In this chapter we examine the way accounting changes and error corrections are handled in a variety of situations that might be encountered in practice. We see that most changes in accounting policies are reported retrospectively. Changes in estimates are accounted for prospectively. | McGraw-Hill/Irwin ACCOUNTING CHANGES AND ERROR Chapter 20 © 2013 The McGraw-Hill Companies, Inc. Chapter 20: Accounting changes and Error Corrections. In this chapter we examine the way accounting changes and error corrections are handled in a variety of situations that might be encountered in practice. We see that most changes in accounting policies are reported retrospectively. Changes in estimates are accounted for prospectively. A change in depreciation methods is considered a change in estimate resulting from a change in policy. Both changes in reporting entities and the correction of errors are reported retrospectively. Accounting Changes The two types of accounting changes are a change in accounting policy and a change in accounting estimate. A change in accounting policy involves changing from one accounting policy to another accounting policy. A change in accounting estimate occurs when new information becomes available that allows a new and better estimate. Correction of an Error The correction of an error is another adjustment sometimes made to financial statements that is not actually an accounting change but is accounted for similarly. Errors occur when transactions are either recorded incorrectly or not recorded at all as shown in the table on this screen. Accounting Changes and Error Corrections Retrospective Two Reporting Approaches Prospective The correction of an error is necessary when a transaction is recorded incorrectly or not recorded at all. An error correction is not actually an accounting change, but it is accounted for in a similar fashion. We use two approaches to reporting accounting changes and error corrections, depending on the situation. The retrospective approach involves the revision of prior year’s financial statements, while the prospective approach affects the financial statements in the current and future years only. Error Corrections and Most Changes in Policies Retrospective Two Reporting Approaches Prospective Revise prior | McGraw-Hill/Irwin ACCOUNTING CHANGES AND ERROR Chapter 20 © 2013 The McGraw-Hill Companies, Inc. Chapter 20: Accounting changes and Error Corrections. In this chapter we examine the way accounting changes and error corrections are handled in a variety of situations that might be encountered in practice. We see that most changes in accounting policies are reported retrospectively. Changes in estimates are accounted for prospectively. A change in depreciation methods is considered a change in estimate resulting from a change in policy. Both changes in reporting entities and the correction of errors are reported retrospectively. Accounting Changes The two types of accounting changes are a change in accounting policy and a change in accounting estimate. A change in accounting policy involves changing from one accounting policy to another accounting policy. A change in accounting estimate occurs when new information becomes available that allows a new and better estimate. Correction of an
