Question

Briefly explain accounting changes after an acquisition in the context of accounting changes covered by ASC 250 “Accounting Changes and Error Corrections.”

Answer 1

Solution:-

Change in the Reporting Entity:-

A change that results in financial statements that, in effect, are those of a different reporting entity. A change in the reporting entity is limited mainly to the following:

• Presenting consolidated or combined financial statements in place of financial statements of individual entities
• Changing specific subsidiaries that make up the group of entities for which consolidated financial statements are presented
• Changing the entities included in combined financial statements. Neither a business combination accounted for by the acquisition method nor the consolidation of a variable interest entity (VIE) pursuant to Topic 810 is a change in reporting entity.

Direct Effects of a Change in Accounting Principle

Those recognized changes in assets or liabilities necessary to effect a change in accounting principle. An example of a direct effect is an adjustment to an inventory balance to effect a change in inventory valuation method. Related changes, such as an effect on deferred income tax assets or liabilities or an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance, also are examples of direct effects of a change in accounting principle.