Question

ASC 250 “Accounting Changes and Error Corrections”

            This case clarified the treatment of accounting changes after acquisitions. As we have seen, FASB’s guidance comes through ASC 805 “Business Combinations.” However, the guidance for other types of accounting changes is in ASC 250 “Accounting Changes and Error Corrections.” This section will integrate accounting changes after an acquisition with the accounting changes listed in ASC 250.

            ASC 250 lists four types of accounting changes.

Change in Accounting Principle – for example, a new revenue-recognition standard

Change in Accounting Estimate – for example, change in estimated useful life of a depreciable asset

Change in Reporting Entity

Correction of an Error in previously issued financial statements – for example, last period’s inventory and therefore retained earnings were overstated

            One particularly confusing element of ASC 250 is the category called “change in reporting entity.” To the unwary observer this sounds a lot like an acquisition, but that is actually not the case. The reason that the distinction is critical is that ASC 250 prescribes a retroactive accounting to “change in reporting entity,” but as we just saw the accounting treatment for acquisitions is prospective, with only limited pro-formal retroactive disclosures.

            The key accounting question for these four types of changes and errors is whether the change is accounted for retrospectively or prospectively. In the former case, we adjust previous financial statements to reflect the new information. In the latter case, we make no adjustments to previous financial statements.

            To help you become more familiar with these terms and the requirements of the codification, Work Schedule 6 lists the four scenarios covered by ASC 250. As the schedule shows, three of the four scenarios are treated retrospectively, including a “change in reporting entity.” To gain a better understanding of what retrospective and prospective means, please identify the paragraph number that prescribes the appropriate accounting treatment (retrospective or prospective) to the four scenarios. Although you are only asked to identify the paragraph number, it is suggested that you also identify the specific word(s) in the paragraph that indicate retrospective or prospective treatment for each of the four types of changes.

Work Schedule 6. ASC 250 “Accounting Changes and Error Corrections”.
For:	Accounting Treatment	Paragraph Number
Change in Accounting Principle	Retrospective
Indicate the paragraph number in the box above and copy and paste the paragraph and highlight/underline the words indicating retrospective application.
Change in Accounting Estimate	Prospective
Indicate the paragraph number in the box above and copy and paste the paragraph and highlight/underline the words indicating prospective application.
Change in Reporting Entity	Retrospective
Indicate the paragraph number in the box above and copy and paste the paragraph and highlight/underline the words indicating retrospective application.
Correction of an Error	Retrospective
Indicate the paragraph number in the box above and copy and paste the paragraph and highlight/underline the words indicating retrospective application.

            As the schedule indicates, changes and corrections are accounted for retrospectively, with the exception of a change in estimate which is accounted for prospectively. Our focus here is to clarify that changes in accounting entity does not cover acquisitions. According the ASC 250-10-34-21, “Changes in Accounting entity” consists of an accounting change that results in a “different reporting entity”. To the casual observer, acquisitions would seem to fit this category, with the requirement of retroactive restatement of all prior periods as if the acquired company had always been a part of the acquirer. However, this is not the case, as ASC 250-10-20 indicates (emphasis added):

A change in 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.

            Item (b) at first view seems to include acquisitions, however the codification adds the following exclusionary statement:  

Neither a business combination accounted for by the acquisition method nor the consolidation of a VIE pursuant to topic 810 is a change in reporting entity.

            To summarize, “change in reporting entity”, which are accounted for retroactively, relates to the decision to consolidate existing subsidiaries (a topic that is sometimes covered in a senior-level accounting course). It does not relate to newly-acquired subsidiaries, which are accounted for prospectively with limited retrospective disclosures. The main takeaway is that acquisitions are not covered by “change in reporting entity” and receive prospective accounting treatment with only limited retrospective disclosures.

Answer 1

1. change in accounting principle

paragraph number 250-10-45-5

An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.

Retrospective application requires all of the following:

a. The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.

b. An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.

c. Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.

2. change in accounting estimate

paragraph number : 250-10-45-17

A change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both.

A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods.

3. change in reporting entity

paragraph number : 250-10-45-21

When an accounting change results in financial statements that are, in effect, the statements of a different reporting entity, the change shall be retrospectively applied to the financial statements of all prior periods presented to show financial information for the new reporting entity for those periods.

Previously issued interim financial information shall be presented on a retrospective basis. However, the amount of interest cost previously capitalized through application of Subtopic 835-20 shall not be changed when retrospectively applying the accounting change to the financial statements of prior periods.

4. correction of an error

paragraph no: 250-10-45-23

Any error in the financial statements of a prior period discovered after the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) shall be reported as an error correction, by restating the prior-period financial statements.