In: Accounting
Why do we restate financial statements?
Whenever there is a changein accounting principle or a change in accounting entity, we have to restate the financial statements to include the effects of change in the periods presented.When there is a change in accounting principle, we should recognize it by adjusting behinning retained earnings in the earliest period presented for the cumultive effect of the change, and ,if prior period (comparative) financial statements are presented, they should be restated (retrospective application). All this means, is that the effects of the change in accounting principle are reported by assuming the what would have occurred if the new principle had been used in prior periods.
Similar is the case when there is a change in accoounting entity.If a change in accounting entity occurs in the current year, all previous financial statements that are presented in comparative financial statements along with the current year should be restated to reflect the information for the new reporting entity.