21
Retained Earnings ($5,100 – $4,350) 750
Interest Receivable 750
4. The unexpired portions of the insurance policies totaled
$65,000 as of December 31, 2021.
Prepaid Insurance 25,000

5. $24,000 was received on January 1, 2021 for the rent of a
building for both 2021 and 2022. The entire amount was
credited to rental income.
Unearned Rent Revenue 14,000
6. Depreciation for the year was erroneously recorded as $5,000
rather than the correct figure of $50,000.
Accumulated Depreciation 45,000

Make the Computations and Prepare the
Entries Necessary to Record a Change from
or to the Equity Method of Accounting

Appendix 22A: Changing from or to the
Equity Method (1 of 7)
Change from the Equity Method
Change from the equity method to the fair-value method.
• Earnings or losses previously recognized under the equity
method should remain as part of the carrying amount of the
investment.
• The cost basis is the carrying amount of the investment at the
date of the change.
• The investor applies the new method in its entirety.
• At the next reporting date, the investor should record the
unrealized holding gain or loss to recognize the difference
between the carrying amount and fair value.

Dividends in Excess of Earnings
Accounted for such dividends as a reduction of the
investment carrying amount, rather than as revenue.
Reason: Dividends in excess of earnings are viewed as a
________________ with this excess then accounted for
as a reduction of the equity investment.

Accounted for such dividends as a reduction of the
investment carrying amount, rather than as revenue.
Reason: Dividends in excess of earnings are viewed as a
liquidating dividend with this excess then accounted for
as a reduction of the equity investment.

Illustration: On January 1, 2019, Investor Company purchased
250,000 shares of Investee Company’s 1,000,000 shares of
outstanding stock for $8,500,000. Investor correctly
accounted for this investment using the equity method. After
accounting for dividends received and investee net income, in
2019, Investor reported its investment in Investee Company at
$8,780,000 at December 31, 2019. On January 2, 2020,
Investee Company sold 1,500,000 additional shares of its own
common stock to the public, thereby reducing Investor
Company’s ownership from 25 percent to 10 percent.

Appendix 22A: Changing from or to the Equity Method
(5 of 7)

Appendix 22A: Changing from or to the Equity Method
(6 of 7)
Impact on Investment Carrying Amount
2020 and Cash 400,000

2021 Dividend Revenue 400,000
2022 Cash 210,000
Equity Investments 60,000
Dividend Revenue 150,000
Change to the Equity Method
• Companies use prospective approach.
• Account for the effects of the change in
• (1) the period of change if the change affects that period
only, or
• (2) the period of change and future periods if the change
affects both.
• Companies should also add the cost of acquiring the
additional interest in the investee company to the cost
basis of their previously held interest (the present stock
holding).
Compare the Procedures for Accounting
Changes and Error Analysis Under GAAP and
IF RS

IFRS Insights (1 of 9)
Relevant Facts
Similarities
• The accounting for changes in estimates is similar
between GAAP and IFRS.
• Under GAAP and IFRS, if determining the effect of a
change in accounting policy is considered impracticable,
then a company should report the effect of the change
in the period in which it believes it practicable to do so,
which may be the current period.

Relevant Facts
Differences
• One area in which GAAP and IFRS differ is the reporting of error
corrections in previously issued financial statements. While both sets
of standards require restatement, GAAP is an absolute standard—that
is, there is no exception to this rule.
• Under IFRS, the impracticality exception applies both to changes in
accounting principles and to the correction of errors. Under GAAP, this
exception applies only to changes in accounting principle.
• IFRS (IAS 8) does not specifically address the accounting and reporting
for indirect effects of changes in accounting principles. As indicated in
the chapter, GAAP has detailed guidance on the accounting and
reporting of indirect effects.
On The Horizon
For the most part, IFRS and GAAP are similar in the area
of accounting changes and reporting the effects of errors.
Thus, there is no active project in this area. A related
development involves the presentation of comparative
data. Under IFRS, when a company prepares financial
statements on a new basis, two years of comparative data
are reported. GAAP requires comparative information for
a three-year period. Use of the shorter comparative data
period could be an issue when U.S. companies adopt IFR
S.
IFRS Self-Test Questions
Which of the following is false?
a. GAAP and IFRS have the same absolute standard regarding
the reporting of error corrections in previously issued financial
statements.
b. The accounting for changes in estimates is similar between GA
AP and IFRS.
c. Under IFRS, the impracticality exception applies both to
changes in accounting principles and to the correction of
errors.
d. GAAP has detailed guidance on the accounting and reporting
of indirect effects; IFRS does not.
Which of the following is false?
a. GAAP and IFRS have the same absolute standard regarding
the reporting of error corrections in previously issued financial
statements.
b. The accounting for changes in estimates is similar between GA
AP and IFRS.
c. Under IFRS, the impracticality exception applies both to
changes in accounting principles and to the correction of
errors.
d. GAAP has detailed guidance on the accounting and reporting
of indirect effects; IFRS does not.
Which of the following is not classified as an accounting
change by IFRS?
a. Change in accounting policy.
b. Change in accounting estimate.
c. Errors in financial statements.
d. None of the above.

Which of the following is not classified as an accounting
change by IFRS?
a. Change in accounting policy.
b. Change in accounting estimate.
c. Errors in financial statements.
d. None of the above.

IFRS requires companies to use which method for
reporting changes in accounting policies?
a. Cumulative effect approach.
b. Retrospective approach.
c. Prospective approach.
d. Averaging approach.

IFRS requires companies to use which method for
reporting changes in accounting policies?
a. Cumulative effect approach.
b. Retrospective approach.
c. Prospective approach.
d. Averaging approach.

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Intermediate Accounting: Accounting Changes and Error Analysis

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Intermediate Accounting

Kieso ● Weygandt ● Warfield

This slide deck contains animations. Please disable animations if

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Adoption of a new principle in recognition of events that

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Three approaches for reporting changes:

FASB requires use of the retrospective approach.

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The cumulative-effect approach results in a loss of comparability. Also, reporting

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Company reporting the change

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Data for Retrospective Change

Journal entry Construction in Process 220,000

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Retained earnings balance is $1,360,000 at the beginning

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Illustration (Change in Principle—Inventory Methods):

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Retained Earnings balances FIFO vs. LIFO

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Retained Earnings Statements After Retrospective

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• Direct Effects - FASB takes the position that companies

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Changes in accounting estimates are reported

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Illustration: Underwriters Labs Inc. purchased for $300,000 a

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Underwriters Labs records depreciation for the year 2020 as follows.

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Companies need not disclose changes in accounting

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Source: T. Baldwin and D. Yoo, “Restatements—Traversing Shaky Ground,” Trend Alert,

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Balance, January 1 $ 1,050,000

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