Accounting Changes And Error Corrections

Question 1

Estimate Changes

Answer 1

This is when you change the estimated useful life of PPE or change depreciation methods. This requires prospective application

Question 2

Accounting Principle changes

Answer 2

This is changing from one GAAP principle to another such as LIFO to FIFO. This requires retrospective application but is not considered restatement.

Question 3

Error Corrections

Answer 3

This is when an error is discovered that affects prior year income. This requires retrospective application and restatement.

Question 4

Prospective Application

Answer 4

The new estimate is applied to the current and future years. Does not need to be applied to prior years

Question 5

Retrospective Application

Answer 5

The change is prior years is recorded and an adjustment to retained earnings is made.

The adjustment to R/E is either a:
Cumulative effect of the change in accounting principle
Or, a prior period adjustment for error correction