Question

In the blank space provided for each type of “accounting change” or “transaction correction” listed below, indicate whether the change/correction is: Change in Accounting Principle, Change in Accounting Estimate, Change in Reporting Entity, or Error Correction.

a. Change in the estimating rates and procedures used to determine a company’s estimated pension liability: _______________________________________________.

b. Change from FIFO to LIFO method of inventory valuation: ________________ ______________________________.

c. Change from reporting a single company’s financials to reporting consolidated financials resulting from the acquisition of one or more companies: __________________________________.

d. Failure to accrue payroll payable due, but not paid, at the end of a company’s Fiscal Year: _____________________________.

For “a,b,c,d,” indicate for each whether the restatement of the financial statements is a retrospective or a prospective adjustment.

a. _____________________________________

b. _____________________________________

c. _____________________________________

d. _____________________________________

Answer 1

(a)
Change in Accounting Estimate - PROSPECTIVE ADJUSTMENT
Financial statement contain many estimates as a certain amount is not known on the date of financial statement which may later on needed to be changed such as 'change in estimated rates and procedures to determine company's estimated pension liability' should be applied PROSPECTIVELY in accounting period which are affected by such change.

(b)
Change in Accounting Principle - RETROSPECTIVE ADJUSTMENT
Change in Accounting principle such as 'change in method of valuation of inventory from FIFO to LIFO' does not happen often and therefore such changes should be applied to all prior period accounts RETROSPECTIVELY as if such changes were the company's  ACCOUNTING PRINCIPLE to begin with.

(c)
Change in Reporting Entity - RETROSPECTIVE ADJUSTMENT
They usually include change of financial statements of a different reporting entity such as 'change from reporting a single company's financial to a consolidated financial as a result of one or more mergers' and should be reported RETROSPECTIVELY by restating all statements

(d)
Error Correction - RETROSPECTIVE ADJUSTMENT
Whenever any error of material value are detected by an entity such as 'Failure to accrue payroll payable due, but not paid', then entity must take action for CORRECTION of such ERRORS RETROSPECTIVELY in that financial statement related to the financial year in which such material errors were detected as well prior periods statements .